QTB – Nov 2014 – L1 – SA – Q19 – Mathematics of Business Finance

Determines the interest rate condition for a sinking fund to have a lower periodic cost than amortization

Question

If the interest rate received on a sinking fund is ……………….., the periodic cost for the sinking fund is lower than that for amortization.
A. Lower than that charged on the debt
B. Equal to that charged on the debt
C. Higher than that charged on the debt
D. Equal to zero
E. Equal to one

Answer

Explanation: The correct answer is B. If the interest rate received on a sinking fund is equal to that charged on the debt, the periodic cost for the sinking fund can be lower than that for amortization. This is due to the different structures of repayments in sinking funds compared to amortization, leading to potentially lower periodic contributions when rates are aligned.

Tags: Amortization, Interest rates, Sinking Fund
Level: Level 1

Topic: Mathematics of Business Finance
Series: NOV 2014

Uploader: Dotse