a. You have been accepted to study international economics at the International

Question

a.            You have been accepted to study international economics at the International Banking College (IBC) in Kuala Lumpur. You will need RM10,500 every 6 months (beginning today) for the next three years to cover tuition and living expenses. Mom and Dad have agreed to pay for your education, and want to make one deposit today in a bank account earning 6% interest, compounded semiannually. How much must they deposit now so that you can withdraw RM10,500 at the beginning of each semester over the next 3 years?

Explanation / Answer

We need to calculate the present value of RM10500 for the 6 occassions of payment

1) At the start and then at the end of 6 months, 12 months, 18 months, 24 months, and 30 months respectively

Future Value = 10500

Rate = 6%

Compounded Semi annually

PV = 10500 + (10500)/(1 + 0.06)^1 + 10500)/(1 + 0.06)^2+ 10500)/(1 + 0.06)^3 + 10500)/(1 + 0.06)^4 + 10500)/(1 + 0.06)^5

= 10500 + 9905.66 + 9344.96 + 8816 + 8316.98 + 7846.21

= RM 54729.81

Amount to be deposited one time = RM 54729.81

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