Question

TYPE ANSWERS

1.

• Differentiate between simple and compound interest; know how to calculate each (investment perspective)

• Understand important considerations of how to allocate cash, such as liquidity, safety, convenience, etc.

• Know what credit is, and the different ways it is utilized in contemporary society; understand basic

  terminology associated with credit, and understand advantages and disadvantages of credit

• Know what a credit report is, and be able to identify components involved in calculating credit scores

Answer 1

Simple interest is simply the interest calculated on the principal alone. While compound interest is the interest calculated on the principal and the accrued interest as well.

For example, if P is the loan, R is the rate of interest and T is the time of the loan, then amount to be paid back as per both kind of interest are:-

Simple Interest: A = P*(1+RT/100)

Compound interest: A = P*(1+R/100)^T

In order to prudently allocate cash, one must bear in mind that sufficient amount of cash must be on hand to ensure that short term obligations could be met. Also the instruments to be used should be such that the principal amount parked should be protected. There should be sufficient liquidity to withdraw the cash as and when required to meet the requirements.

Credit is the process of extending loans to individuals or organizations by banks or individuals. The role of credit is crucial as it allows parties with surplus funds to deploy their capital and also parties needing capital to access capital to undertake projects to grow their business or meet personal needs.

The advantage of credit is that it facilitates investment and consumption thus leading to growth in economic activity. The disadvantage is that too much borrowing can lead to financial distress and bankruptcy.

The credit scores are calculated by using the past repayment history, present income level, amount of loan already sanctioned, age and earning potential.A good credit score means a lower risk for the lender and hence a lower interest rate for the borrower.