IFIM BUSINESS SCHOOL

PGDM, PGDM (IB) AND PGDM (FINANCE), BATCH 2010-12, TERM 4

FINANCIAL MATHEMATICS: WORKSHEET 1

FACULTY: PADMAVATHI MADHAVAN

1. Sania, Jaya and Lisa each borrow Rs. 5,000 for 5 years at a nominal rate of interest of 12%
compounded half-yearly. Sania has interest accumulated over the five years and pays all the
interest and principal in a lump sum at the end of 5 years. Jaya pays interest at the end of every
six months as it accrues and the principal at the end of 5 years. Lisa pays her loan with 10 level
payments at the end of every six-month period. Calculate the total amount of interest on all the
three loans.(Ans: 3954.238, 3000, 1793.5, total interest= 8747.738)

2. The rate of INTEREST per annum convertible quarterly is 8%. Calculate:

(a) The equivalent rate of interest per annum convertible half- yearly.
(b) The equivalent rate of interest per annum convertible monthly.

3. Gopal has invested the following amounts in his bank account:

On 1st Jan 1999 Rs. 1000
On 1st July 2000 Rs. 2000
On 31st Oct. 2000 Rs. 1500
The bank has declared the following the compound interest rates for its accounts:
1st Jan 99 to 31st Dec 99 6% p.a. payable half yearly
1st Jan 00 to 31st Dec 00 4% p.a. payable monthly
1st Jan 01 till date 5% p.a.
Gopal wants to close his accounts as on 3oth Sept. 01. What money will he get back?

4. Ayesha can receive one of the following two payment streams:

a) 100 at time 0, 200 at time n, and 300 at time 2n

b) 600 at time 10

At an annual effective interest rate of “i”, the present values of the two streams under and (b) are
equal. Given vn = 0.75941, determine i.

5. An investment house issues a 10-year loan for Rs. 1,00,000 to a businessman. The loan is to be
repaid by annual instalments payable in arrears calculated using 8%p.a. effective rate of interest.
The repayment schedule is designed by the businessman in such a way that half the capital will
have been repaid by the end of the term. The remaining 50,000 will be repaid with funds from
other sources. Calculate the annual repayment.

6. A loan is repayable by an annuity certain, which is payable annually in arrear for 16 years and
calculated at an effective rate of interest of 5% p.a. The first two payments are Rs. 100 each; the
next two payments are Rs. 120 each, the following two payments are Rs. 140 each, and so on up
to payments of Rs. 240 each at the end of the last two years. Calculate the amount of the loan.
(Ans: Rs. 1,733)
 7. Mr. Smith is struggling to repay his loan of Rs. 20,00,000 with payments of Rs. 42, 790 made
monthly in arrears for 5 years.
 Calculate the annual effective rate of interest on his loan.
 After exactly one year, another company offers to help Mr. Smith by restructuring his
loan with new monthly instalments of Rs., 24, 749 made in arrears. Assuming that the
company charges the same effective rate of interest as the original loan, calculate the
term of the new loan.
 How much more interest in total will Mr. Smith pay on his restructured loan than his
original loan?

8. A housewife buys a refrigerator at Rs.15, 000/- from a dealer under instalment scheme to be
repaid in 36 equal monthly instalments payable in arrear. The amount of each monthly instalment
is Rs.550/-.
(i) Calculate the flat rate of interest p.a.
(ii) Calculate the annual effective rate of interest

9. A man makes payments into an investment account of Rs.200 at time 5, Rs.190 at time 6, Rs.180
at time 7, and so on until a payment of Rs.100 at time 15. [Unit of time is year]. Assuming an
annual effective rate of interest of 3.5%, calculate:
A. the present value of the payments at time 4
B. the present value of the payments at time 0
C. C. the accumulated value of the payments at time 15

10. A loan of Rs. 20, 00,000 is repayable by level annuity, payable monthly in arrears for 18 years.
The amount of the monthly instalment is calculated on the basis of an effective annual rate of
interest of 10%.
a. Calculate the amount of EMI
b. Calculate the principal and interest components of the 25 th instalment.
Immediately after making the 36th payment, the borrower makes an additional payment of Rs.
25,000, the amount of monthly repayment being appropriately reduced. Assuming that the
interest basis is unaltered, find the amount of the revised payment.
11. A loan is repayable by annual instalments paid in arrear for 20 years. The first instalment
is Rs. 4,650 and each subsequent instalment is Rs.150 greater than the previous
instalment.
Calculate the following, using an interest rate of 9% per annum effective:
(i) the amount of the original loan
(ii) the capital repayment in the tenth instalment
(iii) the interest element in the last instalment
(iv) the total interest paid over the whole 20 years
12. A housing finance company offers the following two deals to customers for twenty-five
year mortgage loans:

Product A

A loan of Rs. 50,00,000 is offered with level repayments of Rs. 3,54,763 made annually in
arrear. No processing fee is payable on the loan and there will be no exit fee.
Product B
A loan of Rs. 50,00,000 is offered whereby a monthly payment in advance is calculated such that
the customer pays an effective rate of interest of 4% per annum ignoring processing and exit
fees. In addition the customer also has to pay a processing fee of Rs. 6,000 at the beginning of
the contract, when the loan is sanctioned. and an exit fee of Rs.5,000 at the end of the twenty-
five year term of the mortgage.
Compare the annual effective rates of return paid by customers on the two products and specify
which offer is attractive to the borrower.
13. A loan of Rs. 3,000 is repayable over 5 years by level quarterly instalments calculated using a
rate of interest of 5% pa effective.

a. Calculate the amount of each quarterly payment.

b. What is the capital content of the sixth repayment?
c. How much interest is paid in the second year?
d. Determine when the amount of the loan outstanding falls below Rs. 1,000.
(Ans: Rs. 170.07, 141.63, 110, 14th payment)

14. A loan is repaid with level annual payments based on an annual effective interest rate of 7%. The
8th payment consists of Rs. 789 of interest and Rs. 211 of principal. Calculate the amount of
interest paid in the 18th instalment. (Ans: Rs. 585)
15. Find the total present value as at 1st June 2004 of payments of Rs. 100 on 1st January 2005 and Rs.
200 on 1st May 2005, assuming a rate of interest of 12% p.a. convertible quarterly. (Ans: 272.79)
16. Find the present value as at 1 st June 2004 of 41 monthly payments each of Rs. 100 commencing
on 1st January 2005, assuming a rate of 10% p.a. convertible half yearly. (Rs. 3,307)
17. A man borrows Rs. 7,500 to buy an art piece. He repays the loan by 24 monthly instalments in
arrears. The flat rate of interest is 9% p.a. What is his monthly repayment? What is the annual
effective rate of interest on this transaction? (Ans: Rs. 368.75, IRR: 17.7% approx)
18. A loan of Rs. 30,000 is repaid by a level annuity payable annually in arrears for 20 years. If the
rate of interest on the loan is 15% p.a. effective, calculate the annual instalment . (Ans: Rs.
4,793)
19. A businessman wishes to borrow an amount of Rs. 10,000 for a term of 5 years. The agreed rate
of interest is 8% p.a. effective for the first 3 years and 6% p.a. effective thereafter. Repayments
on the loan are made annually in arrears.

a. Calculate the amount of level annual repayment.

b. What percentage of the loan has been repaid by the end of the third year? (Ans: Rs. 2,479.85,
54.5%)

20. An annuity payable annually in arrears has a first payment of Rs. 300, with subsequent payments
decreasing by Rs. 10 each year, till it reaches Rs. 110 in the final year. Calculate the present value
of this annuity at an effective rate of interest of 6%p.a. (Ans: 2,569)

21. A bank offers two types of Fixed Deposit Accounts:

Account A: The amount invested will earn 18% p.a. simple interest.
Account B: The amount invested will earn 12% effective p.a. compound interest
 The interest along with the amount invested will be paid to the investor at the end of the
chosen term of the fixed deposit.
Which Account will give a higher maturity amount if the term of the deposit is:
(i) 6 months
(ii) 12 months
(iii) 18 months

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COMMERCIAL BANKING:

Components of tier 1 capital

a.       Paid up equity capital

b.      Statutory reserves and undisclosed free reserves

c.       Capital reserves

d.      Innovative perpetual debt instruments ( should not exceed 15% of tier 1 capital)

e.      Any other instrument notified by RBI to be included in TIER1 capital.

  Components of TIER 2 capital

a.       Revaluation reserves

b.      General provisions and loss reserves

c.       Hybrid capita debt instruments

d.      Subordinated term debt

e.      Other undisclosed reserves

Components of tier 3 capital

Can be issued only to meet capital requirements for market risk  not yet approved by RBI.