Question 1

Explain the differences(s)between an interest rate and a rate of return.

Accepted Answer

The answer of Explain the differences(s)between an interest rate and...

Question 2

The amount that an investor puts up initially for a commercial bill is called the principal.

Accepted Answer

The investor pays a discounted price to the principal that they will receive back at maturity.

Question 3

Distinguish between simple interest and compound interest.

Accepted Answer

The answer of Distinguish between simple interest and compound interest....

Question 4

If an investor purchases a commercial bill with a face value of $100 000 with a yield of 7.00% per annum and then,in 60 days,sells it at a yield of 7.50% per annum,the investor will make a capital gain on the sale of the bill.

Accepted Answer

When the investor sells it at the higher yield it means the price is lower. So the investor actually makes a capital loss.

Question 5

If compounding of interest occurs more often than annually,explain how you would compare three interest rates of the same amount:
 one that is quoted annually,one semi-annually and one quarterly.At which rate would you expect the same investment amount to grow the most over ten years?

Accepted Answer

The answer of If compounding of interest occurs more often...

Question 6

Accumulation of final amounts under simple interest happens at a slower rate than with compounding interest.

Accepted Answer

As simple interest is calculated only on the principal it will grow at a slower rate.

Question 7

The principal of a six-month bank deposit is the amount you receive at the end of its term.

Accepted Answer

The principal is the amount you originally deposited with the bank.

Question 8

If a commercial bill is sold into a market in which its yield works out higher than the yield that prevailed at the original purchase date,a capital gain would have been made.

Accepted Answer

A capital loss would have been made as there is an inverse relation between yield and price.

Question 9

When a company issues a commercial bill it is said to discount it.

Accepted Answer

The term discount comes about from how the interest rate is used in the calculation.

Question 10

In relation to interest rates,explain what a yield is.

Accepted Answer

The answer of In relation to interest rates,explain what a...

Question 11

When a company obtains an interest-only business bank loan and is required to make annual interest payments on the principal borrowed and repay the full principal at the maturity date,the type of interest is called simple interest.

Accepted Answer

Simple interest is calculated on the principal only.

Question 12

When a holder of a commercial bill sells it before its maturity date the return to the holder is called the holding period return.

Accepted Answer

The holding period return is likely to be different from the return it would fetch if it had been held to maturity.

Question 13

The euromarkets,unlike those of the US,follow the market convention that a per-annum rate relates to a 365-day year.

Accepted Answer

Both the USA and the euromarkets follow the convention of a 360-day year.

Question 14

If an investor purchases a commercial bill with a face value of $100 000 with a yield of 7.00% per annum and then,in 60 days,sells it at a yield of 6.70% per annum,the investor will make a capital loss on the sale of the bill.

Accepted Answer

When the investor sells it at the lower yield it means the price is higher. So the investor actually makes a capital gain.

Question 15

Distinguish between an ordinary annuity and an annuity due.Give examples.

Accepted Answer

The answer of Distinguish between an ordinary annuity and an...

Quiz 8: Mathematics of Finance: An Introduction to Basic Concepts and Calculations