1
Suggested Solutions for Tutorial 6
Please note that following suggested solutions are only very basic points and you need
to read the textbook and other reference materials for better understanding.
1. Simple interest accumulation
(a) Define and explain the notion of simple interest.
the calculation of interest is based on the initial principal amount invested or borrowed
for example, funds invested in a bank term deposit for sixmonths where simple interest is paid
monthly. The investor will receive the interest payment each month by cash and the amount
invested in the term deposit will remain the same. The principal will be repaid at maturity
(b) A company makes a $50 000 deposit for six months at 6.40 per cent per annum simple
interest. How much interest will the company earn?
i
d
A
I
365
0.064
365
182
000
50
$
= $1595.62
(c) A bank accepts a $15 000 deposit to mature in 135 days, and it pays 5.90 per cent per
annum. How much interest will it have to pay?
i
d
A
I
365
0.059
365
135
000
50
$
= $327.33
(d) A bank accepts a deposit of $105 000 for a term of one year and 97 days, with an interest
rate of 6.25 per cent per annum simple interest. Interest is payable six monthly and at the
maturity date. How much interest will be paid in total?
i
d
A
I
365
0.0625
365
462
000
5
$10
= $8306.51
(e) What is the maturity value of each of the transactions described in parts (b) to (d)?
S
=
A
[1 +(
n
×
i
)]
(b) = $50 000 [1 + (182/365 × 0.064)]
= $51 595.62
(c) = $15 000 [1 + (135/365 × 0.059)]
= $15 327.33
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(d) = $105 000 [1 + (462/365 × 0.0625)]
= $113 306.51
(f) What is the future value of $132 500 invested for 290 days at a current yield of 7.50 per cent
simple interest?
S
=
A
[1 +(
n
×
i
)]
= $132 500[1 + (290/365 × 0.075)]
= $140 395.55
2. Present value with simple interest
(e) A moneymarket discount security maturing in 90 days has a face value of $100 000 and the
current yield is 8.25 per cent per annum. What is the current value of the discount security?
}]
×
{
+
[1
i
n
S
A
= $100 000 / [1 + (90/365 × 0.0825)]
= $100 000 / 1.020342
= $98 006.31
(g) A company issues a bank bill with a face value of $500 000 and a term to maturity of 180
days at a yield of 7 per cent per annum. The company discounts the bill today. What is the
market price of the bill?
maturity
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 Three '11
 Chalmers
 Time Value Of Money, Interest, Nominal Interest Rate, cent

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