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Equal monthly (re)payments

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA MA – FIA FMA › Equal monthly (re)payments

  • This topic has 1 reply, 2 voices, and was last updated 5 years ago by John Moffat.
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  • December 23, 2016 at 6:18 pm #364348
    accaed
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    Are questions like the below still examinable in F2?

    Augustine wishes to take out a loan for £2,000. The interest rate on this loan would be 10% per annum and Augustine wishes to make equal monthly repayments, comprising interest and principal, over three years starting one month after the loan is taken out.

    What would be the monthly repayment on the loan (to the nearest £)?
    A £56
    B £64
    C £66
    D £67

    The answer to the above question is B. But I can’t see how you go about getting it.

    Sydney wishes to make an investment on a monthly basis starting next month for five years. The payments into the fund would be made on the first day of each month.
    The interest rate will be 0·5% per month. Sydney needs a terminal value of £7,000.

    What should be the monthly payments into the fund to the nearest £?
    A £75
    B £86
    C £100
    D £117

    This question uses the formula [A(1+r)^n – 1]/r and equates it to a terminal value of £7,000. But where has this formula come from? I can’t see it in the notes.

    December 23, 2016 at 10:37 pm #364362
    John Moffat
    Keymaster
    • Topics: 57
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    In theory both questions could be asked, but these days they are both extremely unlikely!!

    For the first one, you need to calculate the equivalent monthly interest rate, and then divide 2,000 by the 36 period annuity factor at the equivalent monthly interest rate using the normal formula for the annuity factor.

    For the second one, the formula is not in the notes because you do not need it and it is not given in the exam.
    First you need to calculate the equivalent annual interest rate and then discount the 7,000 for 5 years at the equivalent annual interest rate.
    To get the monthly payment you then divide the present value of the 7,000 by the annuity factor for 60 periods at interest of 0.5%.

    In both cases you need to use the formula that is given for the annuity factor because 36 and 60 periods are obviously not in the tables.

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