__AFB Last Minute Revision__

Paper IV

Paper IV

= 8 per cent * 1,000/800 = 10 per cent

2. Consider a Rs. 1,000 par value bond, whose current market price is Rs. 850/-. The bond carries a coupon rate of 8 per cent and has the maturity period of nine years. What would be the rate of return that an investor earns if he purchases the bond and holds until maturity?

Solution

If kd is the yield to maturity then,

850 = 80 (PVIFA kd per cent, 9 yrs) + 1,000 (PVIF kd, 9 yrs)

To calculate the value of kd, we have to try several values:

= 80 (PVIFA 12 per cent, 9) + 1,000 (PVIF 12 per cent, 9)

= 80x 5.328+ 1,000 x (0.361)

= 426.24 + 361 =787.24

Since, the above value is less than 850, we have to try with value less than 12 per cent. Let us try with

kd =10 per cent

= 80 (PVIFA 10 per cent, 9) + 1,000 (PVIF 10 per cent, 9)

= 80 x 5.759 + 1.000 * 0.424 = 884.72

From the above it is clear that kd lies between 10% and 12%. Now we have to use linear interpolation in the range of 10% and 12%. Using it, we find that kd is equal to the following:

(884.72-850) / (884.72-787.24)

34.72 / 97.48 = 10%.+

.71=10.71%

Therefore, the yield to maturity is 10.71%

3. Madhu had availed a loan of Rs. 120000 @ 12%, which she has to pay in 6 equal annual installments.

Calculate the amount of installment?

P = 120000

R = 12% p.a.

(SINCE PAYMENT IS TO ANNUALLY, NOT Monthly, Rate IS NOT divided by 12)

T = 6 yrs

(SINCE PAYMENT IS TO BE ANNUALLY, NOT Monthly, Time IS NOT multiplied with 12)

So, we can well use EMI formula in this question as we did in questions no 4, 5, 6 & 7 The formula of EMI = P * R * (1 + R)^T ÷ { (1 + R)^T - 1 } EMI = 120000 × 0.12 × 1.12^6 ÷ (1.12^6 – 1)

= (120000*0.012*1.9738) ÷ 0.9738

= 28423 / 0.9738

= 29187

4. An asset cost Rs. 3,30,000/- has residual value of Rs. 30,000/-, and is expected to last 4 years. Calculate the depreciation for 1st year using sum of the digits Method.

D = (nth/E(sigma)n)(cost-Residual Value)

E(sigma)n = 1+2+3+4 = 10

Cost-Residual Value = 330000 - 30000 = 300000 1st year = 4/10(300000) = 120000

2nd year = 3/10(300000) = 90000

3rd year = 2/10(300000) = 60000

4th year = 1/10(300000) = 30000

5. The rate of interest on a sum of money is 4% p.a .for the first 2 years, 6% p.a. for The next 4 years and 8% p.a for the period beyond 6 years. If the simple interest accrued by the sum for a total period of 9 years is Rs, 1,120, what is the sum?

4*2=8,

6*4=24,

8*3=24

8+24+24=56

1120/56*100=2000

6. Capital Rs. 40,000, Liabilities Rs. 15,000, then Assets Rs...... Assets = Capital + Liabilities

= 40000+15000

= 55000