PROBLEMS 1.

Consider the data for a sample of 4 shares for two years, the base year and year t : Number of outstanding shares (in million) A 40 30 3 B 60 75 12 C 20 40 6 D 75 90 5 What is the price weighted index, equal weighted index, and value weighted index for year t? Share Price in base year (Rs) Price in year t (Rs)

2. Consider the data for a sample of 5 shares for two years, the base year and year t. Share Price in base year Price in year t (Rs) No. of outstanding (Rs) shares (in million) M 12 16 10 N 18 15 5 O 36 60 6 P 20 30 40 Q 15 6 30 What is the price weighted index, equal weighted index and value weighted index for year t ? 2. Consider the data for a sample of 3 shares for two years, the base year and year t. Share Price in base year Price in year t (Rs) No. of outstanding shares (in million) X 80 100 15 Y 40 30 20 Z 30 ? 50 The value-weighted index for year t is given to be 115. What is the price of share Z in year t? 3. Calculate the value 5 years hence of a deposit of Rs.1,000 made today if the interest rate is (a) 8 percent, (b) 10 percent, (c) 12 percent, and (d) 15 percent. 4. If you deposit Rs.5,000 today at 12 percent rate of interest in how many years (roughly) will this amount grow to Rs.160,000 ? Work this problem using the rule of 72 ---- do not use tables. 5. A finance company offers to give Rs.8,000 after 12 years in return for Rs.1,000 deposited today. Using the rule of 69, figure out the approximate interest offered. 6. You can save Rs.2,000 a year for 5 years, and Rs.3,000 a year for 10 years thereafter. What will these savings cumulte to at the end of 15 years, if the rate of interest is 10 percent? 7. Mr.Vinay plans to send his son for higher studies abroad after 10 years. He expects the cost of these studies to be Rs.1,000,000. How much should he save annually to have a sum of Rs.1,000,000 at the end of 10 years, if the interest rate is 12 percent?

8. A finance company advertises that it will pay a lump sum of Rs.10,000 at the end of 6 years to investors who deposit annually Rs.1,000. What interest rate is implicit in this offer ? 9. Someone promises to give you Rs.5,000 after 10 years in exchange for Rs.1,000 today. What interest rate is implicit in this offer? 10. Find the present value of Rs.10,000 receivable after 8 years if the rate of discount is (i) 10 percent, (ii) 12 percent, and (iii) 15 percent. 11. What is the present value of a 5-year annuity of Rs.2,000 at 10 percent? 12. At the time of his retirement, Mr.Jingo is given a choice between two alternatives: (a) an annual pension of Rs.10,000 as long as he lives, and (b) a lump sum amount of Rs.50,000. If Mr.Jingo expects to live for 15 years and the interest rate is 15 percent, which option appears more attractive? 13. Mr.X deposits Rs.100,000 in a bank which pays 10 percent interest. How much can he withdraw annually for a period of 30 years. Assume that at the end of 30 years the amount deposited will whittle down to zero. 14. What is the present value of an income stream which provides Rs.1,000 at the end of year one, Rs.2,500 at the end of year two, and Rs.5,000 during each of the years 3 through 10, if the discount rate is 12 percent? 15. What is the present value of an income stream which provides Rs.2,000 a year for the first five years and Rs.3,000 a year forever thereafter, if the discount rate is 10 percent? Hint : The present value for a perpetual annuity is derived by dividing the constant annual flow by the discount factor. 16. What amount must be deposited today in order to earn an annual income of Rs.5,000 beginning from the end of 15 years from now ? The deposit earns 10 percent per year. 17. Suppose someone offers you the following financial contract. If you deposit Rs.20,000 with him he promises to pay Rs.4,000 annually for 10 years. What interest rate would you earn on this deposit? 18. What is the present value of the following cash flow streams ? End of Year Stream A Stream B Stream C 1 100 1,000 500 2 200 900 500 3 300 800 500 4 400 700 500 5 500 600 500 6 600 500 500 7 700 400 500 8 800 300 500 9 900 200 500 10 1,000 100 500 The discount rate is 12 percent. 19. Suppose you deposit Rs.10,000 with an investment company which pays 16 percent interest with quarterly compounding. How much will this deposit grow to in 5 years ? 20. How much would a deposit of Rs.5,000 at the end of 5 years be, if the interest rate is 12 percent and if the compounding is done quarterly ?

21. What is the difference between the effective rate of interest and stated rate of interest in the following cases. Case A : Stated rate of interest is 12 percent and the frequency of compounding is six times a year. Case B : Stated rate of interest is 24 percent and the frequency of compounding is four times a year. Case C : Stated rate of interest is 24 percent and the frequency of compounding is twelve times a year. 22. If the interest rate is 12 percent how much investment is required now to yield an income of Rs.12,000 per year from the beginning of the 10th year and continuing thereafter forever ? 23. You have a choice between Rs.5,000 now and Rs.20,000 after 10 years. Which would you choose ? What does your preference indicate ? 24. Mr.Raghu deposits Rs.10,000 in a bank now. The interest rate is 10 percent and compounding is done semi-annually. What will the deposit grow to after 10 years? If the inflation rate is 10 percent per year, what will be the value of the deposit after 10 years in terms of the current rupee ? 25. How much should be deposited at the beginning of each year for 10 years in order to provide a sum of Rs.50,000 at the end of 10 years ? The interest rate is 12 percent. 26. A person requires Rs.20,000 at the beginning of each year from 2005 to 2009. How much should he deposit at the end of each year from 1995 to 2000 ? The interest rate is 12 percent. 27. What is the present value of Rs.2,000 receivable annually for 30 years ? The first receipt occurs after 10 years and the discount rate is 10 percent. 28. After five years Mr. Ramesh will receive a pension of Rs.600 per month for 15 years. How much can Mr.Ramesh borrow now at 12 percent interest so that the borrowed amount can be paid with 30 percent of the pension amount ? The interest will be accumulated till the first pension amount becomes receivable. 29. Mr.Prakash buys a scooter with a bank loan of Rs.6,000. An installment of Rs.300 is payable to the bank for each of 24 months towards the repayment of loan with interest. What interest rate does the bank charge? 30. South India Corporation has to retire Rs.10 million of debentures each at the end of 8, 9, and 10 years from now. How much should the firm deposit in a sinking fund account annually for 5 years, in order to meet the debenture retirement need? The net interest rate earned is 8 percent 31. Mr. Longman receives a provident fund amount of Rs.100,000. He deposits it in a bank, which pays 10 percent interest. If he withdraws annually Rs.20,000, how long can he do so ? 32. Phoenix Company borrows Rs.500,000 at an interest rate of 14 percent. The loan is to be repaid in 4 equal annual installments payable at the end of each of the next 4 years. Prepare the loan amortisation schedule. 33. You want to borrow Rs.1,500,000 to buy a flat . You approach a housing company which charges 13 percent interest. You can pay Rs.200,000 per year toward loan amortisation. What should be the maturity period of the loan ? 34. You are negotiating with the government the right to mine 100,000 tons of iron ore per year for 15 years. The current price per ton of iron is Rs.3000 and it is expected to

increase at the rate of 6 percent per year. What is the present value of the iron ore that you can mine if the discount rate is 16 percent? 35. Following are the price and other details of three stocks for the year 20X1. Calculate the total return as well as the return relative for the three stocks. Stock Beginning Price Dividend Paid Ending Price A 30 3.40 34 B 72 4.70 69 C 140 4.80 146 36. During the past five years, the returns of a stock were as follows: Year Return 1 0.07 2 0.03 3 -0.09 4 0.06 5 0.10 Compute the following: (a) Cumulative wealth index (b) Arithmetic mean (c) Geometric mean (d) Variance (e) Standard deviation 37. You are thinking of acquiring some shares of ABC Ltd. The rates of return expectations are as follows: Possible rate of return Probability 0.05 0.20 0.10 0.40 0.08 0.10 0.11 0.30 Compute the expected return on the investment.