Exercise 1 :

Identify if these statements are correct 1 a) A bank that pays 10.5 percent interests compounded annually provides a higher effective rate of interest than a bank that pays 10 percent compounded semi-annually. b) The present value interest factor for annuity is equal to the product of the future value interest factor for annuity and the present value interest factor.

1 c) One of the reasons for attributing time value to money is that individuals prefer future consumption to current consumption.

Select the right answer

a) Given an investment of Rs 1,000 to be invested for 9 months and interest is credited annually a. It is better to -invest in a scheme, which earns compound interest at 12%. b. It is better to invest in a scheme, which earns simple interest at 12%. c. It is better to invest in a scheme, which earns simple interest at 15%. d. It is better to invest in a scheme, which earns compound interest at 14%. e. The interest rate does not matter. b) In order to find the value in 1995 of a sum of Rs 100 invested in 1993 at x % interest a. The CVF for an annuity table should be used. b. The PVF for an annuity table should be used. c. The CVF for a lumpsum table should be used. d. The PVF for a lumpsum should be used. e. Both CVF for a lumpsum and CVF for an annuity tables can be used.

Calculate the following

a) How many years will it take for Rs. 5,000 invested today at 12% rate of interest to recover your semester fee of Rs. 1, 60,000? Use the rule of 72. b) If you invest Rs. 3,000 annually for 3 years and Rs. 5,000 annually thereafter for 7 years at a rate of 12%, what will be the maturity value at the end of 10 years? c) If you win a competition at the campus today and are promised to receive Rs. 12,000 receivable after 10 years, what would the present value be of this prize money be, if the rate of discount is ( annually) (i) 10% (ii) 12% (iii) 15%? d) If you invest this Rs.12, 000 with a bank which pays 11% interest with quarterly compounding, how much can you hope to receive in 7 years? e) Your father is due for retirement this month and needs your advice on planning his retirement money. He wants to know which of these options would be more profitable at the end of 20 years, given an interest rate of 10% a) Rs. 50,000 received as a lumpsum today b) Rs. 8000 received at the end of each year? f) At the 10th year, he wants to have a lumpsum of Rs.75000 to finance for your higher studies (??!!!!) If he reinvests the entire annuity of Rs.8000 per year in another scheme providing 15% annual interest, would he need to invest any amount over this amount to cover for the required money? If yes, by how much??