TIME VALUE OF MONEY

1. You expect to receive Rs 10,000 as a bonus after 5 years on the job. You have calculated the
present value of this bonus and the answer is Rs 8000. What discount rate did you use in your
calculation?
- 4.56 %

2. Himalayan Banking Corporation offers two types of certificates of deposit, each requiring a
deposit of Rs 10,000. The first one pays Rs 11,271.60 after 24 months, and the second one pays
Rs 12,139.47 after 36 months. Find their monthly-compounded rate of return.

- 0.5 %, 0.54%

3. Suppose you deposit Rs 350 each month in an account that pays 6% annual interest,
compounded monthly. Find the total amount in this account at the end of 25 months.

- Rs 9,342.17

4. In order to buy a house you want to accumulate a down payment of Rs 15,000 over the next
four years. You can do that by putting a certain sum of money in a savings account on the first
of every month for the next 48 months. The account credits interest every month at the annual
rate of 6%. What is your required monthly deposit?

Rs 275.89

5. Mr.yamu plans to receive an an annuity of Rs 5000 semi - annually for 10 years after he
retires in 18 years . Money is worth 9% compounded semi annually . What amount of single
deposit made now would provide the funds for the annuity ? How much will MR. Yamu receive
from annuity?

Rs 13,333 ; 100,000
6. Mr. Liberal, an established Development Planning Consultant, was approached by the officer
N Investment Banking Ltd. for his wealth management. Mr. Liberal is currently aged exactly 57
years is planning to retire from his profession after the age of 60. He is currently living with his
wife and daughter, who is settled in US. He wants to set aside some funds and let the
Investment Bank manage funds for guaranteed return from 61st year for at least 10 years for
his and his wife's living.
Mr. Liberal estimates the requirement of Rs. 120,000 per month to cover up his living from the
1st year of retirement. The officer of the Investment Bank has offered 3 schemes of which he
has chosen fixed income scheme with 0% risk and yields 10% interest per annum compounded
annually during the entire scheme period from the beginning of 61 st birthday till 70th birthday
while 9.5% compounded quarterly from beginning of deposit till the end of 60th birthday. The
proceeds by the Investment Bank are paid in lump sums and at the beginning of every year.
Ignore management fees of Investment Bank and taxation.

Required: What is the amount Mr. Liberal needs to deposit at the Investment Bank as of today
under the scheme Present your calculations on Rs. in thousands.

Rs 7,344
7. A company offers a fixed deposit scheme whereby Rs. 10,000 matures to Rs. 12,625 after 2 years, on
a half-yearly compounding basis. If the company wishes to amend the scheme by compounding interest
every quarter, what will be the revised maturity value?

Rs 12670

8. Mr. X has made real estate investment for Rs. 120,00,000 which he expects will have a maturity value
equivalent to invest at 12% compounded monthly for 5 years. If most savings institutions currently pay
8% compounded quarterly on a 5 year term, what is the least amount for which Mr. X should sell his
property?

Rs 14,672,948

9. Mr. Lama requires Rs 80 lakhs as on 1st January, 2026 to start business. He has some surplus money
today, i.e. on 31st December, 2015. If he invests available money now and Rs 5 lakh at the end of 1 st
year, 9 lakh at the end of 2nd year, Rs 4 lakh at the end of 3rd year and Rs 3 lakh each at the end of each
year into a fund.
Required:
(i) Determine the amount that needs to be deposited now so that it will be sufficient to start business if
the fund pays 8% interest? ( Rs 913,565)
(ii) If Mr. Lama decides to invest a lump sum in the fund after one year and let it compound annually,
how much will the lump sum be? Assuming the rate of interest is 8% .
(Rs 40,01,600)
10. XYZ Bank pays 8 percent interest, compounded quarterly, on its money market account. The
managers of ABC Bank want its money market account to be equal to XYZ Bank’s effective annual rate,
but interest is to be compounded on monthly basis. What nominal, or quoted, or Annual Percentage
Rate must ABC Bank provide?
7.94%

11. Assume the total cost of a college education be Rs 300000 when your child enters in 18th year from
now. You presently have Rs 24240 to invest. What annual Rate of interest must you earn on your
investment to cover the cost of your child’s college education ?

15%
Theory :
1. Reason for interest
2. Perpetuities
3. Annuity and annuity due
4. Nominal and effective interest rate
5. Inflation premium