BANKING AND FINANCE CERTIFICATE

BF 150 – FINANCIAL MATHEMATICS

Monday 5th October, 2015 14:00 HRS – 17:00HRS

TIME ALLOWED 3 HOURS

INSTRUCTIONS TO CANDIDATES

1. Candidates should attempt any five (5) out of the seven (7) questions in
this paper.

2. All questions carry 20 marks each.

3. Relevant working should be shown clearly.

4. Mortality tables, Discount value tables and formulae sheet are provided.

Please Turn over

QUESTION ONE
1 1 1
(a) Solve for 𝑥: (𝑥+2)
+ 𝑥 = (𝑥−3) (correct to three
decimal places) (5 marks)

(b) The number of liters of petrol consumed by a car is

directly proportional to the number of kilometers
driven. If the car can travel 133 kilometers on 7 liters of
petrol, how many liters will be consumed on a 228
kilometers trip? (3 marks)

(c) How much tax will be collected on a luxury item costing

K30 500 if the rate is 8% on the first K20 000 and 12% on
the amount over K20 000? (7 marks)

(d) A business spends K360 000 on advertising, K240 000 on

research and development, and K300 000 on office rent.
Find the ratios between these expenses. (5 marks)
(Total 20 marks)
QUESTION TWO
(a) Chisha would like to receive K5000 each quarter for 15
years after which she retires. How much money (to the
nearest kwacha) does she have to save in a money
market fund which pays at the rate of 12% compounded
quarterly? (4 marks)

(b) How much interest is earned in 12 years if K200 is

deposited at the end of each month in an account that
pays 12% compounded monthly? (8 marks)

(c) Chileya‘s grandmother let him K150 000 when she died.
She stipulated in her will that the money be invested in
a bank account paying 8% interest compounded
quarterly and paid out in equal installments every three
months for a period of 20 years. How much will Chileya
receive each quarter? (8 marks)

(Total 20 marks)
QUESTION THREE
(a) Lungu wants to buy a boat that costs K25 000. He has
saved K6 000, which he will use as a deposit, and he will
finance the rest of it by taking out a loan to be paid back
in equal monthly installments, amortized over 6 years at
an annual interest rate of 12%. What will his payment
be? (6 marks)

(b) We wish to determine which of the following two

alternatives is the better choice:
(i) Alternative A yields a return of K3 500 at the end
3 years plus K12 500 at the end of 7 years.
(ii) Alternative B gives a return of K600 at the end of
each quarter for 7 years.
Assume that the bank interest rate on money borrowed
is 8% compounded quarterly.
(14 marks)
(Total 20 marks)
QUESTION FOUR
(a) How long will it take for K650 to amount to K850 if it is
invested at 9% compounded quarterly? (10 marks)

(b) Suppose K2000 is hidden under a mattress for safe

keeping. Each year, because of inflation the purchasing
power of the money is 85% of what it was the previous
year. After 10 years, what is the purchasing power of
K2000? Hint consider the formula 𝑃 = 𝑆(1 + 𝑟)−𝑛
where𝑟 = −0.15. (3 marks)

(c) An initial investment of K40 000 in a business

guarantees the following cash flows.
Year Cash flow
3 K10 000
4 K15 000
6 K16 500

Assume an interest of 6% compounded semiannually

(i) Find the net present value of the cash flows.
(ii) Is the investment profitable?
(7 marks)
(Total 20 marks)
QUESTION FIVE
(a) Solve the equation 𝑙𝑜𝑔12 − 𝑙𝑜𝑔32 + 3𝑙𝑜𝑔2 = 𝑥𝑙𝑜𝑔3
(7 marks)

(b) Given that the binomial formula holds as an infinite

“sum” for (1 + 𝑥 )𝑛 , where 𝑛 is a non integer rational
national number and |𝑥 | < 1, find to two decimal
places:
√0.99
(7 marks)

(c) Find the sixth term in the expansion(𝑎 − 𝑏)15 .

(6 marks)
(Total 20 marks)
QUESTION SIX
(a) Moono won K2, 000,000 lottery and will receive a check
for K1, 000, 000 now and a similar one each year for the
next 19 years. To provide these 20 payments, the Lotto
Company purchased an annuity due at the interest rate
of 12% compounded annually. How much did the
annuity cost the Lotto Company? (6 marks)

(b) Determine the finance charge on a 36 – month K30 000

car loan with monthly payments if interest is at the rate
of 15% compounded monthly. (9 marks)

(c) The premiums on an insurance policy are K100 a

quarter, payable at the beginning of each quarter. If the
policyholder wishes to pay 2 year’s premium in advance,
how much should be paid provided that the interest
rate is 12% compounded quarterly? (5 marks)

(Total 20 marks)
QUESTION SEVEN
1 1 2
(a) Find the sum of the given series 5 + 1 + 5 + (5) +
1 6
⋯ + 5 (5) correct to five decimal places. (5 marks)

(b) The beneficiary of an insurance policy has the option of

receiving a lump – sum payment of K60 000 or 10 equal
yearly payments, where the first payment is due at
once. If interest is 5% compounded annually, find the
yearly payment. (5 marks)

(c) X owes Y two sums of money K3 000 plus interest of 8%

compounded annually, which is due in 6 years, and K4
000 plus interest at 9% compounded semiannually
which is due in 8 years. If both debts are to be paid off
by a single payment at the end of 7 years, find the
amount of the payment if money is worth 7%
compounded quarterly. (10 marks)

(Total 20 marks)

END OF PAPER
 FORMULAR SHEET

BF 150 - FINANCIAL MATHEMATICS

1. Expectation : (1  i) n PS

2. d x  lx  lx 1 where x is the age. d x gives the number of deaths within the year from
age x to x +1.

3. A pure Endowment:

lx  n
n Ex  (1  i )  n
lx

4. Amount: S P(1  rt)

where r = interest rate

P = Principal

t = time in years

5. Amount of an Annuity

 (1  i ) n  1
S  R 
 i 

Present value of an Annuity

1  (1  i)  n 
A  R 
 i 

6. Arithmetic and geometric progressions

 i) l  a  (n  1)d

ii) S
n
2a  (n  1)d  or S  n (a  l )
2 2

iii) L  ar n 1

rl  a
iv) S
r 1

Where a = first term

l = last term
d = common difference

r = common ratio

n = is the number of terms

7. Constant Percentage method

S  C (1  d )n

d  rate of depreciation

C = original cost

S = scrap Value

n = time in years.