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Fin Tutorial 2

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0% found this document useful (0 votes)
25 views2 pages

Fin Tutorial 2

Uploaded by

hwezvamunyaradzi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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Financial Management

Tutorial II Questions: Annuities; Amortization and Sinking Funds

Please ensure that you have attempted all the questions in this tutorial before you come to your
allocated tutorial period in the week beginning 28 March. Registers will be taken.

1) If $1000 is invested today and $1000 is invested at the beginning of each of the next three
years at 12% compounded quarterly, the amount the investor will have at the end of the
fourth year will be…?

2) Andrew Smith has inherited $25 000 and wishes to purchase an annuity that will provide him
with a steady income over the next 12 years. He has heard that CBZ is currently paying
interest of 6% p.a. compounded continuously. If he were to deposit his $25 000 into the bank,
what year-end-equal-dollar amount (to the nearest dollar) would he be able to withdraw
annually such that he would have a zero balance after his last withdrawal 12 years from now?
Draw a time line to illustrate.

3) You will need $50 000 at the end of 10 years to finance your postgraduate education at Yale
University in the USA. To accumulate this sum, you have decided to save a certain amount at
the end of each of the next 10 years and deposit it in the bank. The bank pays 8% interest
compounded annually for long term deposits such as this. How much will you have to save
each year (to the nearest dollar)?

4) Same as problem 3 above, except that you deposit a certain amount at the beginning of each
of the next 10 years. Now how much will you have to save each year (to the nearest dollar)?

5) Ronald Gumbo has decided to start saving for his retirement. Beginning on his 21st birthday,
Ronald plans to invest $2 000 each birthday into a savings investment earning a 7%
compound annual rate of interest. He will continue his savings programme for a total of 10
years and then stop making payments. But his savings will continue to compound at 7% for
35 more years, until Ronald retires at the age of 65. How much will his investment plan be
worth at the retirement age of 65?

6) You purchase a house in Mt. Pleasant for $180 000 with an initial down payment of $45 000.
You manage to secure a mortgage bond with a bank for the balance at 18% p.a. compounded
monthly, with a term of 20 years.

a) What are the monthly mortgage repayments?


b) Draw an amortization schedule for the first six payments of the loan and one for
the last six payments (that is the 235th up to the 240th payments)

Mbizi RA [Mcom Finance, MBA, Bcom Econs, IOBZ Dip] Page 1


c) As the buyer, what is your equity in the house after 12 years? [ie how much of the
house have you paid for, in total, after 12 years].

7) Barclays bank has agreed to give Dumisani a loan of $250 000 on the following
conditions:
a) 16% interest rate compounded monthly
b) Dumisani will have to pay back 12 equal installments each at the end of each
quarter.
Determine the value of each installment.
Draw up an amortization table splitting interest payments from capital payments.

8) An enthusiastic entrepreneur would like to borrow $50 000 for five years for a business
venture. TN Bank is willing to lend him the money a 15% p.a. if the debt is amortized by
equal yearly payments. On the other hand, CBZ bank will lend the money at 14% p.a.,
provided that a sinking fund is established with it on which it will pay 11% p.a. to
accumulate to the principal by the end of the term, with equal annual deposits. What is
the difference in total annual payments between the two plans?

Mbizi RA [Mcom Finance, MBA, Bcom Econs, IOBZ Dip] Page 2

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