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 Business Management

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Part  1   You have just joined the staff of Eureka Publishing Company, a current affairs journal, as a business and finance reporter. The business editor has commissioned a series of articles that will span several weeks of the publication and she has asked you to provide advice on the following questions.     1. What difference would it make to the sum repayable after two years (as a single lump sum) if the amount of $5,000 is borrowed at 12% p.a. compounded (a) an ...

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Solutions

1.a) Amount repayable if Interest compounded annually would be 5000*1.12*1.12 or 6,272 dollars. Hence interest payable is 1272 dollars
b) Amount repayable if interest compounded monthly would be 5000*1.1^24 or 6348.68 dollars. Hence interest payable is 1348.68 dollars
2) The interest rate quoted on any borrowing is known as the nominal rate. For the loan in the given scenario it is 12%/ It becomes a handy exercise to be able to directly compare the interest rate for a particular type of loan between time periods to do this the real interest rate is calculated by removing the rate of inflation from the nominal rate.
The nominal interest rate can be shown algebraically as:
n = r + i + (i x r)
where
n = nominal interest rate
r = real interest rate
i = inflation rate.
Rearranging we get r=n-i/1-I
For the above example we get real interest rate as 8.333 if we assume the inflation to be at 4%.
3)Annuity is a series of equal periodic instalments. They might be

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