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Module-A Business Mathematics - Presentation & Mcqs
Module-A Business Mathematics - Presentation & Mcqs
Finance
Accounting & Finance for
Bankers
S.C.Bansal
MODULE-A
BUSINESS MATHEMATICS
Presentation & MCQs
Simple interest
Important symbols ; P=amount deposited
initially, called Principal
r=rate of interest. 12% per annum means that if
you deposit Rs 100 for one year,you will get
interest of Rs 12 at the end of the year.In our
calculations,we will take r=12/100=0.12 p.a.
T=number of years for which P is deposited
I=total interest receivable. I=P*r*T
A=amount receivable.A=P+I=P+(P*r*T)=P(1+rT)
Compound interest
If you deposit Rs 100 @12%p.a.,it becomes Rs 112 at
the end of one year.For next year,you should get interest
on Rs112,which is 112*12/100=13.44.This is called
compounding.In case of simple interest, you would have
received interest of Rs 12 only for the 2nd year also.
Compounding can be yearly,as shown above, or can be
monthly,quarterly,half yearly etc.More frequent
compounding means more interest for you.
In yearly compounding, A=P(1+r) after 1year, P(1+r) 2
after 2years,and so on.After T years, A=P(1+r)T
If compounding is n times in a year, A=P(1+r/n)nT
Rule of 72 is used to find the period in which our money
doubles.
Discount factor
We have seen that P becomes P(1+r)T in T
years.Therefore,if somebody promises to give you Rs
P(1+r)T after T years,you should know that it is worth
only Rs P today.
Amount receivable in future is to be multiplied by a
number(always less than one) to arrive at the present
worth of that amount.
In above example,P(1+r)T is to be multiplied by 1/(1+r)T
to arrive at present worth P. So ,The discount factor is 1/
(1+r)T.
E.g.,if rate of intt is 10%p.a., r=0.10. Therefore, discount
factor is 1/1.10 for 1 year, 1/1.21for 2 years and so on.
Annuities
A series of fixed payments/receipts at a
specified frequency, over a fixed period.
E.g. Payment of Rs 1000 every year by
LIC for next 20 years . Also, a Recurring
deposit with bank for Rs 100 for 5 years.
2 types of Annuities. Ordinary Annuity;
payment is at the end of the period.
Annuity Due;payment is at the beginning
of each period.
Sinking fund
Concept same as that of Annuity
Suppose, you need a fixed amount(A)
after,say, 5 years.You deposit an
amount(C)every year with a bank.This
becomes A after 5 years and can be used
for repaying a debt or any other
purpose.As the rate of intt and the FV is
known, we can calculate C.
Bonds
A Bond is a form of debt raised by the issuer of
the bond.
Issuer of the bonds pays interest to the
purchaser for using his money.
Terms associated with bonds: Face value,
Coupon rate, Maturity, Redemption value,
Market value.
Face value and redemption value may be
different but these are fixed and known.
Market value of the bond may be different form
the face value and keeps changing.
Valuation of bonds
The purchaser of the bonds gets regular interest
payments as also the redemption amount on maturity.
The interest on bond( also called coupon rate) is fixed at
the time of its issue. But interest rate in the market keeps
changing, and,therefore,market price of bond also
changes.
The market price or intrinsic value of a bond is different
from the face value if the coupon rate is different from
the market interest rate at that particular time.
Market value is equal to PV of all the coupon receipts
and redemption value discounted at the prevailing
market rate.
Yield on bonds
Current yield =coupon interest/current
market price.
E.g. if face value of a bond is Rs 50,
coupon rate is 8% pa, and market price is
Rs 40, then the current yield=4/40=0.1 or
10%
Yield to Maturity(YTM) is that discount rate
at which all future cash flows equal the
present market value.
Capital budgeting
Used to choose between various projects.
A capital project involves capital outflow( investment) and
capital inflows(net profit) over the life of the project.
PV of all cash inflows will be +ve and PV of all cash
outflows will be negative.PV will depend on the discount
rate( cost of capital)
Summation of all the PVs of cash inflows and outflows is
called Net Present Value(NPV)
IRR is that discount rate at which NPV of a project is
zero.
Other method used for capital budgeting is pay back
period method.
Depreciation
Concept of depreciation
Straight line method;(cost-residual value)/
estiamted usful life
Written Down Value method or declining
balance mehtod : %age is fixed
Forex Arithmatics
Earlier RBI used to fix buying and selling rates of
Forex.Now LERMS( liberalised exchange rate
management system) is used.
Direct and indirect quotations.From 2-8-93 only
direct quotations are being used.
Cross rate/chain rule; e.g. if 1US$=Rs 48 and
1Euro=US$1.25, then 1Euro=Rs1.25*48
Value date: Cash/ready,TOM, Spot, Forward
Premium and discount.
Factors affecting premium/discount
Capital adequacy
Sample questions
121,000
100,500
110,000
104,545
0.826
1.00
0.909
0.814
10%
20%
30%
15%
Sample questions
5.Annuity is defined as
Sample questions
shareholder
depositor
creditor
employee
Sample questions
gives the return at maturity on the bond for the original holder
b) or c)
Sample questions
yield to maturity
coupon rate
compounded rate
current yield
14.A Bond of face value Rs.5000 carries a coupon interest rate of 12%. It
is quoted in the market at Rs.4500. What is the current yield of the
bond?
12%
10%
13.3%
14.2%
Sample questions
15.Which of the following investment rules
does not use the time value of the money
concept?
A.The payback period
B.Internal rate of return
C.Net present value
D.All of the above use the time value
concept
Sample questions
Rs200,000
Rs170,000
Rs140,000
Rs50,000
17.Cost of Car is Rs. 300,000, Depn. Rate is 10% on WDV. What is the
book value of car after 3 years.
210,000
220,00
214,300
218,700
Sample questions
Sample questions