a) Mr Wong needs RM100, 000, ten years from now for his son's education

Finance Sep 03, 2020

a) Mr Wong needs RM100, 000, ten years from now for his son's education. From a survey he realized that banks are paying an average of 6% interest computed by using compound interest every 6 months. How much does Mr Wong need to put into the bank now in order to have that sum after 10 years?

b) If Ms Chan is thinking of putting RM10, 000 into the saving accounts at the end of each year for 10 years, what sum can she accumulate at an interest rate of 8% interest computed on a yearly basis.

Expert Solution

a). Computation of the present value:-

FV = PV*(1+rate)^n

Here,

Rate = 6%/2 = 3% (semiannual)

n = 10*2 = 20 periods (semiannual)

Substituting the values in formula:

100,000 = PV*(1+3%)^20

PV = 100,000 / 1.8061

= 55,367.58

b). Computation of the future value:-

FV = PV*(1+rate)^n

= 10,000*(1+8%)^10

= 10,000*2.1589

= 21,589.25

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