CAIIB ABM : UNIT 12 TIME VALUE OF MONEY

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PRESENT VALUE:Describes how much a future sum of money is worth today
3 Components:

a. Time
b. excepted rate of return
c. size of the future cash flow

Formulae: PV=CF(1+r)/n
where PV=Present Value, CF= Cash flow in future, r= Rate Of Return/Discounted Rate,n= number of periods

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FUTURE VALUE
: Refers to calculate how much present value of an asset or cash will be worth at a specific time in the future.

METHOD 1 - FOR SIMPLE ANNUAL INTEREST
FV =Orignal Investment * (1+ (Interest rate* No of years))

METHOD 2 - FOR INTEREST COMPOUNDED ANNUALLY
FV= Orignal Investment*((1+ interest rate)^no. of years)

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ANNUITIES
Series of fixed payment at a specified frequency over a fixed time period
1. Ordinary Annuity :Payment at end of each period
2. Annuity Due: Payment required at the begining of each period

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PRESENT VALUE OF ANNUITY
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FUTURE VALUE OF ANNUITY
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NET PRESENT VALUE
Difference between the present value of cash inflow and cash outflow
It may be
Positive; inflow > outflow,
Negative : inflow < outflow
Zero: inflow = outflow
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<<<<<<<<<<<          MCQ     >>>>>>>>>>>>>
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1. Assume that you like to put money in an account today to make sure your child has enough money in 10 yrs to buy a house. if u would like to give your child 10 lakh in 10 years, and you know you can get 5% interest per year from a savings account during that time, how much you should put in the account now?
// NUMERICAL ON PRESENT VALUE//
Ans- PV=10,00,000/(1+.05)/10=613913

2. 10,000 invested for 5 years with simple annual interest of 10% would have a future value of ...?
//Future Value-method1
Ans- FV =  10,000* (1+(.10*5)
=10,000(1+0.50)
=15000

3. 2. 10,000 invested for 5 years ,compounded annually of 10% would have a future value of ...?
//Future Value-method2
Ans- FV =  10,000* ((1+.10)^5)
=10,000*1.61051
= 16105.10

4. Find the present value of quaterly payment of Rs. 250 for 5 years @ 12 % compounded quaterly.
a. 3179
b. 3019
c.3109
d. 3719
Ans-d
//PV-annuity
P=250, T= %*4=20, R= 12/4=.03


5. Money has a time value is shown by which of the following concept.
a. market Value
b. face value
c. present Value
d. b and c
Ans- c

6. present value is defined as :
a. Future cash flows discounted to the present at an appropriate discount rate
b. inverse of future cash flows
c. present cash flow compounded into future
d. None of the above
Ans- a

7. If the present value of the cash flow X is Rs 200, and the present value of the flow Y is Rs 150, then the present value of the combined cash flow is :
a. 200
b. 150
c. 50
d. 350
Ans- d

8. If you invest Rs. 100,000 today at 12 % interest rate for one year, what is the amount you will have at the end of the year?
a. Rs 90,909
b. Rs 112,000
c. Rs 100,000
None of the above
Ans-b

9. An annuity consists of monthly repayments of Rs. 600 made over 20 years and if rate is 14% monthly. What is the present value of the annuity?
a. 48872
b. 42878
c. 48728
d. 48278
Ans- d

10. A process by which present cash flow are converted into their future value is called
a. compounding
b. discounting
c. converting
d. finding present value
Ans- a

11. A higher discount rate will lead to :
a. A higher value of the future cash flow
b Lower present value of future cash flow
c. no change in present value of the future cash flow
d. No change
Ans- b

12. Find the interest rate. Present value is Rs 100,Future value becomes 115.76 in 3 yrs.
a. 4.5%
b. 5%
c. 5.5%
d. 6%
Ans- b
115.76=100*(1+r)^3
(1+r)^3=1.1576
r=0.499
=0.05=5%

13. You will be receiving Rs 204000 at the end of each year for next 20 years. If the current discount rate for such a stream of cash flow is 10%, find the present value of the cash flow.
a. 1737760
b. 1736660
c. 1736770
d. 1737660
Ans- c

14. Present value is Rs 20000. Interest rate is 12% p.a. Interest is compounded on quaterly basis.What will be the cash flow at the end of first year?
a. 25210
b. 22150
c. 22510
d. 21520
Ans- c

15. If payments are made/received at the begining of the period, this annuity is called as..
a. Perpetual Annuity
b. Annuity Ordinary
c. Annuity Due
d. Advance Annuity
Ans- c

16. In case of compounded Interest, if Compounding is done half yearly, then t is multiplied by
a. 2
b. 3
c. 4
d. 6
Ans-a

17. Value today of Rs 1 to be received in future is called
a. present value
b. Compounded factor
c. discount factor
d. Yield factor
Ans- c

18. Mr Ram purchased a property for Rs 8 Lac. He has been assured to get Rs 10 lac, after one year at 9% interest rate. What is the net present value of the property based on this assured return?
a. Rs 117400
b. Rs. 118300
c. rs 119200
d. rs. 120100
Ans- a
1000000/1.09=917431-800000=117400

19. Calculate the Future Value of present value of Rs 10000/- after 4 years if rate of interest is 10 %
a. 13310
b. 14641
c. 14461
d. 13130
Ans- b
FV=PV(1+R)^n

20. Which is an example of sinking fund?
a. Perpetuity
b. annuity
c. Gratuity
d. None of the above
Ans-b

21. What is the repayment of entire loan principle at the end of the loan period called?
a. balloon payment
b. compounded payment
c. annuity
d. term payments
Ans- a

22. A constant cash flow paid or received at regular time intervals is known as ..
a. Annuity
b. Perpetuity
c. Growing Annuity
d. Growing Perpetuity
Ans- a

23. A cash flow that is expected to grow at constant rate forever is called
a. Annuity
b. Perpetuity
c. Growing Annuity
d. Growing Perpetuity
Ans- d

24. Example of annuity is ..
a. EMI of loan account
d. RD
c. Both of the above
d. None of the above
Ans- c