Docstoc

bank loan interest rates

Document Sample
bank loan interest rates Powered By Docstoc
					Interest Calculation Primers: IIMB Microfinance Group


1. Simple Interest
      You deposit Rs 1,000 with a bank, that offers to pay 10% simple interest per annum.
      What will be the total amount you will receive if you deposit the amount for (a) 1
      Year (b) 2 Years (c) 3 Years (d) 10 Years (e) 25 Years. In addition to the total amount
      received show the principal and interest separately.
      Hint

       Step 1 Write down the principal amount (the amount initially deposited)

       Step 2 Calculate the interest amount
       Interest (Amount)=Principal*Interest Rate*Period
       [If the interest rate is annual, as in this example, the period should be in years to
       ensure consistency]

       Step 3 Total = Principal + Interest

       (a) 1 Year
       Principal
       Interest
       Total



       (b) 2 Years
       Principal
       Interest
       Total



       (c) 3 Years
       Principal
       Interest
       Total



       (d) 10 Years
       Principal
       Interest
       Total



       (e) 25 Years
       Principal
       Interest
       Total




   January 2007                                                                            1
Interest Calculation Primers: IIMB Microfinance Group


2. Compound Interest
     You deposit Rs 1,000 with a bank that offers to pay a 10% per annum compounded
     annually. What will be the total amount you will receive if you deposit the amount for
     (a) 1 Year (b) 2 Years (c) 3 Years (d) 10 Years (e) 25 Years. In addition to the total
     amount received show the principal and interest separately.
     Hint

       Step 1 Write down the principal amount (the amount initially deposited)

       Step 2 Calculate the total amount
       Total=Principal*(1+Interest Rate)Period

       Step 3 Interest (Amount) =Total- Principal

       (a) 1 Year
       Principal
       Interest
       Total
       Hint
                Total=Principal*(1+Interest Rate)

       (b) 2 Years
       Principal
       Interest
       Total
       Hint
                Total=Principal*(1+Interest Rate)2
                     = Principal*(1+Interest Rate)*(1+Interest Rate)

       (c) 3 Years
       Principal
       Interest
       Total
       Hint
                Total = Principal*(1+Interest Rate)3
                      = Principal*(1+Interest Rate)*(1+Interest Rate)*(1+Interest Rate)


       (d) 10 Years
       Principal
       Interest
       Total


       (e) 25 Years
       Principal
       Interest
       Total




   January 2007                                                                           2
Interest Calculation Primers: IIMB Microfinance Group


3. Effective Interest Rates
      A bank offers you a loan with a stated annual interest rate of 10% per annum. What is
      the effective annual interest rate with (a) Annual rest (b) Semi-annual rests (c)
      Quarterly rests (d) Monthly rests. Semi-annual rests mean that interest will be applied
      at 5% (10%/2) every six months, the compounding period being six months. Quarterly
      rests mean that interest will be applied at 2.5% (10%/4) every three months, the
      compounding period being three months.

       Hint
       Effective Annual Interest Rate
       =(1+Stated Annual Interest Rate/No. of Intervals)No. of Intervals - 1

       For example with semi-annual compounding the number of intervals in a year is 2.


   Compounding                No. of months         No. of Intervals      Effective   Interest
   Period                                                                 Rate
   Annual                     12                    1

   Semi-annual                6                     2

   Quarterly

   Monthly                    1




   January 2007                                                                                  3
Interest Calculation Primers: IIMB Microfinance Group



4.1 A bank gives a loan of Rs 1,200 to be repaid in twelve monthly instalments. Interest will
    be charged monthly at a stated rate of 24% per annum on a declining balance basis. What
    is the effective annual interest rate?

4.2 A bank gives a loan of Rs 1,200 to be repaid in twelve monthly instalments. Interest will
    be charged monthly at a stated rate of 24% per annum on a declining balance basis. An
    up-front application fee of 2% of the loan principal is charged. What is the effective
    annual interest rate?

4.3 A bank gives a loan of Rs 1,200 to be repaid in twelve monthly instalments. Interest will
    be charged monthly at a stated rate of 24% per annum on a declining balance basis. An
    amount equal to 10% of the loan principal will have to be compulsorily saved at zero
    percent interest rate. This amount can be withdrawn after the loan has been fully repaid.
    What is the effective annual interest rate?

4.4 A bank gives a loan of Rs 1,200 to be repaid in twelve monthly instalments. Interest will
    be charged monthly at a stated rate of 24% per annum on a declining balance basis. An
    up-front application fee of 2% of the loan principal is charged. An amount equal to 10%
    of the loan principal will have to be compulsorily saved at zero percent interest rate. This
    amount can be withdrawn after the loan has been fully repaid. What is the effective
    annual interest rate?




5.1 A bank gives a loan of Rs 1,200 to be repaid in twelve monthly instalments. Interest will
    be charged monthly at a stated rate of 24% per annum on flat basis. What is the effective
    annual interest rate?

5.2 A bank gives a loan of Rs 1,200 to be repaid in twelve monthly instalments. Interest will
    be charged monthly at a stated rate of 24% per annum on a flat basis. An up-front
    application fee of 2% of the loan principal is charged. What is the effective annual
    interest rate?

5.3 A bank gives a loan of Rs 1,200 to be repaid in twelve monthly instalments. Interest will
    be charged monthly at a stated rate of 24% per annum on flat basis. An amount equal to
    10% of the loan principal will have to be compulsorily saved at zero percent interest rate.
    This amount can be withdrawn after the loan has been fully repaid. What is the effective
    annual interest rate?

5.4 A bank gives a loan of Rs 1,200 to be repaid in twelve monthly instalments. Interest will
    be charged monthly at a stated rate of 24% per annum on flat basis. An up-front
    application fee of 2% of the loan principal is charged. An amount equal to 10% of the
    loan principal will have to be compulsorily saved at zero percent interest rate. This
    amount can be withdrawn after the loan has been fully repaid. What is the effective
    annual interest rate?




    January 2007                                                                              4
Interest Calculation Primers: IIMB Microfinance Group


6   An MFI has opening loan portfolio of 1,000. It charges a stated rate of interest of 24% per
    annum.

6.1 Suppose the MFI charges an interest rate payable annually, and the portfolio can only
    grow out of reinvested interest earnings what is the Effective Interest Rate (on an annual
    compounding basis? Compute the yield on the average loan portfolio. What is the
    Yield/APR ratio and the return on the initial portfolio?

6.2 Suppose the MFI applies the stated interest rate on a monthly basis and re-invests interest
    earned in the loan portfolio.      What is the Effective Interest Rate (on an annual
    compounding basis? Compute the yield on the average loan portfolio. What is the
    Yield/APR ratio and the return on the initial portfolio?


7. A bank gives a loan of Rs 1,040 to be repaid in 52 weekly instalments, with repayment
   commencing the week following the disbursement. Interest will be charged weekly at a
   stated rate of 24% per annum on flat basis. What is the effective annual interest rate?




    January 2007                                                                             5

				
DOCUMENT INFO
Shared By:
Categories:
Stats:
views:101
posted:11/17/2008
language:English
pages:5