Question one

Interest Rates over the Millennia

Historical interest rates are fascinating, perhaps because they look so similar to todays interest rates. Nowadays, typical interest rates range from 2% to 20% (depending on other factors). For over 2,500 years, from about the thirtieth century B.C.E. to the sixth century B.C.E., normal interest rates in Sumer and Babylonia hovered around 1025% per annum, though 20% was the legal maximum. In ancient Greece, interest rates in the sixth century B.C.E. were about 1618%, dropping steadily to about 8% by the turn of the millennium. Interest rates in ancient Egypt tended to be about 1012%.

In ancient Rome, interest rates started at about 8% in the fifth century B.C.E. but began to increase to about 12% by the third century A.C.E. (a time of great upheaval). When lending resumed in the late Middle Ages (twelfth century), personal loans in England fetched about 50% per annum, though they tended to hover between 1020% in the rest of Europe. By the Renaissance, commercial loan rates had fallen to 515% in Italy, the Netherlands, and France. By the seventeenth century, even English interest rates had dropped to 610% in the first half, and to 3 6% in the second half. Mortgage rates tended to be lower yet. Most of the American Revolution was financed with French and Dutch loans at interest rates of 45%.

Required

1. Of late Kenyans have been losing money through investments that have been promising unbelievably high returns in excess of 50% p.a. with reference to the case above write a report advising Kenyans on risk and return in investments. (20 marks)