Question Tag: Life insurance policy

a) Eleven years ago, Mr. and Mrs. Akolgo signed onto a joint life insurance policy, which pays out benefits to the surviving spouse when one of them dies. Mrs. Akolgo died a couple of months ago, and Mr. Akolgo has applied for the payment of benefits due him.
He has been presented with three pay-out options to choose from:
Option A: A lump sum payment of GH¢400,000 now.
Option B: A payment of GH¢100,000 now plus quarterly payments of GH¢22,000 at the end of each quarter over the next ten years.
Option C: A monthly payment of GH¢10,000 for life.
The average interest rate in the economy is 25 % per annum.

Required:
Using relevant computations, recommend to Mr. Akolgo the best pay-out option. (6 marks)

b) Gaazie Mining Company (Gaazie) borrows GH¢5 million at a compound interest rate of 28% per annum for five years. Per the terms of the loan agreement, Gaazie will pay interest on the loan monthly over the life of the loan and then make a bullet payment for the principal of the loan at the end of five years.
The managers of the company have decided to deposit equal annual amounts in an interest-bearing savings account to raise money to pay off the loan principal in five years’ time. Interest on the deposits will be paid at a compound rate of 15% per annum.

Required:
Compute the annual deposit Gaazie needs to pay into the savings account. (4 marks)

c) Tofiakwa Ltd is expecting the following in six months’ time:
Receipt: US$700,000
Payment: US$1,200,000
The spot exchange rate between the Ghanaian cedi and the U.S. dollar is currently GH¢11.1255(buy) – GH¢11.5581(sell) to US$1. The cedi-dollar exchange rate has been volatile in recent times, hence the managers of the company have decided to manage the company’s U.S. dollar exposure using a money market hedge.

The following data has been gathered from the Ghanaian and the U.S. money markets:

Required:
i) Set up or construct the money market hedge for the currency exposure. (3 marks)
ii) Calculate the net outcome of the hedge. (7 marks)