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MODULE-A

BUSINESS MATHEMATICS – Presentation & MCQs

**Why Mathematics in Banking
**

• To calculate interest on deposits and advances • To calculated yield on bonds in which banks have to invest substantial amount. • To calculate depreciation • To decide on buying/selling rates of foreign currencies • To calculate minimum capital required by the bank • To appraise loan proposals

**What level of maths is required
**

• In banking, very high level of maths is not needed • We should know the following basic mathematical operations • Addition,e.g. 24+33+9+56=122 • Subtraction,e.g.138-41-72=25 • Multiplication,e.g. 1.1*1.1=(1.1)2 =1.21 • Division,e.g.1/12=0.0833

Weightage of maths in JAIIB/DBF Exam • Constitutes one of the four modules of the paper of Accounting & Finance( total 3 papers) • Therefore. as only simple mathematics is involved and use of calculator is allowed . the weightage in the total exam is about 10% • It is possible to get good score in questions related to this module.

• You need to read the book thoroughly and solve problems • You may get in touch with me whenever you need any clarification • My mail id is bansalsc2006@yahoo.com .Can we cover entire syllabus in this class • We can have conceptual clarity of the entire syllabus on business maths.

Simple interest • Important symbols .a. I=P*r*T • A=amount receivable. called Principal • r=rate of interest.you will get interest of Rs 12 at the end of the year. P=amount deposited initially. • T=number of years for which P is deposited • I=total interest receivable.we will take r=12/100=0.12 p.In our calculations. 12% per annum means that if you deposit Rs 100 for one year.A=P+I=P+(P*r*T)=P(1+rT) .

as shown above. • Compounding can be yearly.In case of simple interest.a.44.you should get interest on Rs112.which is 112*12/100=13. A=P(1+r/n)nT • Rule of 72 is used to find the period in which our money doubles. you would have received interest of Rs 12 only for the 2nd year also. P(1+r)2 after 2years.For next year.it becomes Rs 112 at the end of one year.More frequent compounding means more interest for you.half yearly etc. • In yearly compounding. .After T years. A=P(1+r) after 1year. A=P(1+r)T • If compounding is n times in a year..quarterly.and so on.Compound interest • If you deposit Rs 100 @12%p. or can be monthly.This is called compounding.

.Therefore. . • Amount receivable in future is to be multiplied by a number(always less than one) to arrive at the present worth of that amount.21for 2 years and so on.you should know that it is worth only Rs P today.a. • E.if somebody promises to give you Rs P(1+r)T after T years. 1/1. So . r=0.if rate of intt is 10%p.The discount factor is 1/(1+r)T..10 for 1 year.g. • In above example. Therefore. discount factor is 1/1.P(1+r)T is to be multiplied by 1/(1+r)T to arrive at present worth P.Discount factor • We have seen that P becomes P(1+r)T in T years.10.

PV of Rs 100 .to be received after 2 years will be.10)5 .Similarly. r=0..21=Rs 82.g.64.10.10 for 1 year. • In above example.to be received after 5 years.PV of Rs 100.Present value of money • PV= Future amount* Discount Factor(DF) • DF = 1/(1+r)T • E. discount factor is 1/1. Therefore. will be100*1/(1.10)2 =100/1. 1/(1.if rate of intt is 10%p.a.10)2 =1/1.21 for 2 years and so on.. 100*1/(1.

21=Rs 121. 100*(1.a. Therefore. (1. will be more than the amount(P) available now. after 2 years will be..FV=Present Amount*(1+r)T .Similarly. the amount you receive in future(A).when the compounding is yearly.10 for 1 year.Future value of money • Depending on the rate of interest.g.21 for 2 years and so on. • Therefore.FV of Rs 100. after 5 years.FV of Rs 100 .. • In above example. compounding factor is 1.if rate of intt is 10%p. • A=P(1+r)T . r=0. • E.10)2 =1. We call (1+r)T compounding factor.10)5 .10. will be100*(1.10)2 =100*1.

Also. Payment of Rs 1000 every year by LIC for next 20 years . Ordinary Annuity. • E. payment is at the end of the period. Annuity Due.Annuities • A series of fixed payments/receipts at a specified frequency.g. a Recurring deposit with bank for Rs 100 for 5 years. .payment is at the beginning of each period. over a fixed period. • 2 types of Annuities.

PV of each payment is calculated and added.E.g. if Rs 100 is paid at the end of each year for 10 years. • Similarly. for calculating FV of Annuity. we calculate pv of each of these 10 payments of Rs 100 separately and add these 10 values.Present and Future value of Annuity • For calculating PV of Annuity. FV of each payment is calculated and added.g. we calculate fv of each of these 10 payments of Rs 100 separately and add these 10 values.E. . if Rs 100 is paid at the end of each year for 10 years.

it will be 12/100*12=0.a.But if payment is received monthly.03 and for half yearly payment. it will be 0.g.12.e.E. i. r will be equal to 12/100=0.06 .the interest rate.Precaution while calculating PV and FV • In the formulae. given in the books.we have to correctly arrive at r.01.For quarterly payment. it will be 0.the given intt rate is 12%p.If the payment is received yearly.

5 years.This becomes A after 5 years and can be used for repaying a debt or any other purpose. you need a fixed amount(A) after.say.Sinking fund • Concept same as that of Annuity • Suppose. we can calculate C.As the rate of intt and the FV is known.You deposit an amount(C)every year with a bank. .

• Issuer of the bonds pays interest to the purchaser for using his money. Redemption value. • Face value and redemption value may be different but these are fixed and known. • Terms associated with bonds: Face value. Market value. . Maturity. Coupon rate.Bonds • A Bond is a form of debt raised by the issuer of the bond. • Market value of the bond may be different form the face value and keeps changing.

market price of bond also changes. • The interest on bond( also called coupon rate) is fixed at the time of its issue. But interest rate in the market keeps changing.therefore. and. . • Market value is equal to PV of all the coupon receipts and redemption value discounted at the prevailing market rate.Valuation of bonds • The purchaser of the bonds gets regular interest payments as also the redemption amount on maturity. • 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.

then the current yield=4/40=0.g. and market price is Rs 40. • E. if face value of a bond is Rs 50. coupon rate is 8% pa.Yield on bonds • Current yield =coupon interest/current market price. .1 or 10% • Yield to Maturity(YTM) is that discount rate at which all future cash flows equal the present market value.

Theorems for bond valuation • Effect of change in market interest rate • Effect of maturity period • Bond price is inversely proportional to YTM • Interest rate elasticity= %age change in price/%age change in YTM .

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.Capital budgeting • Used to choose between various projects. . • PV of all cash inflows will be +ve and PV of all cash outflows will be negative. • A capital project involves capital outflow( investment) and capital inflows(net profit) over the life of the project.

(cost-residual value)/ estiamted usful life • Written Down Value method or declining balance mehtod : %age is fixed .Depreciation • Concept of depreciation • Straight line method.

Now LERMS( liberalised exchange rate management system) is used.From 2-8-93 only direct quotations are being used.25. • Factors affecting premium/discount . then 1Euro=Rs1. • Cross rate/chain rule.TOM.Forex Arithmatics • Earlier RBI used to fix buying and selling rates of Forex. Spot. Forward • Premium and discount. • Direct and indirect quotations.g. if 1US$=Rs 48 and 1Euro=US$1. e.25*48 • Value date: Cash/ready.

How much capital? Basel II norms RBI norms .Capital adequacy • • • • Need for capital in banks.

115.000 104.909 0. 2 year discount factor is 0.500 110.545 • – – – – 2.If 1 year discount is 0.000 to be received after 1 year at 10%? 121.8333. what is the discount rate? 10% 20% 30% 15% .a.00 0.At 10% p.What is the Present Value of Rs.814 • – – – – 3.000 100.826 1.Sample questions • – – – – 1.

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 .Present Value is defined as Future cash flows discounted to the present at an appropriate discount rate Inverse of future cash flows Present cash flows compounded into the future Discounting of compounded future cash flows • – – – – 5.Sample questions • – – – – 4.

000 300.300 40.000 -100.000 7.What is the N P V of the following at 15% t=0 t=1 t=2 -120.887 80.000 19.Sample questions • • • • • • • • – – – – 6.Identify shareholder depositor creditor employee • .000 26.A bond holder of a company has one of the following relationship with It .

equals the current price gives the return at maturity on the bond for the original holder b) or c) • • – – – – 9.The yield to maturity is a rate of return which gives the current yield Is the discount rate at which the present value.Sample questions • – – 8. of the coupons • – – and the final payment at face value.The relationship between the bond prices and interest rates is one of the Following direct & linear inverse & linear direct and curvilinear no relationship .

A Bond of face value Rs.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 14.3% – 14.4500. What is the current yield of the bond? – 12% – 10% – 13.2% . It is quoted in the market at Rs.5000 carries a coupon interest rate of 12%.

Which of the following investment rules does not use the time value of the money concept? • A.All of the above use the time value concept .Sample questions • 15.Internal rate of return • C.The payback period • B.Net present value • D.

What is the book value of car after 3 years.000.000 • Rs140. what is the book value of the equipment at the end of 2 years? • Rs200.000 • Rs170.700 .00 • 214.000 slavage value at the end of 5 years. 300.A capital equipment costing Rs200.Sample questions • 16.000 today hasRs 50.Cost of Car is Rs.000 17.000 • 220.300 • 218. • 210. Depn. Rate is 10% on WDV.000 • Rs50. If the straight line depreciation method is used.

If P=principal. r = rate of interest .Sample questions • • 18. n= number of instalments Then formula for equated monthly instalment (EMI) is (p*r)(i+r)n (1+r)n – 1 • .

56.42.850 .If the rates in Mumbai are US $1=Rs.53 c) Rs.56.In London market are US $ 1=Euros 0.7580 Therefore for one Euro we will get a) Rs.45 b Rs.Sample questions • 19.50 • • • • .56.38 d) Rs.56.

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