Question
You are a young personal financial adviser. Diana, one of your clients approached you for consultation about her personal financial plans to get $50,000 for
You are a young personal financial adviser. Diana, one of your clients approached you for consultation about her personal financial plans to get $50,000 for a European 1-month holiday. Diana has a saving of $30,000 and is considering two alternative options:
Option 1: Investing that $30,000 in an investment that would pay a rate of return of 8% annually, compounding semi-annually for 5 years.
Option 2: Obtaining a personal loan of $20,000 from a bank to take the European 1-month holiday now and pay the debt in 5 years. The current interest rate the bank offered for the new personal loan is 5% annually, compounding monthly.
Required:
a)Compute the effective annual interest rate (EAR) Diana would actually get in Option 1.
b)Calculate the amount of money Diana would accumulate in Option 1 after 5 years.
c)How much longer does Diana need to wait until she has $50,000 to get her dream holiday in Option 1?
d)Calculate the monthly debt repayment Diana needs to pay the bank for 5 years in Option 2.
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