Question 3

James Smith is a financial adviser at a reputable financial institution in Jamaica. He was the keynote speaker on financial management at a recent conference and was asked questions on the time value of money. James is asking you to provide the answers to the following questions asked by the attendees at the conference.

A. Sandra is currently saving $1,250 each month at 12% per annum. How much money will be in her account at the end of 5 years?

B. How much money should Anny invest today, so that she will have $10,500 in her bank account in four years time, assuming that the interest rate is 5% compounded annually?

C. A typical credit card agreement quotes an interest rate of 15% per annum. Monthly payments are required. Calculate the actual interest rate that will be paid on such a credit card (i.e. EAR)?

D. You are planning on buying a house in six years time. By that time, the house should cost $5,000,000. Given that the existing interest rate is 8%, how money should be invested at the beginning of each year to accomplish this goal at the end of six years?