- 5 Marks
QT – Nov 2016 – L1 – Q4a – Mathematics of Business Finance
Explain the terms annuities, sinking fund, and amortization related to loan repayment.
Question
One of the most important applications 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 at a future date to pay the principal of the debt, or by making periodic payments that cover the outstanding interest and the principal. This second method is called amortization.
Required:
i) Explain the term annuities as used in the statement above. (2 marks)
ii) What is a sinking fund? (2 marks)
iii) When is a loan with a fixed rate of interest said to be amortized? (1 mark)
Find Related Questions by Tags, levels, etc.
- Tags: Amortization, Annuities, Loan Repayment, Sinking Fund
- Level: Level 1
- Topic: Mathematics of Business Finance
- Series: NOV 2016
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