a) One of the most important application of annuities is the repayment of interest- bearing debts. These debts can be paid by making periodic deposits into a sinking fund which is used as a future date to pay the principal of the debt or by making periodic payments that cover the outstanding interest and the principle. This second method is called amortization.
(i) Explain the term annuities as used in the statement above. (2 marks)
View Solution
Annuity is a sequence of fixed annual payments ( or receipts) made at uniform ( or equal) time interval.
(ii) What is a sinking fund? (2 marks)
View Solution
Sinking fund is amount set aside plus interest to retire or pay a n interest bearing debt.
(iii) When is a loan with a fixed rate of interest said to be amortized ? (1 mark)
View Solution
A loan with a fixed rate of interest is said to be amortized if both
principle and interest are paid by a sequence of equal payments made over equal periods of time.
c) Maame TorTor borrows GH¢ 3000.00 and agrees to pay interest quarterly at an annual rate of 8%. At the same time, she set up a sinking fund in order to repay the loan at the end of 5 years. If sinking fund earns interest at the rate of 6% compounded semi-annually,
Required:
Determine the size of each semi-annual sinking fund deposit. (5 marks)
View Solution
The quarterly interest payments due on the debt are GH¢ 3000(0.2)=GH¢ 60
The size of each semi-annual deposit P is given by P=
