Question 4

Suppose Mr. Amamo informed you that he will be going on retirement in 5 years" time. He wants to increase his regular contributions in a personal pension scheme for the remaining periods and agreed with the Trustees to start the deductions at the beginning of each period. At the beginning of the 19 year, he contributed GHS 1,350 and GHS 1,450 at the beginning of the 2nd year. He increases the contributions to GHS 2,957 at the beginning of 3rd vear and to GHS

3.508 at the 44 year. However, towards the end of the 5th year, he could not make any contribution but he rather withdrew GHS 8.250 to settle emergence needs. The frequency of the interest rates kept varying throughout the time horizon. In year 1, it was 18.5%; year 2, it was 17.25% and year 3, it was 16.15% and in year 4, it was 16.95%.

(E)

Using the simple interest rate, calculate the future value of Mr Amamo and explain your results in relation to the effect of the withdrawal he made getting to the end of the period.

(4 Marks)

Using the semi-year compound interest, compute the future value for Mr Amamo and offer advice to him

(5 Marks)

Calculate the monthly compounded future value of Mr Amamo and consider the situation that he roll-over the funds at the beginning of the 5th year to the vear end at a T-bill rate of 13.5% without making any withdrawal.

(5 Marks)

Discussion one advantage of compound interest over simple interest.