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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

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

com .Can we cover entire syllabus in this class We can have conceptual clarity of the entire syllabus on business maths. 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.

T=number of years for which P is deposited I=total interest receivable.In our calculations.you will get interest of Rs 12 at the end of the year.Simple interest Important symbols . 12% per annum means that if you deposit Rs 100 for one year. P=amount deposited initially.12 p. I=P*r*T A=amount receivable.a. called Principal r=rate of interest.A=P+I=P+(P*r*T)=P(1+rT) .we will take r=12/100=0.

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

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

.PV of Rs 100.to be received after 2 years will be.21 for 2 years and so on.Similarly. discount factor is 1/1.Present value of money PV= Future amount* Discount Factor(DF) DF = 1/(1+r)T E.10)5 . r=0.10)2 =100/1.21=Rs 82. In above example..64.10 for 1 year. 100*1/(1. Therefore.to be received after 5 years.PV of Rs 100 . will be100*1/(1.a.10.if rate of intt is 10%p. 1/(1.10)2 =1/1.g.

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

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

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

E.g. it will be 0.we have to correctly arrive at r. r will be equal to 12/100=0. i.12.03 and for half yearly payment.Precaution while calculating PV and FV In the formulae.the interest rate.e.If the payment is received yearly. it will be 12/100*12=0.For quarterly payment.the given intt rate is 12%p. given in the books. it will be 0.a.06 .01.But if payment is received monthly.

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

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

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

E. if face value of a bond is Rs 50. and market price is Rs 40.1 or 10% Yield to Maturity(YTM) is that discount rate at which all future cash flows equal the present market value. coupon rate is 8% pa. then the current yield=4/40=0.g.Yield on bonds Current yield =coupon interest/current market price. .

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 of all cash inflows will be +ve and PV of all cash outflows will be negative. .Capital budgeting Used to choose between various projects. Other method used for capital budgeting is pay back period method.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. A capital project involves capital outflow( investment) and capital inflows(net profit) over the life of the project.

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

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

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

a.What is the Present Value of Rs.000 to be received after 1 year at 10%? 121. what is the discount rate? 10% 20% 30% 15% .If 1 year discount is 0.At 10% p.814 ± ± ± ± 3.00 0.826 1. 2 year discount factor is 0.500 110. 115.909 0.545 ± ± ± ± 2.000 104.8333.Sample questions ± ± ± ± 1.000 100.

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.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 ± ± ± ± 4.

300 40.What is the N P V of the following at 15% t=0 t=1 t=2 -120.000 -100.887 80.000 26.Identify shareholder depositor creditor employee .A bond holder of a company has one of the following relationship with It .000 300.000 7.Sample questions ± ± ± ± 6.000 19.

The yield to maturity is a rate of return which gives the current yield Is the discount rate at which the present value. 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 .Sample questions ± ± 8. equals the current price gives the return at maturity on the bond for the original holder b) or c) ± ± ± ± 9.

5000 carries a coupon interest rate of 12%. What is the current yield of the bond? ± 12% ± 10% ± 13. It is quoted in the market at Rs.4500.A Bond of face value Rs.3% ± 14.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 14.2% .

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

00 214. Rate is 10% on WDV. what is the book value of the equipment at the end of 2 years? Rs200.A capital equipment costing Rs200.000 Rs50.000 17.000 Rs140. What is the book value of car after 3 years.000 220.000 today hasRs 50.000. 210.700 .Sample questions 16.300 218.000 Rs170.000 slavage value at the end of 5 years.Cost of Car is Rs. Depn. If the straight line depreciation method is used. 300.

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 .If P=principal.

56.56.53 c) Rs.56.50 .38 d) Rs.42.850 .In London market are US $ 1=Euros 0.45 b Rs.56.If the rates in Mumbai are US $1=Rs.Sample questions 19.7580 Therefore for one Euro we will get a) Rs.

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