Specimen Q10You must refer to the spreadsheet file 'Q10 Carol's Gift' when answering this question.
You must complete parts (b), (c) (i) and (c) (ii), using the spreadsheet file.
Carol has received a gift of £2500, and is considering what to do with it. She has a savings account that pays interest at an annual effective rate of 1.25%.
(a) Calculate how much interest Carol would earn if she invested this gift in her savings account for 34 months.
Carol also has a personal loan. She originally borrowed £8000 to be repaid by level monthly repayments for 48 months, with the first repayment made one month after she took out the loan. Interest is charged at an annual effective rate of 4.9%.
(b) Open the 'Original Loan' worksheet. Complete formulae in the loan schedule and calculate the level monthly repayment amount, and the final repayment amount.
Carol has just made the 14th monthly repayment on the loan. She decides to find out the impact of using the £2500 gift as a lump sum payment to reduce the outstanding balance on her loan. The loan provider agrees to recalculate a new level monthly repayment amount, to be paid in each of the remaining 34 months.
(c) (i) Copy the 'Original Loan' worksheet. Rename the copy to 'Pay Lump Sum'. Adjust the 'Pay Lump Sum' worksheet as required, and hence calculate Carol's new level monthly repayment.
(ii) On the 'Pay Lump Sum' worksheet, calculate how much Carol would save in interest payments by making this lump sum payment.
(d) State one reason why Carol might choose to pay the gift into her savings account, rather than use it to reduce the balance on her loan.