Cost of credit of some financial instruments in Singapore

• Main Authors: Lee, Yong Ming, Tan, Siew Ching, Yew, Josephine Hui Ling
• Other Authors: Low Chan Kee
• Format: Final Year Project
• Language: English
• Published: 2015
• Subjects: DRNTU::Business
• Online Access: http://hdl.handle.net/10356/64530
• Institution: Nanyang Technological University

Absence of controlling legislation and the general lack of understanding of the theory of interest has led to quoted interest rates underlying financial instruments that do not properly reflect the cost of finance. It is, thus, the aim of this study to provide a theoretically-based quantification of the cost of credit underlying some common financial instruments. After a comprehensive coverage of the theory of interest, the concepts of annuities and some problem-solving techniques, a detailed analysis of the terms of some financial instruments (namely, life insurance policies, loans and deposits) is carried out. For life insurance policies, the effective rates of return are calculated and compared to the rates of return on fixed deposits with the conclusion that long term participative insurance policies yield higher returns than fixed deposits. In the analysis of loans, a comparison of the quoted and effective rates reveal that effective rates are generally higher than quoted rates, the greatest discrepancies being observed in personal loans where the effective rates are approximately twice the value of the quoted rates. A similar comparison carried out for deposits shows that the effective rates are also higher than the quoted rates, however the differences are marginal unlike the loan cases. It should also be noted that although the effective rate found for the monthly basis savings account is higher than that for the daily basis savings account, the actual rate of return received by the depositor would depend on his/her expenditure pattern . As the quoted rates do not reflect the effective rates, a general understanding of the interest and annuities theories is required so that a better interpretation of the quoted rates in the financial market is possible.