FINANCIAL MANAGEMENT

C A I I B
PAPER-1

MODULE A
QUANTATIVE TECHNIQUES
&
FINANCIAL MATHEMATICS
RAVI ULLAL
CONSULTANT

TIME VALUE OF MONEY

MONEY HAS TIME VALUE

THIS IS BASED ON THE CONCEPT OF EROSION IN VALUE OF

MONEY DUE TO INFLATION

HENCE THE NEED TO CONVERT TO A PRESENT VALUE

OTHER REASONS FOR NEED TO REACH PRESENT VALUE IS

-- DESIRE FOR IMMEDIATE CONSUMPTION RATHER THAN
WAIT FOR THE FUTURE

-- THE GREATER THE RISK IN FUTURE THE GREATER THE

EROSION

TIME VALUE OF MONEY

EXTENTOF EROSION IN THE VALUE OF MONEY IS AN

UNKNOWN FACTOR. HENCE A WELL THOUGHT OUT
DISCOUNT RATE HELPS TO BRING THE FUTURE CASH
FLOWS TO THE PRESENT.

THIS HELPS TO DECIDE ON THE TYPE OF INVESTMENT,

EXTENT OF RETURN & SO ON.

ALL THREE FACTORS THAT CONTRIBUTE TO THE EROSION

IN VALUE OF MONEY HAVE AN INVERSE RELATIONSHIP WITH
THE VALUE OF MONEY i.e. THE GREATER THE FACTOR THE
LOWER IS THE VALUE OF MONEY

TIME VALUE OF MONEY

IF DESIRE FOR CURRENT CONSUMPTION ISGREATER THEN

WE NEED TO OFFER INCENTIVES TO DEFER THE
CONSUMPTION.

THE MONEY THUS SAVED IS THEN PROFITABLY OR

GAINFULLY EMPLOYED . HENCE THE DISCOUNT RATE WILL
BE LOWER.

INVESTMENT IN GOVERNMENT BONDS / SECURITIES IS LESS

RISKY THAN IN THE PRIVATE SECTOR SIMPLY BECAUSE NOT
ALL CASH FLOWS ARE EQUALLY PREDICTABLE AND WHERE
THERE IS SOVEREIGN GUARANTEE THE RISK IS LESS.

IF THE RISK OF RETURN IS LOWER AS IN GOVT. SECURITIES

THEN THE RATE OF RETURN IS ALSO LOWER.

TIME VALUE OF MONEY

THE PROCESS BY WHICH FUTURE FLOWS ARE ADJUSTED

TO REFLECT THESE FACTORS IS CALLED DISCOUNTING &
THE MAGNITUDE IS REFLECTED IN THE DISCOUNT RATE.

THE DISCOUNT VARIES DIRECTLY WITH EACH OF THESE

FACTORS.

THE DISCOUNT OF FUTURE FLOWS TO THE PRESENT IS

DONE WITH THE NEED TO KNOW THE EFFICACY OF THE
INVESTMENT.

TIME VALUE OF MONEY

THE DISCOUNTING BRING THE FLOWS TO A NET PRESENT

VALUE OR N P V.

N P V IS THE NET OF THE PRESENT VALUE OF FUTURE CASH

FLOWS AND THE INITIAL INVESTMENT.

IF N P V IS POSITIVE THEN WE ACCEPT THE INVESTMENT

AND VICE VERSA.

IF 2 INVESTMENTS ARE TO BE COMPARED THEN THE

INVESTMENT WITH HIGHER N P V IS SELECTED. THE
DISCOUNTED RATES FOR EACH ARE THE RISK RATES
ASSOCIATED WITH INVESTMENTS.

TIME VALUE OF MONEY

REAL CASH FLOWS ARE NOMINAL CASH FLOWS ADJUSTED

TO INFLATION.

NOMINAL CASH FLOWS ARE AS RECEIVED WHILE REAL CASH

FLOWS ARE NOTIONAL FIGURES

REAL CASH FLOWS = NOMINAL CASH FLOWS

1 INFLATION RATE

TIME VALUE OF MONEY

THERE ARE 5 TYPES OF CASH FLOWS:

-- SIMPLE CASH FLOWS
-- ANNUITY
-- INCREASING ANNUITY
-- PERPETUITY
-- GROWING PERPETUITY

THE FUTURE CASH FLOWS ARE CONVERTED TO THE

PRESENT BY A FACTOR KNOWN DISCOUNT

THE DISCOUNT RATE adjusted for inflation IS REAL RATE

THIS REAL RATE IS AN INFLATION ADJUSTED RATE

TIME VALUE OF MONEY

DISCOUNTING IS THE INVERSE OF COMPOUNDING

FINAL AMOUNT = A
PRINCIPAL = P
RATE OF INT. = r
PERIOD
= n
n
n
A = P(1+r) WHERE (1 + r) = COMPOUNDING FACTOR
n
n
P = A__
(1+ r)
WHERE 1 (1 + r) = DISCOUNTING FACTOR

IF INSTEAD OF COMPOUNDING ON ANNUAL BASIS IT IS ON

SEMI-ANNUAL OR MONTHLY BASIS THE THE EFFECTIVE RATE
OF INTEREST CHANGES
n
EFFECTIVE INTEREST RATE = (1 + r) - 1

TIME VALUE OF MONEY

ANNUITY IS A CONSTANT CASH FLOW AT REGULAR

INTERVALS FOR A FIXED PERIOD

THERE 4 TYPES OF ANNUITIES

A) END OF THE PERIOD

n
a) P V OF AN ANNUITY(A) = A [1-- {1 (1 + r)} ] r
n
b) F V OF AN ANNUITY(A) = A{(1 + r) -- 1} r

a) IS THE FORMULA OF EQUATED MONTHLY

INSTALMENT(EMI).

TIME VALUE MONEY

B) BEGINNING OF THE PERIOD

n-1
- a) P V OF ANNUITY(A) = A + A[1- {1 (1 + r) }] r
n
- b) F V OF ANNUITY(A) = A(1+ r){(1 + r) - 1} r
IF g IS THE RATE AT WHICH THE ANNUITY GROWS THEN
n
n
P V OF ANNUITY(A) = A(1 + g ){1 [(1 + g) (1 + r)] } (r + g)
IMP: IN BANKS , TERM LOANS MADE AT X% REPAYABLE AT
REGULAR INTERVALS GIVE A YIELD 1.85X%.

TIME VALUE OF MONEY

A PERPETUITY IS A CONSTANT CASH FLOW AT REGULAR

INTERVALS FOREVER. IT IS ANNUITY OF INFINITE DURATION.

P V PERPETUITY(A) = A r

P V PERPETUITY(A) = A (r g) IF PERPETUITY IS GROWING

AT g.

RULE OF 72: DIVIDING 72 BY THE INTEREST RATE GIVES

THE NUMBER OF YEARS IN WHICH THE
PRINCIPAL DOUBLES.

SAMPLING METHODS

A SAMPLE IS A REPRESENTATIVE PORTION OF THE

POPULATION

TWO TYPES OF SAMPLING:

--- RANDOM OR PROBABILITY SAMPLING

--- NON-RANDOM OR JUDGEMENT SAMPLING
IN JUDGEMENT SAMPLING KNOWLEDGE & OPINIONS ARE
USED. IN THIS KIND OF SAMPLING BIASEDNESS CAN CREEP
IN, FOR EX. IN INTERVIEWING TEACHERS ASKING THEIR
OPINION ABOUT THEIR PAY RISE.

SAMPLING METHODS

FOUR METHODS OF SAMPLING:

a) SIMPLE RANDOM

-- USE A RANDOM TABLE

-- ASSIGN DIGITS TO EACH ELEMENT OF THE

POPULATION(SAY 2)

-- USE A METHOD OF SELECTING THE DIGITS (SAY FIRST 2

OR LAST 2) FROM THE TABLE TO SELECT A SAMPLE

THE CHANCE OF ANY NUMBER APPEARING IS THE SAME
FOR ALL.

SAMPLING METHODS

b) SYSTEMATIC SAMPLING

-- ELEMENTS OF THE SAMPLE ARE SELECTED AT A UNIFORM

INTERVAL MEASURED IN TERMS OF TIME, SPACE OR

ORDER.
-- AN ERROR MAY TAKE PLACE IF THE ELEMENTS IN THE

POPULATION ARE SEQUENTIAL OR THERE IS A CERTAINITY

OF CERTAIN HAPPENINGS .
.

SAMPLING METHODS

c) STRATIFIED SAMPLING
-- DIVIDE POPULATION INTO HOMOGENOUS GROUPS
-- FROM EACH GROUP SELECT AN EQUAL NO. OF ELEMENTS
AND GIVE WEIGHTS TO THE GROUP/STRATA ACCORDING
PROPORTION TO THE SAMPLE OR
--SELECT AT RANDOM A SPECIFIED NO. OF ELEMENTS FROM

EACH STRATA CORRESPONDING TO ITS PROPORTION

TO THE POPULATION
-- EACH STRATUM HAS VERY LITTLE DIFFERENCE WITHIN

SAMPLING METHODS

d) CLUSTER SAMPLING

-- DIVIDE THE POPULATION INTO GROUPS WHICH ARE

CLUSTERS

-- PICK A RANDOM SAMPLE FROM EACH CLUSTER

-- EACH CLUSTER HAS CONSIDERABLE DIFFERENCE WITHIN

BUT SIMILAR WITHOUT

IMP: WHETHER WE USE PROBABILITY OR JUDGEMENT

SAMPLING THE PROCESS IS BASED ON SIMPLE RANDOM
SAMPLING .

SAMPLING METHODS

EXAMPLES OF TYPES OF SAMPLING:

SYSTEMATIC SAMPLING : A SCHOOL WHERE ONE PICKS

EVERY 15TH STUDENT.

STRATIFIED SAMPLING: IN A LARGE ORGANISATION PEOPLE

ARE GROUPED ACCORDING TO RANGE OF SALARIES.

CLUSTER SAMPLING: A CITY IS DIVIDED INTO LOCALITIES.

SAMPLING METHODS

SINCE WE WOULD USING THE CONCEPT OF STANDARD

DEVIATION LET US UNDERSTAND ITS SIGNIFICANCE

IT IS A MEASURE OF DISPERSION.

GENERAL FORMULA FOR STD. DEV. IS (X - )

N

WHERE X = OBSERVATION
= POPULATION MEAN
N = ELEMENTS IN POPULATION

SAMPLING METHODS

DESPITE ALL THE COMPLEXITIES IN THE FORMULA THE

STD. DEV. IS THE SAME IN STATE AS SUMMATION OF
DIFFERENCES BETWEEN THE ELEMENTS AND THEIR MEAN.
. --- IT IS THE RELIABLE MEASURE OF VARIABILITY .

. --- IT IS USED WHEN THERE IS NEED TO MEASURE

CORRELATION COEFFICIENT, SIGNIFICANCE OF
DIFFERENCE BETWEEN MEANS.
--- IT IS USED WHEN MEAN VALUE IS AVAILABLE.
--- IT IS USED WHEN THE DISTRIBUTION IS NORMAL OR NEAR
NORMAL

SAMPLING METHODS

FORMULA FOR STANDARD DEVIATION:

S = {(fx2 N) - f2x2 N}

-- FOR POPULATION

THIS IS FOR GROUPED DATA, WHERE f IS THE FREQUENCY

OF ELEMENTS IN EACH GROUP AND N IS THE SIZE OF

POPULATION

SAMPLING METHODS

IT IS IMPORTANT TO REMEMBER THAT EACH SAMPLE HAS

A DIFFERENT MEAN AND HENCE DIFFERENT STD.
DEVIATION. A PROBABILITY DISTRIBUTION OF THE
SAMPLE MEANS IS CALLED THE SAMPLING
DISTRIBUTION OF THE MEANS. THE SAME PRINCIPLE
APPLIES TO A SAMPLE OF PROPORTIONS.

SAMPLING METHODS

A STD. DEVIATION OF THE DISTRIBUTION OF THE SAMPLE

MEANS IS CALLED THE STD. ERROR OF THE MEAN. THE
STD. ERROR INDICATES THE SIZE OF THE CHANCE
ERROR BUT ALSO THE ACCURACY IF WE USE THE
SAMPLE STATISTIC TO ESTIMATE THE POPULATION STATISTIC

SAMPLING METHODS

TERMINOLGY :\

x = MEAN OF THE SAMPLING DITRIBUTION OF THE MEANS

= MEAN OF A SAMPLE

= STD. DEVIATION OF THE POPULATION DISTRIBUTION

x = STD. ERROR OF THE MEAN

= MEAN OF THE POPULATION DISTRIBUTION

SAMPLING METHODS

x= WHERE n IS THE SAMPLE SIZE. THIS FORMULA IS

n
TRUE FOR INFINITE POPULATION OR FINITE
POPULATION WITH REPLACEMENT.

Z = x -
x

WHERE Z HELPS TO DETERMINE THE DISTANCE

OF THE SAMPLE MEAN FROM THE POPULATION
MEAN.

SAMPLING METHODS

STD. ERROR FOR FINITE POPULATION:

x = [N-n] WHERE N IS THE POPULATION SIZE

n [N-1]

AND [N-n] IS THE FINITE POPULATION MULTIPLIER

[N-1]
THE VARIABILITY IN SAMPLING STATISTICS RESULTS FROM
SAMPLING ERROR DUE TO CHANCE. THUS THE DIFFERENCE
BETWEEN SAMPLES AND BETWEEN SAMPLE AND
POPULATION MEANS IS DUE TO CHOICE OF SAMPLES.

SAMPLING METHODS

CENTRAL LIMIT THEOREM

THE RELATIONSHIP BETWEEN THE SHAPE OF POPULATION
DISTRIBUTION AND THE SAMPLNG DIST. IS CALLED CENTRAL
LIMIT THEOREM.
AS SAMPLE SIZE INCREASES THE SAMPLING DIST. OF THE
MEN WILL APPROACH NORMALITY REGARDLESS OF THE
POPULATION DIST.
SAMPLE SIZE NEED NOT BE LARGE FOR THE MEAN TO
APPROACH NORMAL
WE CAN MAKE INFERENCES ABOUT THE POPULATION
PARAMETERS WITHOUT KNOWING ANYTHING ABOUT THE
SHAPE OF THE FREQUENCY DIST. OF THE POPULATION

SAMPLING METHODS

EXAMPLE: n = 30, = 97.5, = 16.3

a) WHAT IS THE PROB. OF X LYING BETWEEN 90 & 104
ANS) x= , = 2.97
n

P( 90 97.5 < x - < 104-97.5 )

2.97
x
2.97

-2.52 < Z < 2.19

USE Z TABLE

P = 0.4941 + 0.4857 = 0.98

b) FOR MEAN X LYING BELOW 100

P( Z< 100 104 )
2.97

REGRESSION AND CORRELATION

REGRESSION & CORRELATION ANALYSES HELP TO

DETERMINE THE NATURE AND STRENGTH OF RELATIONSHIP

BETWEEN 2 VARIABLES. THE KNOWN VARIABLE IS CALLED

THE INDEPENDENT VARIABLE WHEREAS THE VARIABLE WE

ARE TRYING TO PREDICT IS CALLED THE DEPENDENT

VARIABLE. THIS ATTEMPT AT PREDICTION IS CALLED

REGRESSION ANALYSES WHEREAS CORRELATION TELLS

THE EXTENT OF THE RELATIONSHIP.

REGRESSION AND CORRELATION

THE VALUES OF THE 2 VARIABLES ARE PLOTTED ON A

GRAPH WITH X AS THE INDEPENDENT VARIABLE. THE

POINTS WOULD BE SCATTERED . DRAW A LINE BETWEEN

POINTS SUCH THAT AN EQUAL NUMBER LIE ON EITHER SIDE

OF THE LINE. FIND THE EQN. SAY Y= a +b X ; PLOT THE

POINTS ON THE LINE.

REGRESSION AND CORRELATION

ONE CAN DRAW ANY NUMBER OF LINES BETWEEN THE

POINTS. THE LINE WITH BEST FIT IS THE THAT WITH LEAST
SQUARE DIFFERENCE BETWEEN THE ACTUAL AND
ESTIMATED POINTS.
IN THE EQN. Y = a + b X
b = SLOPE = XY n X Y
X2 n X2
SLOPE OF THE LINE INDICATES THE EXTENT OF CHANGE IN
Y DUE TO CHANGE IN X.

. a = Y - b X

WHERE X , Y ARE MEAN VALUES

.

REGRESSION AND CORRELATION

STD ERROR OF ESTIMATE

Se = {(Y Ye ) (n -2)} or = { Y -a Y b (XY)}
(n-2)
WHERE Ye = ESTIMATES OF Y

n 2 IS USED BECAUSE WE LOSE 2 DEGREES OF FREEDOM

IN ESTIMATING THE REGRESSION LINE.
IF SAMPLE IS n THE DEG OF FREEDOM = n-1 i.e. WE CAN
FREELY GIVE VALUES TO n-1 VARIABLES.

REGRESSION AND CORRELATION

THERE ARE 3 MEASURES OF CORRELATION

- COEFFICIENT OF DETERMINATION. IT MEASURES THE

STRENGTH OF A LINEAR RELATIONSHIP

COEFF. OF DET. = r2 =

(Y Ye )2
1- ---------------( Y - Y )2

COEF. OF DETERMINATION IS r

COEFF. OF CORRELATION IS r
r = + r, HENCE FROM r2 TO r WE KNOW THE STRENGTH
BUT NOT THE DIRECTION.
.

REGRESSION AND CORRELATION

-COVARIANCE. IT MEASURES THE STRENGTH &

DIRECTION OF THE RELATIONSHIP.
COVARIANCE = ( X - X )(Y - Y )
n

-COEFFICIENT OF CORRELATION. IT MEASURES THE

DIMENSIONLESS STRENGTH & DIRECTION OF THE
RELATIONSHIP
COEFF.OF CORR. = COVARIANCE
xy

TREND ANALYSIS

4 TYPES OF TIME SERIES VARIATIONS:

-- a) SECULAR TREND IN WHICH THERE IS FLUCTUATION BUT
STEADY INCREASE IN TREND OVER A LARGE PERIOD OF
TIME.
-- b) CYCLICAL FLUCTUATION IS A BUSINESS CYCLE THAT
SEES UP & DOWN OVER A PERIOD OF A FEW YEARS.
THERE MAY NOT BE A REGULAR PATTERN.
-- c) SEASONAL VARIATION WHICH SEE REGULAR CHANGES
DURING A YEAR.
-- d) IRREGULAR VARIATION DUE TO UNFORESEEN
CIRCUMSTANCES.

TREND ANALYSIS

IN TREND ANALYSIS WE HAVE TO FIT A LINEAR TREND BY

LEAST SQUARES METHOD. TO EASE THE COMPUTATION WE

USE CODING METHOD WHERE WE ASSIGN NUMBERS TO THE

YEARS FOR EXAMPLE. THEN WE CALCULATE THE VALUES OF

CONSTANTS a & b IN THE EQN. Y = a + b X AND THEN USE

THE EQN. FOR FORECASTING.

TREND ANALYSIS

STUDY OF SECULAR TRENDS HELPS TO DESCRIBE A

HISTORICAL PATTERN;
USE PAST TRENDS TO PREDICT THE FUTURE;

AND ELIMINATE TREND COMPONENT WHICH

MAKES IT EASIER TO STUDY THE OTHER 3 COMPONENTS.

TREND ANALYSIS

ONCE THE SECULAR TREND LINE IS FITTED THE CYCLICAL &

IRREGULAR VARIATIONS ARE TACKLED SINCE SEASONAL
VARIATIONS MAKE A COMPLETE CYCLE WITHIN A YEAR AND
DO NOT AFFECT THE ANALYSIS.

THE ACTUAL DATA IS DIVIDED BY THE PREDICTED DATA

A RELATIVE CYCLICAL RESIDUAL IS OBTAINED

A PERCENTAGE DEVIATION FROM TREND FOR EACH VALUE

IS FOUND

TREND ANALYSIS

SEASONAL VARIATION IS ELIMINATED BY MOVING AVERAGE

METHOD

. a) FIND AVERAGE OF 4 QTRS. BY PROCESS OF SLIDING

b) DIVIDE EACH VALUE BY 4

c) FIND AVERAGE OF SUCH VALUES IN b) FOR 2 QTRS BY

SLIDING METHOD

TREND ANALYSIS

d) CALCULATE THE PERCENTAGE OF ACTUAL VALUE TO

MOVING AVERAGE VALUE

e) MODIFY THE TABLE ON QTR. BASIS AND AFTER

DISCARDING THE HIGHEST AND LOWEST VALUE FOR EACH

QTR FIND THE MEANS QTR. WISE.

f) ADJUST THE MODIFIED MEANS TO BASE 100 AND OBTAIN A

SEASONAL INDEX
g) USE THE INDEX TO GET DESEASONALISED VALUES.

PROBABILITY DISTRIBUTION

THIS CHAPTER IS ON METHODS TO ESTIMATE POPULATION

PROPORTION AND MEAN:

THERE ARE 2 TYPES OF ESTIMATES:

POINT ESTIMATE: WHICH IS A SINGLE NUMBER TO ESTIMATE

AN UNKNOWN POPULATION PARAMETER. IT IS INSUFFICIENT
IN THE SENSE IT DOES NOT KNOW THE EXTENT OF WRONG.

PROBABILITY DISTRIBUTION

INTERVAL ESTIMATE: IT IS A RANGE OF VALUES

USED TO ESTIMATE A POPULATION PARAMETER;

ERROR IS INDICATED BY EXTENT OF ITS RANGE

AND BY THE PROBABILITY OF THE TRUE
POPULATION LYING WITHIN THAT RANGE.

ESTIMATOR IS A SAMPLE STATISTIC USED TO ESTIMATE A

POPULATION PARAMETER.

PROBABILITY DISTRIBUTION

CRITERIA FOR A GOOD ESTIMATOR

a) UNBIASEDNESS: MEAN OF SAMPLING DISTRIBUTION OF

SAMPLE MEANS ~ POPULATION MEANS. THE STATISTIC

ASSUMES OR TENDS TO ASSUME AS MANY VALUES

ABOVE AS BELOW THE POP. MEAN

b) EFFICIENCY: THE SMALLER THE STANDARD ERROR, THE

MORE EFFICIENT THE ESTIMATOR OR BETTER THE
CHANCE OF PRODUCING AN ESTIMATOR NEARER TO THE

POP.PARAMETER .

PROBABILITY DISTRIBUTION

c) CONSISTENCY: AS THE SAMPLE SIZE INCREASES, THE

SAMPLE STASTISTIC COMES CLOSER TO THE POPULATION
PARAMETER.

d) SUFFICIENCY: MAKE BEST USE OF THE EXISTING SAMPLE.

PROBABILITY Of 0.955 MEANS THAT 95.5 OF ALL SAMPLE
MEANS ARE WITHIN + 2 STD ERROR OF MEAN
POPULATION .

SIMILARLY, 0.683 MEANS + 1 STD ERROR.

PROBABILITY DISTRIBUTION

CONFIDENCE INTERVAL IS THE RANGE OF THE

ESTIMATE WHILE CONFIDENCE LEVEL IS THE
PROBABILITY THAT WE ASSOCIATE WITH INTERVAL
ESTIMATE THAT THE POPULATION PARAMETER IS IN IT

AS THE CONFIDENCE INTERVAL GROWS SMALLER, THE

CONFIDENCE LEVEL FALLS.

PROBABILITY DISTRIBUTION

FORMULA:

ESTIMATE OF POPULATION : ^= (x - x )
STD. DEVIATION
(n 1)

ESTIMATE OF STD. ERROR : ^x = ^

n

STANDARD ERROR OF THE : p = p q

PROPORTION
n

OR = ^ (N - n)
n (N - 1)

BOND VALUATION

BONDS ARE LONG TERM LOANS WITH A PROMISE OF SERIES

OF FIXED INTEREST PAYMENTS AND REPAYMENT OF
PRINCIPAL

THE INTEREST PAYMENT ON BOND IS CALLED COUPON RATE

IS COUPON RATE.

THEY ARE ISSUED AT A DISCOUNT AND REPAID AT PAR.

GOVT. BONDS ARE FOR LARGE PERIODS

BONDS HAVE A MARKET AND PRICES ARE QUOTED ON

NSE/BSE.

BOND VALUATION

BOND PRICES ARE LINKED WITH INTEREST RATES IN THE

MARKET.

IF THE INTEREST RATES RISE, THE BOND PRICES FALL AND

VICE VERSA.

PRESENT VALUE OF BONDS CAN ALSO BE CALCULATED

USING THE DISCOUNT FACTOR FOR THE COUPONS AS WELL

AS THE FINAL PAYMENT OF THE FACE VALUE

BOND VALUATION

SOME IMPORTANT STANDARD MEASURES:

CURRENT YIELD: IT IS THE RETURN ON THE PRESENT

MARKET PRICE OF A BOND = (COUPON INCOME)*100
CURRENT PRICE

RATE OF RETURN: IT IS THE RATE OF RETURN ON YOUR

INVESTMENT

.RATE OF RETURN = (COUPON INCOME+ PRICE CHANGE)

INVESTMENT PRICE.

BOND VALUATION

YIELD TO MATURITY: THIS MEASURE TAKES INTO ACCOUNT

CURRENT YIELD AND CHANGE IN BOND VALUE OVER ITS

LIFE . IT IS THE DISCOUNT RATE AT WHICH THE PRESENT

VALUE (PV) OF COUPON INCOME & THE FINAL PAYMENT AT

FACE VALUE = CURRENT PRICE.

n
PRICE = C i
+ C n+ F V
WHERE C i = COUPON

i =1 (1 + r) n-1 (1 + r) n

INCOME
F V = FACE

VALUE
n = LIFE OF
BOND

BOND VALUATION

IF THE YIELD TO MATURITY (YTM) REMAINS UNCHANGED,

THEN THE RATE OF RETURN = YTM

EVEN IF INTEREST RATES DO NOT CHANGE, THE BOND

PRICES CHANGE WITH TIME;
AS WE NEAR THE MATURITY PERIOD, THE BOND PRICES

TEND TO THE PAR/FACE VALUE.

.

BOND VALUATION

THERE ARE 2 RISKS IN BONDS INVESTMENT

a) INTEREST RATE RISK: WHERE THE BOND PRICES CHANGE

INVERSELY WITH INTEREST RATE. ALSO THE LARGER THE

MATURITY PERIOD OF A BOND, THE GREATER THE

SENSITIVITY TO
PRICE.

DEFAULT RISK: WHICH IS TRUE WITH PRIVATE BONDS

RATHER THAN GOVT. BONDS( GILT EDGED SECURITIES)

BOND VALUATION

DIFFERENT TYPES OF BONDS:

ZERO COUPON BOND: NO COUPON INCOME.

FLOATING RATE BOND: INTEREST RATES CHANGE

ACCORDING TO THE MARKET.

CONVERTIBLE BOND: BONDS CONVERTED TO SHARES AT A

LATER DATE.

BONDS ON CALL: THE ISSUER RESERVES THE RIGHT TO

CALL BACK THE BOND AT ANY POINT IN TIME GENERALLY
OVER PAR.

BOND VALUATION

SOME THOUGHTS ON BONDS

THE INTEREST IS CALLED COUPON INCOME AS COUPONS
ARE ATTACHED TO THE BONDS FOR INTEREST PAYMENTS
OVER THE LIFE OF THE BOND
BOND INTEREST REMAINS THE SAME IRRESPECTIVE OF THE
CHANGES IN THE INT. RATES IN THE MARKET
BOND PRICES ARE USUALLY QUOTED AT %AGE OF THEIR
FACE VALUE i.e. 102.5.
CURRENT YIELD OVERSTATES RETURN ON PREMIUM BONDS
& UNDERSTATES RETURN ON DISCOUNT BONDS; SINCE
TOWARDS THE END OF THE BOND PERIOD THE PRICE
MOVES NEARER THE FACE VALUE. i.e. PREMIUM BOND AND
DISCOUNT BOND .
IF BOND IS PURCHASED AT FACE VALUE THEN Y T M IS THE
COUPON RATE.

LINEAR PROGRAMMING

EVERY ORGANISATION USES RESOURCES SUCH AS

MEN(WOMEN), MACHINES MATERIALS AND MONEY.

THESE ARE CALLED RESOURCES

THE OPTIMUM USE OF RESOURCES TO PRODUCE THE

MAXIMUM POSSIBLE PROFIT IS THE ESSENCE OF LINEAR
PROGRAMMING

EACH RESOURCE WOULD HAVE CONSTRAINTS

HENCE WORKING WITHIN THE CONSTRAINTS; MINIMIZING

COST; MAXIMIZING PROFIT SHOULD BE THE CORPORATE
PHILOSOPHY.

LINEAR PROGRAMMING

IN LINEAR PROGRAMMING PROBLEMS, THE CONSTRAINTS

ARE IN THE FORM OF INEQUALITIES

LABOUR AVAILABLE FOR UPTO 200 HRS.

< 200

MAXIMUM FUNDS AVAILABLE IS RS. 30,000/-

< 30,000

MINIMUM MATERIAL TO BE USED IS 300 KGS

> 300

SOLUTION TO THESE EQUATIONS ARE BY GRAPHICAL

METHOD OR THE SIMPLEX METHOD

SIMULATION

SIMULATION IS A TECHNIQUE WHERE MODEL OF THE

PROBLEM, WITHOUT GETTING TO REALITY, IS MADE TO
KNOW THE END RESULTS

SIMULATION IS IDEAL FOR SITUATIONS WHERE SIZE OR

COMPLEXITY OF THE SITUATION DOES NOT PERMIT USE OF
ANY OTHER METHOD

IN SHORT, SIMULATION IS A REPLICA OF REALITY.

EXAMPLES OF PROBLEM SITUATIONS FOR SIMULATION ARE

-- AIR TRAFFIC QUEUING
-- RAIL OPERATIONS
-- ASSEMBLY LINE SYSTEMS
-- AND SO ON

SIMULATION

THEREFORE IT IS CLEAR THAT WHEN USE OF REAL SYSTEM

UPSETS THE WORKING SCHEDULE IN THE SYSTEM OR IS
IMPOSSIBLE TO EXPERIMENT REAL TIME, AND IT IS
TOO EXPENSIVE TO UNDERTAKE THE EXERCISE, THEN
SIMULATION IS IDEAL.

HOWEVER SIMULATION CAN BE A COSTLY EXERCISE, TIME

CONSUMING AND WITH VERY FEW GUIDING PRINCIPLES.

FINAL LEG

THANK YOU VERY MUCH FOR YOUR

PATIENCE; I TRUST IT WAS USEFUL.
BEFORE WE DISPERSE LET US GO
THRU A SET OF QUESTIONS WITH
MULTIPLE CHOICE ANSWERS,WHICH
WILL COVER THOSE ASPECTS OF THE
SUBJECT THAT MAY NOT BEEN
TOUCHED UPON.

END
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