These Questions are complementary to those in the course text (Finan).
Attempt the following questions individually then in groups of three. See the lecturer if you require assistance. Solutions are given in brackets.
1. Describe two cashflows (one positive and one negative) that will occur in the next month when one of the parties involved is (i) you (ii) your employer.
2. In what situations does a bank act as (i) a lender (ii) a borrower
3. An investor puts Kshs 5000 in a savings account that pays 10% simple interest at the end of each year. Compare how much the investor would have at the end of 6 years if the money was:
a. Invested for 6 years (8,000)
b. Invested for three years then immediately reinvested for a further 3 years (8,450)
4. An investor must make a payment of Kshs. 5,000 in 5 years’ time. The investor wishes to make a provision for this investment by investing a single sum now in a deposit account that pays 10% compound interest per annum. How much should the initial investment be? (3,105)
5. An 8 month loan repayable by a single repayment is issued at a rate of commercial (simple) discount of 15% per annum. If the amount of the repayment is Kshs. 100,000; how much was initially lent to the borrower? (90,000)
6. A company is due to receive a payment of Kshs 500,000 from a customer in 6 months’ time. To smooth its cashflows, the company opts to receive the payment immediately and has agreed to transfer its entitlement to this payment to a third party called a discount house in return for an immediate payment calculated using a rate of commercial (simple) discount of 16% per annum. How much will the immediate payment received from the discount house be? (460,000)
7. What is the principal of consistency in financial mathematics?
8. Kshs. 4,600 is invested at time 0 and the proceeds at time 10 are Kshs.8,200. Calculate ( i.e. calculate the accumulation factor between time 7 and time 10) if and . (
9. If the forced of interest is . Calculate:
a. The accumulated value at time t=5 of an investment of Kshs.1,000 at time t=0. (1,532)
b. The present value at time t=2 of a sum of Kshs.1,000 payable at time t=8. (605.34)
10. The force of interest is given as:
{
a. Calculate the present value at time 2of a payment of Kshs. 1,000 at time 10. (706.45)
b. Calculate an annual effective rate of interest from time 2 up to time 10 that is equivalent to the force of interest in part (a) above. ( )
(Foundations of ) Financial Mathematics (I) Practice Questions – SET 2
These Questions are complementary to those in the course text (Finan).
Attempt the following questions individually then in groups of three. See the lecturer if you require assistance. Solutions are given in brackets.
1. Calculate the present value on 1 September 2002 of payments of Kshs.280 due on 1 September 2004 and Kshs.360 due on 1 March 2005. Interest is 15% pa effective. (465.56)
2. Find the value at time t=0 of Kshs.250 due at time t=6 and Kshs600 due at time t=8 if pa for all t. (680.79)
3. Find the value at time 4 of a payment of 860 at time 10 if and (718.24)
4. Under its current rent agreement a company is obliged to make annual repayments of 7,500 for the building it occupies. Payments are due on 1st January 2004, 1st January 2005 and 1st January 2006. The nominal rate of interest is 8% per annum, convertible quarterly.
a. What is the present value of the payments on 1st January 2003? (19,243.72)
b. What is the accumulated value of these payments on 1st January 2007? (26,418)
5. The force of interest takes the following values:
{

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