1. A civil servant decides to save for his retirement which is due in 10 years, by making payments into a retirement account at the beginning of each year. The first 5 payments are of Kshs 200,000 each, while the remaining 5 payments are of Kshs 500,000 each. Assuming an effective annual return on investment of between the rate of 8% and 12%, find:

i. The present value of these cashflows (3 marks)

ii. The future value of these cashflows (3 marks)

2. A two-year bond with annual coupons of Kshs 100,000 and redemption value of Kshs 1,000,000 is priced at Kshs 1,037,410. The current two-year spot rate is 8%. Determine the current one-year spot rate that is consistent with the pricing of the bond. (4 marks)

3. John borrows Kshs 3,000,000 from a bank and promises to repay this money over the next 5 years by making level payments at the end of each year. His annual effective rate of interest of between 8% to 10%.

Required;

Using Any rate of interest from the range given;

1. Create Mikes amortization schedule. (4 marks)
2. Using the rate of interest selected in part (i) create Mikes Sinking fund Schedule (4 marks)
3. Show that repayment methods (i) and (ii) above are equivalent. (2 mark)