Essays on Fundamentals of Finance - ABC Friendly Finance Company Assignment

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The paper "Fundamentals of Finance - ABC Friendly Finance Company" is an outstanding example of a finance and accounting assignment. The aim of this question is to weigh through three options and decide the best form of investment. The three borrowing options offer different rates. The interest rates are nominal meaning that they have not been adjusted to inflation. The effective rate is used in this case since it is more realistic. The interest rates have been compounded. Compounding means that they change with time. This can be daily, monthly, quarterly or annually.

The funding that is needed is $1,000,000 and is required for 5 years. The best option is that which gives rise to the least amount payable at the end of the loan. Option 1: ABC Friendly Finance Company The nominal rate is 10.50% per annum which is compounded daily. ABC Friendly Finance Company effective annual rate of interest: = (1+0.1050/365)^365-1=1.000287671^365-1 =1.110693838-1= 0.110693837 =11.07% Amount payable after 5 years= P (1+r/n) nt =$1,000,000 (1+ 0.1107/365) 365*5 =$1,000,000*(1.0003032881825) =$1,739,184.07 Option 2: DEF Commercial Bank Ltd The nominal rate is 10.55% per annum which is compounding quarterly. DEF Commercial Bank Ltd effective annual rate of interest: =(1+0.1055/4)^4-1=1.026375^4-1 =1.109747718-1=0.109747717 =10.97% Amount payable after 5 years: =$1,000,000 (1+ 0.1097/4) 4*5 =$1,000,000*(1.02742520) =$1,717,918.60 Option 3: SHARKIES Cheap Loans Ltd The rate used in this option is 9.50% per year (simple interest).

This has been converted to 4.75% every half year. Therefore, the instalments are made in equal ‘ six-monthly instalments’ over the term of the loan. SHARKIES Cheap Loans Ltd effective annual rate of interest: =2*Annual no. of payments*Interest/ (Total no. of payments+1)*Principal =2*2*(95,000*5)/ (2*5+1)*1,000,000= 1,900,000/ (11*1,000,000) =0.1727=17.27% Amount payable after 1 year=$1,000,000 + (1,000,000*0.1727/2*1) = 1,000,000+86,350 =$1,086,350 Amount payable after 2 years=$1,086,350+86,350=$1,172,700 Amount payable after 3 years=$1,172,700+86,350=$1,259,050 Amount payable after 4 years=$1,259,050+86,350=$1,345,400 Amount payable after 5 years=$1,345,400+86,350=$1,431,750.

Works Cited

Reserve Bank of Australia: Monetary Policy 2012. Web. 20 May. .

Yahoo Finance: Home 2012. Web. 20 May. .

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