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)
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