Question Tag: Interest calculation

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  • 20 Marks

ITF – APR 2024 – L3 – Q1 – Financing Options for Advance Payment

Calculate and compare two financing options for a customer awaiting an advance payment under a construction contract: borrowing the USD amount or the GHS equivalent, considering exchange rates, interest, fees, and a forward contract; select the most favorable option from the customer's perspective.

Zakaria Construction Plc. (ZCP) are your customers specialized in the construction of highways. Sometime in February, your customer approached you to discuss their intention to apply for a Bid Bond to participate in an International Competitive Tender by the Ministry of Roads and Highways. The Tender is for the award of a contract to construct the Eastern Corridor Road. After discussions with your bank, the Bid Bond was issued in Favour of Ministry of Roads and Highways. On March 1, Mr. Adamu, the Chief Finance Officer of ZCP, called to inform you that the company has successfully won the Tender and had been awarded a contract to construct a portion of the main project. At the meeting, Mr. Adamu showed other documents confirming the award of the contract – which also showed the contract value as USD1.2million. The meeting discussed at length, how the bank could assist ZCP to obtain an Advance Payment Bond in Favour of Ministry of Roads and Highways to enable the company access $11.25 %$ initial Mobilization Funding of the contract value.

The following events took place: a. On April 1, the Advance Payment Guarantee was issued and submitted to the Ministry of Roads and Highways. b. The $11.25 %$ Advance Payment Funding is confirmed by Ministry of Roads and Highways and will be received by your bank exactly in three months’ time, on July 1, for customer’s account. c. Also on April 1, the company entered into three months’ Forward Contract to sell the US Dollar proceeds of the $11.25 %$ Advance Payment to your bank on arrival of funds.

ZCP has to acquire materials before main construction works begin in July and so, have requested your bank for immediate funding and have proposed two options as follows: I) To borrow the US Dollar amount of the $11.25 %$ Advance Payment for three months and repay when it is received on July 1. ii) To borrow Ghana Cedi equivalent of the US Dollar amount for three months and repay from proceeds of the three months Forward Contract.

Rates available for the day are as follows:

April 1, Spot 10.2570
One month forward 0.0085 10.2640
Two months’ forward 0.0115 0.0095 cedis discount
Three months’ forward 0.0135 0.0125 cedis discount
0.0145 cedis discount

You are also given the following additional information: a. Term SOFR (Secured Overnight Financing Rate) which has replaced the LIBOR, is quoted this morning for 3 months US Dollar at $5.1 %$ with your bank’s margin at $4.5 %$. b. Commitment and Arrangement Fees are charged separately on Dollar borrowing at $1.50 %$ and $0.50 %$ respectively. c. Interest and other charges on US Dollar borrowing should be translated at middle-rate. d. For ZCP, your bank will lend local currency at $2 %$ above its Base Rate of $21.75 %$ p.a. e. Processing Fees for Cedi Facility is $1.0 %$. f. Cedi Facility also attracts Group Insurance Commission of $1.50 %$.

REQUIRED Calculate each of the two options and choose the most favorable one from your customer’s point of view, stating your reason.

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  • 20 Marks

ITF – APR 2024 – L3 – Q1 – Funding Options for Advance Payment in Construction Contract

Calculate the costs of two financing options—borrowing in USD or equivalent GHS—for a construction company's advance payment and determine the most favorable from the customer's perspective.

Zakaria Construction Plc. (ZCP) are your customers specialised in the construction of highways. Sometime in February, your customer approached you to discuss their intention to apply for a Bid Bond to participate in an International Competitive Tender by the Ministry of Roads and Highways. The Tender is for the award of a contract to construct the Eastern Corridor Road. After discussions with your bank, the Bid Bond was issued in favour of Ministry of Roads and Highways. On March 1, Mr. Adamu, the Chief Finance Officer of ZCP, called to inform you that the company has successfully won the Tender and had been awarded a contract to construct a portion of the main project. At the meeting, Mr. Adamu showed other documents confirming the award of the contract – which also showed the contract value as USD1.2million. The meeting discussed at length, how the bank could assist ZCP to obtain an Advance Payment Bond in favour of Ministry of Roads and Highways to enable the company access 11.25% initial Mobilization Funding of the contract value.

The following events took place: a. On April 1, the Advance Payment Guarantee was issued and submitted to the Ministry of Roads and Highways. b. The 11.25% Advance Payment Funding is confirmed by Ministry of Roads and Highways and will be received by your bank exactly in three months’ time, on July 1, for customer’s account. c. Also on April 1, the company entered into three months’ Forward Contract to sell the US Dollar proceeds of the 11.25% Advance Payment to your bank on arrival of funds.

ZCP has to acquire materials before main construction works begin in July and so, have requested your bank for immediate funding and have proposed two options as follows: i) To borrow the US Dollar amount of the 11.25% Advance Payment for three months and repay when it is received on July 1 . ii) To borrow Ghana Cedi equivalent of the US Dollar amount for three months and repay from proceeds of the three months Forward Contract.

Rates available for the day are as follows:

Bid Offer
April 1, Spot 10.2570 10.2640
One month forward 0.0085 cedis discount 0.0095 cedis discount
Two months’ forward 0.0115 cedis discount 0.0125 cedis discount
Three months’ forward 0.0135 cedis discount 0.0145 cedis discount

You are also given the following additional information: a. Term SOFR (Secured Overnight Financing Rate) which has replaced the LIBOR, is quoted this morning for 3 months US Dollar at 5.1% with your bank’s margin at 4.5%. b. Commitment and Arrangement Fees are charged separately on Dollar borrowing at 1.50% and 0.50% respectively. c. Interest and other charges on US Dollar borrowing should be translated at middle-rate. d. For ZCP, your bank will lend local currency at 2% above its Base Rate of 21.75% p.a. e. Processing Fees for Cedi Facility is 1.0%. f. Cedi Facility also attracts Group Insurance Commission of 1.50%.

REQUIRED Calculate each of the two options and choose the most favorable one from your customer’s point of view, stating your reason.

[Total Marks 20]

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  • 20 Marks

QTB – Nov 2014 – L1 – SB – Q6 – Mathematics of Business Finance

Calculate the value of an investment with compound interest, the payoff amount for a loan with simple interest, and the additional interest for a loan with monthly payments and reduced interest rates.

a. If N250,000 is invested in an account that earns 4% per year compound interest, what is the:
i. value of the investment after 5 years? (3 Marks)
ii. total interest earned? (2 Marks)

b. When it was apparent that your parents could not afford to finance your university education, you sought and obtained a 4-year loan of N250,000.00 from Education Bank Limited. The bank imposed a simple interest rate of 7½%.
i. How much do you need to pay off the bank now

(4 years after) that you are through with your study?

(7 Marks)
ii. If you decide to be paying N25,000 every month from now and the bank agreed to reduce the interest rate to 1% per month on the unpaid balance at the beginning of the month, how much additional total interest will be paid? (8 Marks)

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  • 10 Marks

PT – Aug 2022 – L2 – Q1c – Income Tax Liabilities

Calculate interest for underestimation of tax for Vito Ltd for the 2019 year of assessment.

The estimated chargeable income for Vito Ltd for the 2019 year of assessment was GH¢50,000,000, but its actual chargeable income declared at the end of the year was GH¢80,000,000. The company prepares accounts to 31 December each year. The company submitted its returns on 30 April, 2020. The BOG prevailing discount rate is 25%.

Required:
Calculate the interest for underestimation of tax.

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  • 10 Marks

AFM – May 2017 – L3 – Q5a – Hedging against financial risk: Non-derivative techniques

Calculation of settlement value, loan amount, interest on loan, and effective interest rate under a Forward Rate Agreement.

The Board of Directors of Aduana Enterprise has approved an expansion project which will require a cash inflow of GH¢10 million. The investment duration will be 6 months, and management is considering taking a fixed interest rate loan from its bankers. The loan will be required in three months from the date of board’s approval.

Management of Aduana is considering hedging its risk exposure using a Forward Rate Agreement (FRA). The 3-9 months’ FRA rate at the transaction date was 5%.

Required:
If the spot rate at the settlement date is 8%, calculate the following:
i) Settlement value (3 marks)
ii) Loan amount required (2 marks)
iii) Interest on the loan (2 marks)
iv) Effective interest rate (3 marks)

 

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  • 10 Marks

FM – May 2020 – L2 – Q3a – Simple interest and compound interest

Calculate the quarterly loan installment and prepare an amortization schedule for a loan with compound interest and equal quarterly payments.

Odapagyan Foods Ltd is borrowing GH¢500,000 to finance a project involving an expansion of its existing factory. It has obtained an offer from Sika Bank. The terms of the loan facility are as follows:

  • Annual interest rate: 22%
  • Duration: 2 years
  • Interest method: compound interest with quarterly compounding
  • Payment plan: equal installments at the end of each quarter

Required:

i) Compute the quarterly installment.
(3 marks)

ii) Prepare a loan amortization schedule to show the periodic interest charges, installment payments, principal payments, and balance of the loan at the end of each quarter.
(7 marks)

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  • 20 Marks

ITF – APR 2024 – L3 – Q1 – Financing Options for Advance Payment

Calculate and compare two financing options for a customer awaiting an advance payment under a construction contract: borrowing the USD amount or the GHS equivalent, considering exchange rates, interest, fees, and a forward contract; select the most favorable option from the customer's perspective.

Zakaria Construction Plc. (ZCP) are your customers specialized in the construction of highways. Sometime in February, your customer approached you to discuss their intention to apply for a Bid Bond to participate in an International Competitive Tender by the Ministry of Roads and Highways. The Tender is for the award of a contract to construct the Eastern Corridor Road. After discussions with your bank, the Bid Bond was issued in Favour of Ministry of Roads and Highways. On March 1, Mr. Adamu, the Chief Finance Officer of ZCP, called to inform you that the company has successfully won the Tender and had been awarded a contract to construct a portion of the main project. At the meeting, Mr. Adamu showed other documents confirming the award of the contract – which also showed the contract value as USD1.2million. The meeting discussed at length, how the bank could assist ZCP to obtain an Advance Payment Bond in Favour of Ministry of Roads and Highways to enable the company access $11.25 %$ initial Mobilization Funding of the contract value.

The following events took place: a. On April 1, the Advance Payment Guarantee was issued and submitted to the Ministry of Roads and Highways. b. The $11.25 %$ Advance Payment Funding is confirmed by Ministry of Roads and Highways and will be received by your bank exactly in three months’ time, on July 1, for customer’s account. c. Also on April 1, the company entered into three months’ Forward Contract to sell the US Dollar proceeds of the $11.25 %$ Advance Payment to your bank on arrival of funds.

ZCP has to acquire materials before main construction works begin in July and so, have requested your bank for immediate funding and have proposed two options as follows: I) To borrow the US Dollar amount of the $11.25 %$ Advance Payment for three months and repay when it is received on July 1. ii) To borrow Ghana Cedi equivalent of the US Dollar amount for three months and repay from proceeds of the three months Forward Contract.

Rates available for the day are as follows:

April 1, Spot 10.2570
One month forward 0.0085 10.2640
Two months’ forward 0.0115 0.0095 cedis discount
Three months’ forward 0.0135 0.0125 cedis discount
0.0145 cedis discount

You are also given the following additional information: a. Term SOFR (Secured Overnight Financing Rate) which has replaced the LIBOR, is quoted this morning for 3 months US Dollar at $5.1 %$ with your bank’s margin at $4.5 %$. b. Commitment and Arrangement Fees are charged separately on Dollar borrowing at $1.50 %$ and $0.50 %$ respectively. c. Interest and other charges on US Dollar borrowing should be translated at middle-rate. d. For ZCP, your bank will lend local currency at $2 %$ above its Base Rate of $21.75 %$ p.a. e. Processing Fees for Cedi Facility is $1.0 %$. f. Cedi Facility also attracts Group Insurance Commission of $1.50 %$.

REQUIRED Calculate each of the two options and choose the most favorable one from your customer’s point of view, stating your reason.

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  • 20 Marks

ITF – APR 2024 – L3 – Q1 – Funding Options for Advance Payment in Construction Contract

Calculate the costs of two financing options—borrowing in USD or equivalent GHS—for a construction company's advance payment and determine the most favorable from the customer's perspective.

Zakaria Construction Plc. (ZCP) are your customers specialised in the construction of highways. Sometime in February, your customer approached you to discuss their intention to apply for a Bid Bond to participate in an International Competitive Tender by the Ministry of Roads and Highways. The Tender is for the award of a contract to construct the Eastern Corridor Road. After discussions with your bank, the Bid Bond was issued in favour of Ministry of Roads and Highways. On March 1, Mr. Adamu, the Chief Finance Officer of ZCP, called to inform you that the company has successfully won the Tender and had been awarded a contract to construct a portion of the main project. At the meeting, Mr. Adamu showed other documents confirming the award of the contract – which also showed the contract value as USD1.2million. The meeting discussed at length, how the bank could assist ZCP to obtain an Advance Payment Bond in favour of Ministry of Roads and Highways to enable the company access 11.25% initial Mobilization Funding of the contract value.

The following events took place: a. On April 1, the Advance Payment Guarantee was issued and submitted to the Ministry of Roads and Highways. b. The 11.25% Advance Payment Funding is confirmed by Ministry of Roads and Highways and will be received by your bank exactly in three months’ time, on July 1, for customer’s account. c. Also on April 1, the company entered into three months’ Forward Contract to sell the US Dollar proceeds of the 11.25% Advance Payment to your bank on arrival of funds.

ZCP has to acquire materials before main construction works begin in July and so, have requested your bank for immediate funding and have proposed two options as follows: i) To borrow the US Dollar amount of the 11.25% Advance Payment for three months and repay when it is received on July 1 . ii) To borrow Ghana Cedi equivalent of the US Dollar amount for three months and repay from proceeds of the three months Forward Contract.

Rates available for the day are as follows:

Bid Offer
April 1, Spot 10.2570 10.2640
One month forward 0.0085 cedis discount 0.0095 cedis discount
Two months’ forward 0.0115 cedis discount 0.0125 cedis discount
Three months’ forward 0.0135 cedis discount 0.0145 cedis discount

You are also given the following additional information: a. Term SOFR (Secured Overnight Financing Rate) which has replaced the LIBOR, is quoted this morning for 3 months US Dollar at 5.1% with your bank’s margin at 4.5%. b. Commitment and Arrangement Fees are charged separately on Dollar borrowing at 1.50% and 0.50% respectively. c. Interest and other charges on US Dollar borrowing should be translated at middle-rate. d. For ZCP, your bank will lend local currency at 2% above its Base Rate of 21.75% p.a. e. Processing Fees for Cedi Facility is 1.0%. f. Cedi Facility also attracts Group Insurance Commission of 1.50%.

REQUIRED Calculate each of the two options and choose the most favorable one from your customer’s point of view, stating your reason.

[Total Marks 20]

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  • 20 Marks

QTB – Nov 2014 – L1 – SB – Q6 – Mathematics of Business Finance

Calculate the value of an investment with compound interest, the payoff amount for a loan with simple interest, and the additional interest for a loan with monthly payments and reduced interest rates.

a. If N250,000 is invested in an account that earns 4% per year compound interest, what is the:
i. value of the investment after 5 years? (3 Marks)
ii. total interest earned? (2 Marks)

b. When it was apparent that your parents could not afford to finance your university education, you sought and obtained a 4-year loan of N250,000.00 from Education Bank Limited. The bank imposed a simple interest rate of 7½%.
i. How much do you need to pay off the bank now

(4 years after) that you are through with your study?

(7 Marks)
ii. If you decide to be paying N25,000 every month from now and the bank agreed to reduce the interest rate to 1% per month on the unpaid balance at the beginning of the month, how much additional total interest will be paid? (8 Marks)

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  • 10 Marks

PT – Aug 2022 – L2 – Q1c – Income Tax Liabilities

Calculate interest for underestimation of tax for Vito Ltd for the 2019 year of assessment.

The estimated chargeable income for Vito Ltd for the 2019 year of assessment was GH¢50,000,000, but its actual chargeable income declared at the end of the year was GH¢80,000,000. The company prepares accounts to 31 December each year. The company submitted its returns on 30 April, 2020. The BOG prevailing discount rate is 25%.

Required:
Calculate the interest for underestimation of tax.

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  • 10 Marks

AFM – May 2017 – L3 – Q5a – Hedging against financial risk: Non-derivative techniques

Calculation of settlement value, loan amount, interest on loan, and effective interest rate under a Forward Rate Agreement.

The Board of Directors of Aduana Enterprise has approved an expansion project which will require a cash inflow of GH¢10 million. The investment duration will be 6 months, and management is considering taking a fixed interest rate loan from its bankers. The loan will be required in three months from the date of board’s approval.

Management of Aduana is considering hedging its risk exposure using a Forward Rate Agreement (FRA). The 3-9 months’ FRA rate at the transaction date was 5%.

Required:
If the spot rate at the settlement date is 8%, calculate the following:
i) Settlement value (3 marks)
ii) Loan amount required (2 marks)
iii) Interest on the loan (2 marks)
iv) Effective interest rate (3 marks)

 

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  • 10 Marks

FM – May 2020 – L2 – Q3a – Simple interest and compound interest

Calculate the quarterly loan installment and prepare an amortization schedule for a loan with compound interest and equal quarterly payments.

Odapagyan Foods Ltd is borrowing GH¢500,000 to finance a project involving an expansion of its existing factory. It has obtained an offer from Sika Bank. The terms of the loan facility are as follows:

  • Annual interest rate: 22%
  • Duration: 2 years
  • Interest method: compound interest with quarterly compounding
  • Payment plan: equal installments at the end of each quarter

Required:

i) Compute the quarterly installment.
(3 marks)

ii) Prepare a loan amortization schedule to show the periodic interest charges, installment payments, principal payments, and balance of the loan at the end of each quarter.
(7 marks)

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