Introduction to Financial Planning

(Faculty Copy)
Lecture # 1: Present Value, Future Value, Interest Calculations (Basic), , CNVR Calculations: Present Value & Future Value: 1) If you invest Rs. 10,000 today at a compound interest of 10% p.a., what will be its future value
after 10 years?
a) Rs. 25, 937
b) Rs. 23, 947
c) Rs. 20, 636
d) Rs. 22, 937
Ans: Method # 1: - Formula Method
FV = PV (1+r)n = 10000 (1+0.10)10 = 25, 937.4246.
Method # 2: - CMPD mode
Set = Begin (Unless specified in the question or if it is a problem related to loan we shall
stick with Begin mode)
n = 10 x 1 = 10 (n here signifies, total payment periods i.e. No. of years x no of annual
payments (n x P/Y).
I% = 10% (ROI p.a.) (The ROI should always be taken in the p.a. basis irrespective of the
annual compoundings)
PV = - 10,000 (Cash outflow, so denoted with a -ve sign)
PMT = 0
FV = ? (Rs. 25, 937. 4246) (Cash Inflow, so automatically is denoted with a +ve sign)
P/Y = 1 (P/Y here signifies, no. of annual payments. P/Y is used in case of PMT. If
payments (PMT) are made monthly, quarterly, semiannually and annually; P/Y would be 12,
4, 2, 1 respectively).
C/Y = 1 (C/Y here signified, no. of annual compoundings. If the compounding takes place
monthly, quarterly, semiannually and annually; C/Y would be 12, 4, 2, 1 respectively).
2) What is the Present Value of Rs. 10,000 receivable after 6 years if the rate of discount is 10%.
a) - 5,465
b) - 5, 675
c) - 5, 645
d) - 6,000
Ans: Method # 1: - Formula Method
PV = FV = 10000 = 5,644.739301.
(1+r)n (1.10)6
Method # 2: - CMPD mode
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Set = Begin (unless otherwise specified or in case of loan calculations)

n = 6 x 1 = 6 (i.e. n x P/Y = 6 x 1)
I% = 10
PV = ? (- 5,644.739301) (Cash Outflow, so automatically denoted as -ve)
PMT = 0
FV = 10000 (Cash Inflow, therefore +ve)
P/Y = 1
C/Y = 1

3) M/S D Ltd has placed a deposit of Rs. 5,000 with a company at 15% p.a. interest being
compounded semi annually. In the three years their investment will grow to?
a) Rs. 7,250
b) Rs. 7,344
c) Rs. 7,500
d) Rs. 7,604
e) Rs. 7,716
Ans: CMPD Mode
Set = Begin
n = 3 x 1 = 3 (i.e. n x P/Y)
I% = 15 (always to be taken as p.a.)
PV = - 5000 (Cash outflow, so denoted with a -ve sign)
PMT = 0
FV= ? (7,716.507628) (Cash inflow, so denoted with a +ve sign)
P/Y = 1
C/Y = 2 (semi annual compounding, therefore C/Y is denoted as 2)
Rate of Interest: 4) Someone promises to give you Rs. 5,000 after 10 years in exchange for Rs. 1,000 today. What is
the interest rate offered to you?
a) 14.76%
b) 17.46%
c) 16.47%
d) None of the above
Ans: CMPD mode
Set = Begin
n = 10 x 1 = 10 (i.e. n x P/Y)
I% = ? (17.46%)
PV = -1000
PMT = 0
FV = 5000
P/Y = 1
C/Y = 1
5) The IDBI deep discount bond offers an investor Rs. 50,000 after 20 years, for an initial investment
of Rs. 9,500. The interest rate implied in the offer is?
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a) 8.65%
b) 6.85%
c) 9.12%
d) 8.95%
Ans: CMPD mode
Set = Begin
n = 20 x 1 (i.e. n x P/Y)
I% = ? (8.65%)
PV = - 9500 (Cash Outflow, so indicated with a -ve sign)
PMT = 0
FV = 50000 (Cash Inflow, so indicated with a +ve sign)
P/Y = 1
C/Y = 1
6) If Rs. 1,00,000 becomes Rs. 1,50,000 in 2.5 years when compounding is done semi annually, find
the annualized rate of return.
a) 16.89%
b) 16.50%
c) 15.95%
d) 16%
Ans: CMPD mode
Set = Begin
n = 2.5 x 1 = 2.5 (i.e. n x P/Y)
I% = ? (16.89%)
PV = -100000 (Cash Outflow, so indicated with a -ve sign)
PMT = 0
FV = 150000 (Cash Inflow, so indicated with a +ve sign)
P/Y = 1
C/Y = 2 (Compounding is done semi annually)
7) You buy a growth oriented non dividend paying share for Rs. 20,000 & 4 years later you sell it for
Rs. 35,000. The compounded annual growth rate (CAGR) is?
a) 10.30%
b) 18.80%
c) 75%
d) 15%
Ans: CMPD mode
Set = Begin
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 n = 4 x 1 (i.e. n x P/Y)
I% = ? (15%)
PV = - 20000 (Cash Outflow, therefore -ve)
FV = 35000 (Cash Inflow, therefore +ve)
P/Y = 1
C/Y = 1
8) You invested Rs. 20,000 in a 12 month deposit. At maturity, it is worth Rs. 22,500. What is the
monthly compounded annual rate of return?
a) 9.15%
b) 12.50%
c) 7.62%
d) 11.83%
Ans: CMPD mode
Set = Begin
n = 1* x 1 (i.e. n x P/Y) (*12 month = 1 year)
I% = ? (11.836%)
PV = - 20,000 (Cash Outflow, therefore -ve)
PMT = 0
FV = 22,500 (Cash Inflow, therefore +ve)
P/Y = 1
C/Y = 12 (compounded monthly)

Conversion- CNVR: 9) What is the effective annual rate, if the stated nominal rate is 12% p.a. compounded monthly?
a) 12.53%
b) 12.30%
c) 12.68%
d) 12.49%
Ans: Properties of CNVR mode: n = C/Y (here in C/Y stands for no. of annual compoundings)
I% = ROI p.a.
EFF = Used for calculating the Effective Interest Rate
APR = Used for calculating the Annual Percentage Rate (also called the Nominal or Stated
Interest Rate)
CNVR Mode
n = 12 (compounded monthly)
I% = 12
EFF = Solve = 12.68250301%
10) If the effective rate of interest is 17.87, then on a debt that has quarterly payments & compounded
quarterly, what is the nominal annual interest rate?
a) 16.78%
b) 18.92%
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c) 20.93%
d) 21.00%
Ans: CNVR Mode
n = 4 (compounded quarterly)
I% = 17.87
APR = Solve = 16.78378293%
11) The fixed deposit scheme of a bank offers 10% p.a. interest for 3 year deposit. If the compounding
is done semi annually, then effective annual interest rate is: a) 10%
b) 10.25%
c) 10.38%
d) 10.50%
Ans: CNVR Mode
n = 2 (compounded semi annually)
I% = 10
EFF = Solve = 10.25%

Lecture # 2:PMT, PV & FV (Advance Calculations), Perpetuity: PMT: 12) Your client deposits Rs. 5,00,000 on retirement in a bank which pays interest @ 10% p.a. being
compounded semi annually. How much can be withdrawn every year for a period of 10 years?
a) 80,242.58
b) 80,534.20
c) 74, 601.95
d) 40,121.29
Ans: CMPD mode
Set = Begin
n = 10 x 1 = 10
I% = 10
PV = - 500000 (Cash Outflow, so designated with a -ve sign)
PMT = ? (74,601.95181) (Cash Inflows, automatically designated with a +ve sign)
FV = 0
P/Y = 1 (withdrawal done once a year; therefore P/Y =1)
C/Y = 2 (compounded done semi annually)
13) How much should a person invest at the beginning of each year @ 14% p.a, so that it can
accumulate Rs. 10,00,000 at the end of year 10 for daughters higher education.
a) Rs. 45,363
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b) Rs. 48,195
c) Rs. 51,714
d) Rs. 65, 236
Ans: CMPD mode
Set = Begin
n = 10 x 1 (i.e. n x P/Y)
I% = 14
PV = 0
PMT = ? (- 45,362.7551) (Cash outflow, therefore automatically indicated as -ve)
FV = 10,00,000 (Cash Inflow, therefore +ve)
P/Y = 1 (investment done once a year)
C/Y = 1
14) What is the stated annual percentage rate for an annuity due with 48 monthly payments of Rs.
5,000 & with a future value of Rs.300,000?
a) 15.75%
b) 12.60%
c) 10.50%
d) 11.14%
Ans: CMPD mode
Set = Begin
n = 4 x 12 = 48 (i.e. n x P/Y)
I% = ? (11.14%)
PV = 0
PMT = - 5000(Cash Outflow, so indicated with a -ve sign)
FV = 300,000 (Cash Inflow, so indicated with a +ve sign)
P/Y = 12 (monthly payments)
C/Y = 1
15) Suppose you expect to receive Rs. 15,000 annually for 5 years, each receipt occurring at the end
of the year. What is the Present Value of this stream of benefits if the discount rate is 10%?
a) Rs. 56,861.80
b) Rs. 57,463. 75
c) Rs. 75,000
d) Rs. 55,000
Ans: CMPD mode
Set = End (specifically mentioned in the question)
n = 5 x 1 (i.e. n x P/Y)
I% = 10
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PV = ? (- 56,861.80154)
PMT = 15,000 (Cash inflow, therefore + ve)
FV = 0
P/Y = 1 (investment done once a year)
C/Y = 1

Note: - Usage of Cash function can also be shown immediately along with the difference
between the end mode & begin mode.
16) Gary received an inheritance of Rs. 2,00,000. He wants to withdraw equal periodic payments at
the beginning of each month for 5 years, starting after 5 years. He expects to earn 12% annual interest,
compounded monthly on his investments. How much can he receive each month?
a) Rs. 8,082.28
b) Rs. 4,448.89
c) Rs. 4,404.84
d) Rs. 8002.26
Ans: CMPD mode
FV of investments for 5 years
Set = Begin
n = 5 x 1= 5 (i.e. n x P/Y)
I% = 12
PV = - 2,00,000 (Cash Outflow, so - ve)
PMT = 0
FV = ? (3,63,339.3397)
P/Y = 1
C/Y = 12 (monthly compounding)

Withdrawals each month

Set = Begin
n = 5 x 12 = 60 (i.e. n x P/Y)
I% = 12
PV = - 3,63,339.3397
PMT = ? (8,002.26) (Cash Inflow, so +ve)
FV = 0
P/Y = 12 (withdrawal to be made on monthly basis)
C/Y = 12 (monthly compounding)

17) Sudha has invested Rs. 120,000 for 8 years at ROI of 6%. What amount shell get after 8 years if
the amount is compounded annually for the first 5 years & semi annually for the last 3 years?
a) Rs. 198,030
b) Rs. 191,750
c) Rs. 189,760.
d) Rs. 192,030

Ans: CMPD mode

For the first 5 years,

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annual compounding
Set = Begin
n = 5 x 1 (i.e. n x P/Y)
I% = 6
PV = - 120000
PMT = 0
FV = ? (160587.0693)
P/Y = 1
C/Y = 1 (compounded annually)

semi annual compounding

Set = Begin
n = 3 x 1 = 3 (i.e. n x P/Y)
I% = 6
PV = 160587.0693
PMT = 0
FV = ? (191749.3589)
P/Y = 1
C/Y = 2 (compounded semi annually)

18) An amount becomes Rs. 5,62,778 in 5 years, when for the first 4 years ROI is 6% p.a.
compounded quarterly & in the 5th year compounding is done annually. Find the amount invested
a) Rs. 4,16,000
b) Rs. 4,18,383
c) Rs. 4,20,000
d) Rs. 4,15,000
Ans: CMPD mode
For the 5th year,
annual compounding
Set = Begin
n = 1 x 1 (i.e. n x P/Y)
I% = 6
PV = ? (- 533,018.8679)
PMT = 0
FV = 565,000 (Cash Inflow, therefore +ve)
P/Y = 1
C/Y = 1 (compounding is done annually)

For the first 4 years,

quarterly compounding
Set = Begin
n = 4 x 1 (i.e. n x P/Y)
I% = 6
PV = ? (- 420,035.4125)
PMT= 0
FV = 533,018.8679
P/Y = 1
C/Y = 4 (compounding is done quarterly)

Advance PV & FV calculations: 19) You wish to save for your sons education the present cost of which is Rs. 3,20,000 & is expected
to increase by 6% every year. If your son is 12 years old & will require money in 8 years time, what is
the amount of investment to be made if it likely to earn 12% rate of return.
a) 2,05,993
b) 2,05,670
c) 2,10,000
d) 2,09,553
Ans: CMPD mode
Rise in cost due to inflation @ 6%

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Set = Begin
n = 8 x 1 (i.e. n x P/Y)
I% = 6
PV = - 320,000
PMT = 0
FV = ? (510031.3838)
P/Y = 1
C/Y = 1

Set = Begin
n = 8 x 1 (i.e. n x P/Y)
I% = 12
PV = ? (- 2,05,993.1217)
PMT =0
FV = 510031.3838
P/Y = 1
C/Y = 1

Note: - Also ask students to calculate the amount of investment to be made if the investment was
done, yearly; semi annually; quarterly & monthly
Investments to be
done annually

Investments to be
done semi annually

Investments to be done
quarterly

Investments to be done
monthly

Set = Begin
n = 8 x 1 (i.e. n x P/Y)
I% = 12
PV = 0
PMT = ?
(- 37,024.10776)
FV = 5,10,031.3838
P/Y = 1
C/Y = 1

Set = Begin
n = 8 x 1 (i.e. n x P/Y)
I% = 12
PV = 0
PMT = ?
(- 48,990.54464)
FV = 5,10,031.3838
P/Y = 2
C/Y = 1

Set = Begin
n = 8 x 1 (i.e. n x P/Y)
I% = 12
PV = 0
PMT = ?
(- 56,004.37119)
FV = 5,10,031.3838
P/Y = 4
C/Y = 1

Set = Begin
n = 8 x 1 (i.e. n x P/Y)
I% = 12
PV = 0
PMT = ?
(- 61,086.95549)
FV = 5,10,031.3838
P/Y = 12
C/Y = 1

20) Mr. Sahai has just retired from Govt. service with a lump sum of Rs 30,00,000 as retirement
benefits in total. Currently he is 60 years and life expectancy for him is 75 years. He intends to take a
International vacation after one month, which would entail an amount of Rs 5.00 lakhs at current
prices and wants to buy a new car of Rs 3.00 lakhs immediately. Calculate what amount will be
available to him for post retirement living expenses in the beginning of every month; rate of return is
8 % p.a?
a)
b)
c)
d)

Rs. 20,540
Rs. 25,400
Rs. 20,670
Rs. 23,500

ANS:
Particulars
Retirement Benefit
Less:
International Vacation
Car purchase
Amount Available for Regular
income (PV)

Amount
3,000,000
-500,000
-300,000
2,200,000

Calculate Regular Income (Annuity) / Pmt of the amount available to invest:

Set= BGN, n =15*12 (75 -60), I=8%, PV=-22,00,000, PMT=Solve (-20,539), P/Y=12,
C/Y = 1)

21) For an investment product guaranteeing a fixed cash flow of Rs. 4.00 Lakh per annum for 20
years after four years from the date of investment (start of every year), what price should be fixed if
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the same can be invested in financial instruments which can yield 8.25 % p.a. for the four years and
7.5% p.a. for the remaining period of the product?
a)
b)
c)
d)

Rs. 29,69,709
Rs. 31,92,437
Rs. 26,90,769
Rs. 32,19,473

ANS:
Step 1: BGN, N= 20, I= 7.5%, Pmt = 400,000, PV= Solve (-43,83,631), P/y= 1, C/y= 1
Step 2: BGN, N= 4, I= 8.25%, PV= Solve (-31,92,437), FV= 43,83,631, P/y= 1, C/y= 1
22) A person invested Rs. 45.00 lakh in a 30-year fixed monthly annuity providing a yield of 9%
p.a. What will be the amount of monthly annuity if the start date is deferred by 3 years?
a)
b)
c)
d)

Rs.45,100
Rs. 45,500
Rs. 35,000
Rs. 34,800

ANS:
Step 1:
As the requirement of monthly annuity will commences after 3 years from. We will first find out FV
of current investment amount growing @ 9% p.a
BGN, N=3, I=9, Pv = -45,00,000, FV= Solve (5827630.5), P/y=1,C/y=1
Step 2:
Finding out regular monthly Annuity to earn for next 30 years from the corpus generated in Step 1
BGN, N=30*12, I=9, Pmt=Solve (45,100), PV= -58,27,630.5, P/y=12,C/y=1

Future Value of Growing Annuity

23) A 30 year old employee is currently earning an annual salary of Rs 300,000. He will start saving
10% of his salary at the end of each year in a savings plan yielding 8% p.a. His salary increases by
5%pa.What accumulated amount would he be having on his retirement at age 60?
a) Rs. 57,40,715
b) Rs. 59,00,000
c) Rs. 62,00,000
ANS:
Use Future value of growing annuity (FVGA) formulae for End mode calculation:
As the investment is taking place at the END of each year.
Amount (1st Year Saving) * [(1+R) ^ n - (1+G) ^ n] / (R G)
R Required rate of return
G Growth rate in salary
30,000 * [(1.08) ^ (30) (1.05) ^ (30)] / (0.08 0.05)
= Rs. 57,40, 715
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24) In the above case, if the investment are taking place at the start of the year. What accumulated
amount would he be having on his retirement at age 60?
a) Rs. 57,40,715
b) Rs. 59,00,000
c) Rs. 62,00,000
ANS:
As the investment is taking place at the BGN of each year. Formulae for FVGA will be as follow:
[Amount (1st Year Saving) * [{(1+R) ^ n - (1+G) ^ n} / (R G)] * (1+R)

Lecture # 3
Cash Flow, Loan Numerical and Home Equity, Perpetuity:
25) Ramesh will receive Rs. 25,000 & Rs. 15,000 at the end of 14 & 15 year respectively. If rate of
return is 6%. Compute the Present Value of the amount.
a) Rs. 17,316
b) Rs. 17,500
c) Rs. 18,200
d) Rs. 17,300
Properties of Cash Function: Cash function is always in the Begin Mode
Cash function can be used only when the payments / receipts are in the yearly fashion (i.e.
this function cannot be used when the payments / receipts are in any other mode other than
yearly mode)
Cash function denotes Net Cash flow, all receipts are in the positive mode while payments
are in the negative mode.
Since the payments / receipts are in the yearly fashion, the compounding is also done on
annual basis only.

Cash Function
i% = 6
D. Editor x =
Year

Cash Flow (X)

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Cash Flow (X)

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10

11

12

13

14

15

25,000

16

15,000

NPV = Solve = 17,316

Method # 2: - CMPD Mode

Present Value of Rs. 25,000
Set = End
n = 14 x 1 = 14 (i.e. n x P/Y)
I% = 6
PV = ? (11,057)
PMT = 0
FV = 25,000
P/Y = 1
C/Y = 1

Present Value of Rs. 15,000

Set = End
n = 15 x 1 = 15 (i.e. n x P/Y)
I% = 6
PV = ? (6,259)
PMT = - 7,064
FV = 15,000
P/Y = 1
C/Y = 1

Total Present Value

Total PV
= 11,057 + 6,259
= 17,316

26) Raghavan will receive an annuity of Rs. 50,000 payable once every two years. The payments will
stretch out over 10 years. The first payment will be received at the end of two years. If the annual
interest rate is 8%, what is the Present Value of annuity?
a) Rs. 2,65,426
b) Rs. 1,61,300
c) Rs. 2,71,456
d) Data is insufficient to calculate the answer.
Ans: Cash Function
i% = 8

D. Editor x =

Year

Cash Flow (X)

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50,000

50,000

50,000

50,000

10

11

50,000

NPV = Solve = Rs. 1,61,300.0336

Loan Numericals:27) Mukesh wishes to purchase a house with the help of a loan. He approaches HDFC to them that his
paying capacity is Rs. 18,000 per month. ROI to be charged by the bank is 10.50% p.a. Mukesh
wishes to pay back the amount in 20 years. Compute the amount of loan which can be availed by him.
a) Rs. 18,02,920
b) Rs. 18,18,696
c) Rs. 14,15,376
d) Rs. 19,15,672
Ans: CMPD mode
Set = End (loan numerical. Calculation to be made in end mode)
n = 20 x 12 = 240 (i.e. n x P/Y)
I% = 10.5
PV = ? (18,02,920) (Receipt of loan, cash inflow, therefore +ve)
PMT = -18000 (EMI payments, cash outflow, therefore -ve)
FV = 0
P/Y = 12 (payments made monthly, therefore total payments in a year are 12)
C/Y = 12 (although silent, compounding is done monthly in lines with stated loan procedures)
28) Shashi wants to purchase a car which is costing Rs. 8,50,000. Reviewing her budget she
determines she can afford to pay Rs. 15,000 per month for three years towards the car. The going rate
of interest is 1% per month for 3 years. How much can she afford to borrow? Indicate the nearest
amount.
a) Rs. 4,50,000
b) Rs. 5,50,000
c) Rs. 8,80,000
d) Rs. 6,00,000
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Ans: CMPD mode

Set = End (Loan numerical)
n = 3 x 12 = 36 (i.e. n x P/Y)
I% = 12 (ROI should always be on p.a. basis)
PV = ? (4,51,612.5756) (Cash Inflow, therefore +ve)
PMT = - 15,000 (Cash Outflow, therefore -ve)
FV = 0
P/Y = 12 (He is paying Rs. 15,000 per month, therefore there will be 12 payments in a year)
C/Y = 12 (In case of loans, the compounding is always done on monthly basis)
29) Avinash pays his mortgage of Rs. 12,00,000 for 15 years at an interest rate of 7%. Avinash makes
his payment on monthly basis. What is the total amount of interest Avinash will pay over the term of
the mortgage?
a) Rs. 6,47,000
b) Rs. 7,76,300
c) Rs. 7,30,200
d) Rs. 7,41,480
Ans:Method # 1: - CMPD mode
Calculations of EMI paid
Set = End (loan numerical)
n = 15 x 12 = 180 (i.e. n x P/Y)
I% = 7
PV = 12,00,000 (Cash Inflow, so +ve)
PMT = ? (- 10,785.93925) (Cash Outflow, so -ve)
FV = 0
P/Y = 12 (payments made on monthly basis)
C/Y = 12 (monthly compounding)

Calculation of Total Interest paid over the term of the

mortgage
Total amount paid over the life of the loan
= (Rs. 10,786 x 12 months) x 15 years
= Rs. 19,41,480
Total Interest paid over the life of the loan
= Rs. 19,41,480 - Rs. 12,00,000 (Amount of loan)
= Rs. 7,41,480

Method # 2: - AMRT Function

Set = End
PM1 = 1 (where PM1 stands for No. of Payments - starting point of the payment period
asked in the question)
PM2 = 180 (where PM2 stands for No. of Payments - ending point of the payment period
asked in the question)
n = 180
I% = 7
PV = 12,00,000
PMT = - 10,785.93925
FV = 0
P/Y = 12
C/Y = 12
= Solve = - 7,41,469.065

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30) In the above question, Avinash wants to know after paying 5 years of EMI what is the status of
this Loan taken with regards to following?
I. Total interest paid so far.
II. Total Principal Amount paid so far
III. Balance outstanding after completing 5 years
Ans:I. Total interest paid in last 5 years
Method - AMRT Function
Set = End
PM1 = 1 (where PM1 stands for No. of Payments - inception of payments)
PM2 = 60 (5*12) (where PM2 stands for No. of Payments - last payment that will be
paid)
n = 180
I% = 7
PV = 12,00,000
PMT = - 10,785.93925
FV = 0
P/Y = 12
C/Y = 12
= Solve = -3,76,109 (The Answer indicate interest amount paid so far on the loan taken)
II. Total Principal amount in last 5 years
Method - AMRT Function
Set = End
PM1 = 1 (where PM1 stands for No. of Payments - inception of payments)
PM2 = 60 (5*12) (where PM2 stands forNo. of Payments - last payment that will be
paid)
n = 180
I% = 7
PV = 12,00,000
PMT = - 10,785.93925
FV = 0
P/Y = 12
C/Y = 12
= Solve = -2,71,046.37 (The Answer indicate amount paid towards the principal portion of
loan taken)
III. Balance outstanding after 5 years
Method - AMRT Function
Set = End
PM1 = 1 (where PM1 stands for No. of Payments - inception of payments)
PM2 = 60 (5*12) (where PM2 stands forNo. of Payments - last payment that will be
paid)
n = 180
I% = 7
PV = 12,00,000
PMT = - 10,785.93925
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FV = 0
P/Y = 12
C/Y = 12

Bal = Solve = -9,28,953.62 (The Answer indicate amount outstanding towards the principal
portion of loan taken)
31) Ms. Akansha is 28 years old, working in an IT company. She refinanced her housing loan from a
public sector bank for which she incurred a cost of 2.5% on her previous mortgage amount balance
and the same was paid separately. The previous loan balance was Rs. 12,50,000. If shell be paying an
EMI of Rs. 12,270 per month for a period of 20 years, calculate what annualized rate of interest is
charged from her?
a) 10.25%
b) 9.90%
c) 12.00%
d) 11.30%
Ans: New Loan Balance = Previous Balance
New Loan Balance = 12,50,000
CMPD mode
Set = Begin
n = 20 x 12 = 2400 (i.e. n x P/Y)
I% = ? (10.2493%)
PV = 12,50,000 (Cash Inflow, so + ve)
PMT = - 12,270
FV = 0
P/Y = 12 (Payments are made on monthly basis, so therell be 12 payments in a year)
C/Y = 12 (Compounded monthly)
Note: Processing fees of 2.5% of loan amount will be paid by client separately and it will not
add in the loan amount.

Home Equity
Mr. Mukesh purchased his home costing Rs. 25.00 Lakhs in year 1st Jan 2008 with help of home
loan for a term of 15 years at fixed interest rate of 10% p.a (reducing balance basis). Today on 1 st Jan
2013, the value of his home is worth Rs. 35.00 Lakhs and loan outstanding as on 31 st Dec 2012 is Rs.
20.33 Lakhs. Calculate Home equity for Mr. Mukesh?
32)

a)
b)
c)
d)

Rs. 20.33 Lakhs

Rs. 35.00 Lakhs
Rs. 14.67 Lakhs
Rs. 10.00 Lakhs

ANS:

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Home equity: It is nothing but the current market value of a home minus the outstanding
mortgage (Loan) balance.
Current market value as on 1st Jan 2013: Rs. 35.00 Lakhs
Outstanding mortgage (Loan) balance as on 1st Jan 2013: Rs. 20.33 Lakhs
So, Home Equity for Mr. Avinash will Rs. 14.67 Lakhs (Rs. 35.00 Lakhs - Rs. 20.33 Lakhs)
33) Mr. Raj Kapoor purchased his 1 st Home costing Rs. 40.00 Lakhs, for which he took home loan
of Rs. 35.00 Lakhs from SBI bank on 1 st April 2007 for a term of 15 years @ 10.50% p.a (reducing
balance basis) and balance amount was paid from his own source. Today on 1 st Jan 2013, the
current market value of his home is worth Rs. 55.00 Lakhs. Based on following information
calculate the following:
A. Loan outstanding as on 1st Jan 2013
B. Home Equity as on 1st Jan 2013

a) 27,40,450 & 27,59,549

b) 27,08,160 & 55,00,000
c) 27,40,450 & 20,00,000
ANS:
Part 1: Calculate EMI / Pmt of the original loan taken
Set= End, n =15*12, I= 10.5%, PV = 35,00,000, PMT =Solve (-38,688.96), P/Y = 12, C/Y = 12)

Step 2: Use AMRT mode to get Balance amount

PM 1: 1 (Starting period Month - April 2007)
PM 2: 69 (Period Apr07 to Dec 12)
Note: Rest of the fields with regards to N,I, PV and PMT will be captured from CMPD. Which was
used to calculate EMI (PMT)?

Balance: Solve (Rs. 27,40, 450.473)

Part 2: Calculation

of Home Equity as on 1st Jan 2013:

Home Equity: Current value of home Loan outstanding
Rs. 55,00,000 Rs. 27,40,450 = Rs. 27,59,549.527

Perpetuity: 34) A person wants to earn Rs. 60,000 p.a. at the end of every year, when the interest rate is 6%. What
is the capital required?
a) Rs. 10,00,000
b) Rs. 5,00,000
c) Rs. 6,00,000
d) Rs. 7,00,000

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CMPD Mode

Perpetuity Method

Set = End
n = 100 (assumed) (n x P/Y is a very large no.)
I% = 6
PV = ? (- 9,97,052.7738) (Cash Outflow,
so - ve) (The answer in this method will
always be an approximate answer)
PMT = 60,000 (Cash Inflow, so +ve) (will
always be annually in case of perpetuity
calculations)
FV = 0
P/Y = 1
C/Y = 1

Capital Required = Annual PMT

i% p.a.
(Formulae based on End mode cash flow)

Capital Required = Rs. 60,000

0.06
Capital Required = Rs. 10,00,000

35) If you want to earn Rs. 100,000 p.a at the start of the every year, what is the capital required @
8%?
a) Rs. 13,50,000
b) Rs. 15,00,000
c) Rs. 12,50,000
d) Rs. 17,50,000
CMPD Method

Perpetuity Method

Set = BGN
n = 100 (assumed) (n x P/Y is a very large no.)
I% = 8
PV = ? (- 13,49,386) (Cash Outflow,
so - ve) (The answer in this method will
always be an approximate answer)
PMT = 1,00,000 (Cash Inflow, so +ve) (will
always be annually in case of perpetuity
calculations)
FV = 0
P/Y = 1
C/Y = 1

Capital Required = Annual PMT * (1+I )

I% p.a.
(Formulae based on BGN mode cash flow)

Capital Required = Rs. 1,00,000

0.08

* (1+0.08 )

Capital Required = Rs. 13,50,000

Lecture # 4
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Calculations of Returns & Risk: 36) Calculate Total Return

Price at the beginning of the year = Rs. 60
Price at the end of the year = Rs. 69
Dividend received during the year = Rs. 2.40
a) 20%
b) 19%
c) 18.65%
d) None of the above
Ans: Total Return =
Cash flows received during the year + (End Price - Begin Price)
Begin Price
Total Return = 2.40 + (69 - 60) = 0.19 = 19%
60
37) Suppose a household deposits Rs. 100 with a bank for 1 year at an interest rate of 10% p.a. & at
the same time the inflation rate in the economy is 5% p.a., then the real rate of return (or inflation
adjusted return) is: a) 5.75%
b) 5%
c) 4.76%
d) None of the above
Ans: Real Rate of Return = [ (1 + Nominal Interest Rate) / (1 + Inflation Rate) ] - 1 x 100
= [ (1 + 0.10) / (1 + 0.05) ] - 1 x 100
= [ (1.10 / 1.05) ] - 1 x 100
= 4.76%
38) The average inflation over the last three years is 8.5 % p.a. You invested Rs. 1 lakh in a security 3
years ago which you have redeemed for Rs. 1.3 lakh. What real return have you obtained from
investment?
a) 0.5898%
b) 0.8598%
c) 0.75%
d) 0.64%
Solution:
Step 1 : Find Investment rate earned on given investment
Set = BGN, N= 3, I= Solve (9.14%) , PV= -100,000 FV= 130,000 P/Y=1, C/Y=1
Step 2 : Use Real Rate of Return Formulae= 0.5898%

Real Rate of Return = [ (1 + Nominal Interest Rate) / (1 + Inflation Rate) ] - 1 x 100

= [ (1 + 0.914) / (1 + 0.085) ] - 1 x 100
= [ (1..0914 / 1.085) ] - 1 x 100
= 0.5898%

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39) Mr. Mohan investment Rs. 10,000 with a bank for 1 year at an interest rate of 10% p.a.
compounded annually. Compute Post tax return of Mr. Mohan if he pay tax @ 20%.
a) 10%
b) 7%
c) 8%
d) None of the above
Ans:Post Tax Return = [Pre Tax *{ 1 - Tax Rate} ]*100
= [10%* {1- 20%}] *100
= 8%
Calculation of Risk
40)
Year

Total Returns (%)

14

12

-8

25

Calculate Standard Deviation

a) 14.56 %
b) 23.88 %
c) 11.207 %
d) 12.35 %
Ans:Steps

Properties

Press STAT mode

1 - VAR: EXE

1
2
3 4
5

x
14
12
8
25
2

Press Shift Stat

Press 5.Var

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Press 3.

Youll automatically be taken to the main screen with

being displayed

Press EXE, the answer 11.207 will be displayed

41)
Year

Total Return (X)

(%)

19

14

22

-12

Calculate Standard Deviation

a) 15.44%
b) 14.23%
c) 12.24%
d) 15.54%
Ans: Steps

Properties

Press STAT mode

1 - VAR: EXE

1
2
3
4
5

x
19
14
22
- 12
5

Press Shift Stat

Press 5.Var

Press 3.

7
8

Youll automatically be taken to the main screen with

being displayed

Press EXE, the answer 12.24 will be displayed

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42)
Particulars

Security A

Market

Return (%)

14

12

Beta

1.1

Standard Deviation (%)

10

10

Risk free Rate (%)

Calculate: a) Sharpe Ratio

b) Treynor Ratio
c) Jensens Ratio
a) 0.9, 8.818, 3.2
b) 0.9, 8.365, 3.66
c) 0.9, 8.818, 1.3
d) 0.9, 8.365, 4.2
Ans: Sharpe Ratio = (Rp - Rf) /
Treynor Ratio = (Rp - Rf) /

= (14 - 5) / 10 = 0.9
= (14 - 5) / 1.1 = 8.818

Jensens Ratio = { Rp - [ Rf + (Rm - Rf) x

]}

= { 14 - [ 5 + (12 - 5) x 1.10] }
= ( 14 - 12.7) = 1.3

Asset Allocation:
43) Your client starts investing immediately for 10 years annually Rs. 60,000 in the ratio of 80:20 in
equity and debt products. You expect return from equity and debt to be 11.75% p.a. and 8.25% p.a.
respectively during this period. What will be his portfolio value after 10 year?
a)
b)
c)
d)

11,20,439
12,05,000
11,05,916
10,22,650

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ANS:
Asset
Equity
Debt
Total

Allocation
80.00%
20.00%
100.00%

Amount
48,000
12,000
60,000

Return On Investment
11.75%
8.25%

Step 1: Finding out Future value of regular investment (Based on asset allocation)
As per question, annual investment of Rs.60, 000 is done in the allocation between Equity: Debt
(80:20) respectively.
Future Value of Equity instrument with 80% allocation.
Set= BGN , N = 10, I =11.75 , PMT = -60,000*80% , FV= Solve (930,010), P/y = 1 , C/y = 1
Future value of Debt instrument with 20% allocation.
BGN, N = 10, I =8.25, PMT = -60,000*20% , FV= Solve (190,429 ) , P/y = 1, C/y = 1
Combined future value of Equity and Debt (This is known as Portfolio):
Portfolio Value= Rs. 930,010 + Rs.190,429 = Rs. 11,20,439

44) Happy Singh, current age 40, wants to accumulate Rs.60 Lakh by retirement age 55. After investing
Rs. 45,000 p.a for past 10 yrs of his working life @ 9 % compounded yearly on ordinary annuity basis.
Happy Singh now realize he can now earn 12 % pa on his investment and accordingly moves his previous
accumulated value to new investment rate and also increases his investment amount to Rs. 60,000 p.a on
ordinary annuity basis for the rest of the working life. Will he be able to accumulate the amount
required? What will his corpus be?
a) Yes, Rs.61,65, 359
b) Yes, Rs .64,56,141
c) Yes, Rs. 65,36,450
Step 1: Finding out Future value of regular investment of past 10 years
Set= END , N = 10, I = 9 , PMT = -45000 , FV= Solve (683,682), P/y = 1 , C/y = 1
As per question language after completing 10 years of investment, portfolio amount of Rs. 683,682
will now be rebalance or switched over to new investment rate of 12% along with increased regular
investment of Rs. 60,000 p.a for next 15 years to retirement.
Step 2: Finding out Future value of regular investment for next 15 years
Set= END, N = 15, I = 12, PV= -683,682 , PMT = -60,000 , FV= Solve (61,65,359), P/y = 1 , C/y = 1

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