Question No.

1:

Part a) Today, most of the people in our country acknowledge the importance of education in our lives. Therefore, Mr. Akram is also planning to provide the best education to his son. In this regard, he is planning to set aside a handsome amount for his son education. Suppose the university fee of his son after 10 years will be Rs.200, 000. His bank is offering him 12% interest rate compounded annually. How much amount he has to deposit in his bank account today in order to
get Rs.200, 000 from his bank after 10 years?

Solution: PV = FV/(1 + i)^n Present Value = Future Value/ (1+(interest))^years PV = 200,000/(1+0.12)^10 PV = 200,000/3.10558 PV = 64394.65 Part b) Suppose you have some extra funds with you and you want to make investment in bonds with those funds. Currently a 6% coupon bond with face value of Rs.1, 000 is selling at Rs.850. If you want to keep that bond till its maturity (which is one year), then what will be the yield to maturity of this bond?

Solution:
Total annualized return = Face value Par value = annualized capital gain + yearly interest 1000 850 = 150 + 60 = 210 Annualized return / Par value = yield to maturity 210/850 = 24.7%

Question No. 2: Part a) Define GDP deflator and explain how it differs from CPI (Consumer Price Index) although both are used to measure inflation rate in an economy? (4 marks) Solution:
Differences between the GDP Deflator and CPI:

Although at first glance it may seem that CPI and GDP Deflator measure the same thing, there are a few key differences. The first is that GDP Deflator includes only domestic goods and not anything that is imported. This is different because the CPI includes anything bought by consumers including foreign goods. The second difference is that the GDP Deflator is a measure of the prices of all goods and services while the CPI is a measure of only goods bought by consumers.
b) Suppose you are given the responsibility to calculate the inflation rate prevailing in an

economy. You, along with your team members, collect the following data related to that particular economy:
Years Nominal GDP Real GDP

2009 2010 2011 Solution:

Rs. 48,300 54,400 59,300

Rs. 46,200 51,000 53,000

b) GDP Deflator = (Nominal GDP / Real GDP) 100

2009 2010 2011

48300/46200*100 = 104.55 54400/51000*100 = 106.67 59300/53000*100 = 111.89

Inflation rate = (Current Years GDP Deflator Previous Years GDP Deflator) / Previous Years GDP Deflator X 100 Inflation Rate 2009 = cannot calculate because previous years GDP deflator is not available 2010 = IF Rate = (106.67 - 104.55) / 104.55*100 = 2.02% 2011 = IF Rate = (111.89 106.67) / 106.67*100 = 4.9%