a) A bank offers to lend you K1,000 if you sign a note to pay K1,610.50 at the end of 5 years. What rate of interest is the bank charging you?
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
QUESTION SEVEN
a) A bank offers to lend you K1,000 if you sign a note to pay K1,610.50 at the end of 5
years. What rate of interest is the bank charging you?
b) Basket Wonders (BW) has a $1,000 Cash Deposit (CD) at the bank. The interest rate is
6% compounded quarterly for 1 year. What is the Effective Annual Interest Rate (EAR)?
c) Prepare an amortization schedule for a K1, 000 loan to be paid in 3 equal installments at
the end of each of the next 3 years. Interest is charged at a rate of 6% per annum.
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