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Question 1

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Answer 1

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Question 2

What is a loan?

Answer 2

A loan is an arrangement in which a lender gives money or property to a borrower, and the borrower agrees to return the property or repay the money, usually along with interest, at some future point(s) in time.

Question 3

Who typically gets loans and why?

Answer 3

Loans are mostly used by companies or individuals to raise funds, usually to buy buildings or equipment, etc.

Question 4

What are the two methods of calculating the balance of a loan?

Answer 4

The two methods are the�Prospective method�and the�Retrospective method.

Question 5

What are the two main methods of repaying a loan?

Answer 5

The two main methods are�The amortization method�and�The sinking fund method.

Question 6

What is the amortization method of loan repayment?

Answer 6

In the amortization method, the borrower makes installment payments to the lender at regularly spaced periodic intervals, progressively reducing the amount owed.

Question 7

What is the sinking fund method of loan repayment?

Answer 7

In the sinking fund method, the loan is repaid by a single lump sum payment at the end of the term, and the borrower pays interest in installments while accumulating the repayment amount in a sinking fund.

Question 8

What is the prospective method for calculating the loan balance?

Answer 8

The prospective method calculates the loan balance as the present value of all future payments to be made.

Question 9

What is the retrospective method for calculating the loan balance?

Answer 9

The retrospective method calculates the loan balance as the accumulated value of the loan at the time of evaluation minus the accumulated value of all installments paid up to that time.

Question 10

What is the relationship between the prospective and retrospective methods?

Answer 10

The two methods are equivalent, meaning they will yield the same outstanding loan balance when calculated correctly.

Question 11

Define amortization as understood in financial communities.

Answer 11

Amortization is the process of gradually paying off a loan through periodic payments, which include both principal and interest, over a specified period.

Question 12

What do you understand by the issue price of a bond?

Answer 12

The issue price of a bond is the price at which the bond is initially sold to investors by the issuer.

Question 13

State the similarity between a forward contract and a swap.

Answer 13

Both forward contracts and swaps are financial derivatives that involve an agreement between two parties to exchange assets or cash flows at a future date based on predetermined terms.

Question 14

Bonds with an infinite term are called ______.

Answer 14

Perpetuals.

Question 15

What is a certificate of deposit?

Answer 15

A certificate of deposit is a financial product offered by banks that pays a fixed interest rate in exchange for the customer depositing a sum of money for a specified period.

Question 16

True or False? Internal rate of return is also known as the yield rate of return.

Answer 16

True.

Question 17

Describe the characteristics of a European call option.

Answer 17

A European call option allows the holder to buy the underlying asset only at the expiration date, not before.

Question 18

Describe the characteristics of an American call option.

Answer 18

An American call option allows the holder to buy the underlying asset at any time before or on the expiration date.

Question 19

Describe the characteristics of a Bermuda call option.

Answer 19

A Bermuda call option allows the holder to exercise the option at specific predetermined dates before or on the expiration date.

Question 20

Briefly explain the retrospective method for calculating the loan balance.

Answer 20

The retrospective method calculates the loan balance as the accumulated value of the original loan minus the accumulated value of all payments made up to the current date.

Question 21

Briefly explain the prospective method for calculating the loan balance.

Answer 21

The prospective method calculates the loan balance as the present value of all future payments to be made.

Question 22

What is the life of a swap called?

Answer 22

The life of a swap is called the�swap term�or�swap tenor.

Question 23

Define the term redemption date as understood in the financial community.

Answer 23

The redemption date is the date on which a bond or other financial instrument is repaid or redeemed by the issuer.

Question 24

State four (4) uses of financial derivatives.

Answer 24

1. Hedging against risk. 2. Speculating on future price movements. 3. Arbitraging price differences between markets. 4. Reducing transaction costs.

Question 25

Define the Discounted Payback Period.

Answer 25

The Discounted Payback Period is the time it takes for the cumulative discounted cash flows from an investment to equal the initial investment cost.

Question 26

Distinguish between forward and futures contracts.

Answer 26

Forward contracts�are private agreements between two parties to buy or sell an asset at a specified price on a future date.�Futures contracts�are standardized agreements traded on exchanges.

Question 27

Why is the purchaser of a futures contract called the "long" party?

Answer 27

The purchaser of a futures contract is called the "long" party because they have the obligation to buy the underlying asset at the contract's expiration.

Question 28

Why is the seller of a futures contract called the "short" party?

Answer 28

The seller of a futures contract is called the "short" party because they have the obligation to sell the underlying asset at the contract's expiration.

Question 29

State clearly the difference between ordinary and preference shares.

Answer 29

Ordinary shares�give shareholders voting rights and dividends that vary based on company performance.�Preference shares�give shareholders fixed dividends and priority over ordinary shareholders.

Question 30

A sum of money paid regularly (typically annually) by a company to its shareholders out of its profits (or reserves) is known as the _____.

Answer 30

Dividend.