Professional Documents
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MODULE-A
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
Need for capital in banks. How much capital? Basel II norms RBI norms
Sample questions
1.What is the Present Value of Rs. 115,000 to be received after 1 year at 10%?
121,000 100,500 110,000 104,545
Sample questions
5.Annuity is defined as
Equal cash flows at equal intervals forever Equal cash flows at equal intervals for a specified period Unequal cash flows at equal intervals for specified period Unequal cash flows at equal intervals forever
Sample questions
6.What is the N P V of the following at 15% t=0 t=1 t=2 -120,000 -100,000 300,000 19,887 80,000 26,300 40,000 7.A bond holder of a company has one of the following relationship with It .Identify
shareholder depositor creditor employee
Sample questions
and the final payment at face value, equals the current price
gives the return at maturity on the bond for the original holder b) or c)
9.The relationship between the bond prices and interest rates is one of the Following
direct & linear inverse & linear direct and curvilinear no relationship
Sample questions
13) What does the rate of return equal to if interest rates do not change during the pendency of the bond ?
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
16.A capital equipment costing Rs200,000 today hasRs 50,000 slavage value at the end of 5 years. If the straight line depreciation method is used, what is the book value of the equipment at the end of 2 years? 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
18.If P=principal, r = rate of interest , n= number of instalments Then formula for equated monthly instalment (EMI) is (p*r)(i+r)n (1+r)n 1
Sample questions
19.If the rates in Mumbai are US $1=Rs.42.850 .In London market are US $ 1=Euros 0.7580 Therefore for one Euro we will get a) Rs.56.45 b Rs.56.53 c) Rs.56.38 d) Rs.56.50