1 How much should be saved every year to accumulate Rs.

3000000 in 15 years if the amount can be

invested at 12 percent per annum?

2 What is the rate of interest paid by you on a loan of Rs. 84000 recovered in 36 monthly instalment of Rs. 3240 per in
Normal Rate of
Interest
Monthly 1.89%
Annualized 22.73%
3 What is the price of a bond which pays a half yearly coupon of 5 percent maturing in 5 years if the half yearly yield t
is 4%.(assume face value to be 1000)
₹ 1,081.11

Financial Functions:
1. Grouped under Valuation, NPV, IRR
2. Grouped as Bond, price ,duration, yield
lk
Valuation involves types of cashflows
1 one time Rate of interest:
2 annuity 1. IRR Function (Uneven cashflows)
3 uneven amount, time 2. rate function (one time or annuity)
4 perpetuity

coupon vs YTM
company promises to pay - coupon
YTM is inferred
YTM can be determined only if you have a market price
 Yearly Monthly
₹ 80,472.72 ₹ 6,005.04
stalment of Rs. 3240 per instalment?
EIR (takes in to account
compunding fctor)

25.26%
ars if the half yearly yield to maturity

(Uneven cashflows)
(one time or annuity)
1 A bank wants to lease finance for an asset and wants to earn an IRR of 20 percent including
depreciation tax shield. Build a financial model for determining the lease rental given the tenure,
cost of the asset, depreciation rate and tax rate. The residual value is the book value
depreciation rate and the tax rate. The residual value is book value
Cost of asset 100000
IRR 0.2
Term 5
Depreciation 0.2
Tax rate 0.3
Residual value Book value
Depreciation schedule
Year Depreciation
1 20000
2 16000
3 12800
4 10240
5 8192

Residual value $32,768.00

Present value of residual value $13,168.72
Amount to be recovered $73,806.58
EMI post tax $24,679.42
Cross check
Year Lease rental
0
1 35256.32
2 35256.32
3 35256.32
4 35256.32
5 35256.32

2 An initial loan of Rs. 100000 is given to a customer with the explicit option for
the customer to repay principal anytime any amount. Develop a model to incorporate
this payment adjusting the remaining EMI without changing the time period
Loan amount
Tenue
Interest

EMI
INO Principal paid
0
5 1 $15,128.35
4 2 $15,214.28
3 3 $17,344.28
 2 4 $19,772.47
1 5 $22,540.62
3 In the same problem, if the emi is to be retained and the period is to be adjusted,
how will you change the model?
Loan amount
Tenure
Interest
EMI
INO Principal
0
1 $15,128.35
2 $20,046.32
3 $22,852.81
4 $21,972.51
5 $0.00

4 Structuring of loan repayments

Cost of the asset 100000
Required IRR 0.2
Term 5

Pattern of payments

1 1
1 1
1 1
1 0
1 0

Term Pv of Rs.1
0
1 0.83
2 0.69
3 0.58
4 0.48
5 0.40

Total of PV of pattern

Amount to be recovered
5 Accelerated recovery
A company wants a loan of 1000000, to be recovered in 5 instalments with every instalment
increasing at a rate of 8%. If the lender's IRR is 12 %, show the recovery schedule
Amount of loan 1000000
Rate of acceleration 0.08
Lender's IRR 0.12
 Instalment PV factor
0
1 0.89
2 0.80
3 0.71
4 0.64
5 0.57
Amount to be recovered $240,581.55
6 Structuring Payments-2

Pattern of payments

Cost of the asset 100000

Required IRR 0.2
Term 5

Term Pv of Rs.1
0
1 0.83
2 0.69
3 0.58
4 0.48
5 0.40

Total of PV

Amount to be recovered
7 A company wants to structure its repayment of the loan to its core risk, which is measured
by the commodity price index. It wants a loan 20 million to be repaid in six instalments but the
amount of instalment will vary depending on the movements in the commodity price index.
The instalment will go up or down depending on the rate of decrease or increase in the price inde
Construct a model to implement this scheme
Amount of loan 2000000
Required irr 0.15
term 6
Index PV factor

1 100
2 106
3 94
4 110
5 108
6 90
8 Construct a model for recovery of loan where the future recovery gets adjusted
automatically depending on the amount paid in a particular instalment

Loan amount
Recovery
Required irr
of 20 percent including
se rental given the tenure,
the book value
in this, depreciation tax benefit is passed on to the lessee

hedule
Balance Tax shield
80000 6000
64000 4800
51200 3840
40960 3072
32768 2457.6
Present value of tax shield 13,024.69

pricing of financial products - lease

$105,437.98 With tax you wont get IRR of 20%, so, after payment of tax if you want to earn 20%, value will be R
35256.32
Cross check
Depreciation Profits before tax Tax Cash flow
-100000
20000 $15,256.32 $4,576.90 $30,679.42
16000 $19,256.32 $5,776.90 $29,479.42
12800 $22,456.32 $6,736.90 $28,519.42
10240 $25,016.32 $7,504.90 $27,751.42
8192 $27,064.32 $8,119.30 $59,905.02 Add residual value
20%

el to incorporate

100000 shorten the EMI

5
0.14

Interest Instalment Additional Balance

100000
14000 $29,128.35 10000 $74,871.65
10482.0303491254 $25,696.31 $59,657.37
8352.0316437176 $25,696.31 $42,313.09
 5923.8331195527 $25,696.31 $22,540.62
3155.6868020047 $25,696.31 $0.00
be adjusted,
Shorten the period of loan
100000
5
0.14
$29,128.35
Interest Instalment Additional Balance
100000
14000 $29,128.35 20000 $64,871.65 If balance, Installment, installment, balance+
9082.0303491254 $29,128.35 $44,825.32
6275.5449471283 $29,128.35 $21,972.51
3076.1515888517 $25,048.66 $0.00
0 $0.00 $0.00

customization of recovery

years

0 0 0
0 1 0
0 0 0
1 1 0
1 1 1

Pattern Pv of pattern Crosscheck same model for uniform, front, back, bullet
-100000
0 0.00 0.00
0 0.00 0.00
0 0.00 0.00
1 0.48 113105.45
1 0.40 113105.45

of PV of pattern 0.88 20.00%

nt to be recovered 113105.45 $33,437.97

instalments with every instalment

w the recovery schedule
 Pattern PV of pattern Crosscheck
-1000000
$1.00 $0.89 240581.549076
$1.08 $0.86 259828.073002
$1.17 $0.83 280614.318842
$1.26 $0.80 303063.464349
$1.36 $0.77 327308.541497
$4.16 12%

years

Pattern PV of Lump Sum PV of Annuity Crosscheck

nt to be recovered
its core risk, which is measured
be repaid in six instalments but the
ts in the commodity price index.
f decrease or increase in the price index

Pattern PV of pattern Cross-check

$1.00
$1.06
$0.94
$1.10
$1.08
$0.90
100000
60 months
0.2
assed on to the lessee

earn 20%, value will be Recovered rental/(1-tax)

nt, installment, balance+balance*interest