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Thread: Compound Interest Question

  1. #1
    Feb 2010

    Exclamation Compound Interest Question

    Hi Helpers,
    This may sound easy but I am a bit confused in the completion of this work:
    ************************************************** *******

    People with large amounts of money invested in the stock market are likely to want to rush out and sell if the price of a particular stock is predicted to fall significantly, yet few home owners react in such a way as the values of homes fluctuate over time. If calculations were posted daily on property values, it would be quite possible that a home could lose $10 000 of its value overnight. Over time, however, it’s most likely that growth in value would occur. Assuming a growth of just 5% a year, the property would rise
    in value by about 60% in 10 years, double in 13 years and triple in 18 years.
    Home loan interest rates are the other side to buying a dream home. Unlike property values, there is generally no long-term trend up or down. A rise at the wrong time can make home owning very expensive. Purchasing property is not a good short-term investment. It is sometimes better to rent for a short period of time and to invest the deposit, and the difference between rent and what would be loan repayments, elsewhere.


    1 Alex and Trinh want to purchase a $270 000 property. Most financial institutions will
    lend them only 90% of this amount. What deposit do Alex and Trinh need?
    2 Alex and Trinh take out a $243 000 loan for a 25-year term at fixed interest of 7% p.a.
    Their monthly repayments are $1717, which remain the same for the 25-year period.
    (a) How much will they have paid for the house at the end of the 25 years, given that
    they paid stamp duty of $8000? Don’t forget to include the initial deposit.
    (b) How much interest will they have paid in total?
    (c) Find the average amount of interest in the monthly repayment of $1717.

    4 Another cost of owning a house is maintenance. The approximate amount spent on
    maintenance per year is 1% of the house’s value that year. Complete column 5 of the
    table above by finding 1% of each of the end-of-year values.
    5 After 4 years, Alex and Trinh decide to sell their house. The total cost to them so far is
    the initial value of the house, plus stamp duty, plus interest already paid, plus
    maintenance costs. Show that the total cost of the house is $333 756.
    6 If Alex and Trinh only manage to sell the house for $320 000, slightly under its predicted
    value, what will be their profit/loss?
    7 Four years ago, friends of Alex and Trinh, Kate and Mustafa, were also looking to buy a
    house valued at $270 000. Instead they decided to continue renting at $1200 per month.
    They invested the deposit of $27 000, then continued to invest the difference between
    their potential mortgage repayments ($1717 per month) and the rent.
    (a) How much rent have they paid in total during the 4 years if rent has increased by
    5% per year, so that the rent was $1200 per month in the first year, $1260 per
    month in the second, $1323 per month in the third and $1389 per month in the
    (b) Their $27 000 investment, plus deposits, has mounted to $64 430 at the end of the
    4 years. Subtract rent from this amount to find their profit/loss.
    (c) Which couple is better off financially after the 4-year period, and by how much?
    ************************************************** *******
    I would appreciate any help. Working out is appreciated
    Last edited by zackywacky6; Feb 23rd 2010 at 08:21 PM. Reason: More Questions added
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