Question 1 (10 marks) wan
A business arranges an overdraft facility for K10,000 with their bank. They use the
facility regularly for the first 6 months of the year and on average have an overdraft
of K6, 000 each month. The interest rate on the overdraft is set at 10%.
(A) How much interest does the business pay over that 6 month period? (Use
simple interest formula). SIK
(B) As a result of a change in the interest rate set by the Bank of PNG, i. e. the
Kina Facility rate (KFR) the business is informed by its bank that the interest
rate on its overdraft will rise to 12%. What effect does this have on the cost of
servicing the overdraft if the business uses the overdraft in the same way for
the next six months? SIR
Question 2 (5 marks)
You wish to borrow K50, 000 from a bank for working capital requirements. You
have received the following quotes from various financial institutions. Institution A:
12% per annum, compounding monthly; Institution B: 11.5% per annum
compounded weekly; and Institution C: 11.3% per annum, compounded daily.
(A) Other things being equal, which bank would you select? (Note: Use the
effective annual rate formula). (3 marks) Chower interest Rate)
(B) Define "Effective Annual Rate. (2 marks)​