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Unformatted text preview: MenuItem8:(Topic 8)Mathematics of finance: An Introduction to basic concepts and calculations Question 1: Some aspects of financial calculations are based on market conventions. For the purpose of simple interest calculations in the Australian market, what is the convention concerning the number of days in a year? A: 360 days per year B: 365.25 days per year C*: 365 days per year D: 365 days per year, except for leap years, when it is 366 Feedback: The convention in the Australian market is to assume that there are 365 days in a year. If the period of an investment in a leap year includes 29 February, the 29th day is counted but the year is still assumed to have 365 days. MORE: Financial Institutions, Instruments and Markets 5/e , p. 327. In Example 3 the amount was borrowed for ninety days, which must be converted into a fraction of a year in order to apply Equation 8.1. It is important to note that the market convention relating to the number of days in the year varies between countries. In the United Kingdom, Australia and a number of other countries the convention is that a per annum rate relates to a 365day year. However, in the United States and in the euromarkets the convention is to use a 360day year. In this chapter the 365day convention is used. Question 2: Some aspects of financial calculations are based on market conventions. For the purpose of simple interest calculations in the US and euromarkets, what is the convention concerning the number of days in a year? A*: 360 days per year B: 365.25 days per year C: 365 days per year D: 365 days per year, except for leap years when it is 366 Feedback: In some markets, including the US and the euromarkets, it is conventional to assume that there are 360 days in a year. This simplifies calculations for securities with terms to maturity of 90, 180 and 270 days. MORE: Financial Institutions, Instruments and Markets 5/e , p. 327. In Example 3 the amount was borrowed for ninety days, which must be converted into a fraction of a year in order to apply Equation 8.1. It is important to note that the market convention relating to the number of days in the year varies between countries. In the United Kingdom, Australia and a number of other countries the convention is that a per annum rate relates to a 365day year. However, in the United States and in the euromarkets the convention is to use a 360day year. In this chapter the 365day convention is used. Question 3: A sum of $60 000 is deposited in a bank account that pays interest at 5.50 per cent per annum. If the account is closed after 270 days and all funds are withdrawn, how much will be paid to the depositor? A: $62 312.50 MaxMark t/a Financial Institutions, Instruments and Markets 5e by Viney 1 B: $2441.10 C*: $62 441.10 D: $62 475 Feedback: Using Equation 8.1 the interest earned is $60 000 × 0.055 × (270/365) = $2441.10 so the total paid to the depositor will be $62 441.10....
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 Spring '12
 Mr.Mark
 Interest, Nominal Interest Rate, Viney

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