ACC1005 Foundations of Finance

Tutorial 2 (Week 3)

Q1. Suppose in Singapore fixed deposit is calculated based on simple interest. Nicholas
deposits $2000 in a bank fixed deposit for 6 months at an interest rate of 13.25% per
annum. How much interest will he earn?

If Nicholas reinvests the $2000, plus the interest earned for a further 6 months again
at 13.25% per annum, how much interest will he earn in this second 6-month period

Q2. Mary borrowed $7250 at an annual simple interest rate of 15.50%. She repaid the
loan by paying a lump sum of $7394.70. What was the loan term?

Q3. On 2 April 2014, Paradise Pencils Ltd borrows $200 000, repaying in a lump sum on
16 May 2014. The interest rate is 9.55 per cent per annum. Use simple interest rate,
how much is the lump sum repayment?

Q4. What will be the accumulated value, at the end of 10 years, of $1000 invested in a
savings account that pays 8 per cent per annum?

Scenario A: Assume that no withdrawals are made from the savings account until
the end of the tenth year. What is the interest component of the accumulated value?

Scenario B: Assume that interest is withdrawn every year. What will be the total
interest earnings for the ten years?

Where does the difference in the amounts for the above 2 scenarios come from?

Q5. Neeta Stoves Ltd borrows $8000 repayable in a lump sum after 1 year. The interest
rate agreed to is described as “15% per annum, calculated monthly”. How much is
the repayment?

Q6. Real interest rate in Singapore was reported at 3.3575 % p.a. in 2018, according to
the World Bank. For the whole of 2018, core inflation rose to 1.7 per cent from 1.5
per cent in the year before. What should be the nominal interest rate for 2018?

Q7. Consider a $2,000 deposit earning 8% compound interest per year for 5 years.
a. What is the future value at the end of the fifth year?
b. How much total interest is earned on the original deposit?
c. How much is earned on interest?

1|Page
Q8. You have found three investment choices for a one-year deposit: 10% APR
compounded monthly, 10% APR compounded annually, and 9% APR compounded
daily. Compute the EAR for each investment choice. (Assume that there are 365 days
in the year.)

Q9. Your bank account pays interest with an EAR of 5%. What is the APR quote for this
account based on annual compounding? What is the APR quote for this account
based on semiannual compounding? What is the APR with monthly compounding?

Q10. Compute the interest rate required for each of the following interest rate statements
respectively.
Interest Rate Statement Interest rate required
(1) 8% per year, compounded monthly Effective quarterly rate
(2) 14% per year, compounded semiannually EAR
(3) 4% per quarter, compounded quarterly EAR
(4) Effective 10% semiannually, compounded monthly APR
(5) Effective 1% per month compounded daily APR & EAR

2|Page