Question

1.

Describe the three (3) concepts listed below:

a) Simple interest rate.

b) Present value & Future value of an amount

c) Yield - in the context of bank term deposit and discount securities.

Answer 1

(a) SIMPLE INTEREST RATE

It is the easiest method of calculating interest on a loan. It can be calculated by simply multiplying the interest rate by the amount by number of days that elapses between the payments. It does not take into account the concept of compounding hence is smaller than compounding rate.

Simple interest rate= P*I*T

p= principal amount

I = interest rate  

T= no of days that elapses between the payments

(B) PRESENT VALUE

It is the current value of future sum of expected cash flows or an amount of money.Present value is the concept that states an amount of money today is worth more than that same amount in the future.

Present Value=FV/(1+r)^n

​where:

FV=Future Value

r=Rate of return

n=Number of periods​

FUTURE VALUE

IT is the value of an asset at an estimated date in the future . It is calculated by keeping in account the expected growth rate or rate of return.

FV = I x (1 + R) ^T

where:

• I = Investment Amount
• R = Interest Rate
• T = Number of years

(C) YIELD- IN CONTEXT OF BANK TERM DEPOSITS AND DISCOUNT SECURITIES

It refers to the earnings generated and realized on an investment over a particular period of time. It's expressed as a percentage of the invested amount . It includes the interest earned or dividends received from holding a particular security.

Yield = Net Realized Return / Principal Amount