Mid-Term Examination, Winter 2010
Level: Masters Full Marks: 100
Program: MBAe Section B Pass Marks: 60
Course: Financial Management Time: 3 Hrs.
Term: III
Candidates are required to be original and fair in the presentation of their answers.
The figures in the parenthesis indicate the marks for respective question.
Attempt all the questions
Section A
Attempt all questions
Each question carries 6 marks [5 x 6 =30]
1. You have to pay $12,000 a year in school fees at the end of each of the next six years. If the
interest rate is 8%, how much do you need to set aside today to cover these bills? [3]
Answer:
Find out the PV of $ 12,000 as 6 years annuity. Answer – $ Rs 55476
You have invested $60,476 at 8%. After paying the above school fees, how much would remain at
the end of the six years? [3]
Answer:
$ 60,476 and $ 55476 are at the same point of time and hence law of subtraction applies
Difference is $ 5,000. Find out the FV of $ 5000 after 6 years.
Answer - $ 7934.37
2. Jill has $40,000 on hand and expects her income next year to be $48,000. She would like to
consume $50,000 today by borrowing the additional $10,000 from a bank at the market rate of
20%. A friend, however, suggests that she should instead borrow $15,000 from the bank and
invest the additional $5,000 in an investment project that will return $12,000 in one year. The
friend believes that this will make Jill better off. What should Jill do?
Answer:
If Jill borrows $10,000 at 20 % to satisfy her consumption plan, then next year she will pay back
$12,000 (=$10,000 × 1.20) and have $36,000 (=$48,000 - $12,000) to consume. On the other hand, if
she follows her friend's advise and borrows $15,000 and invests $5,000 in the project, then next year
she will pay back $18,000 (=$15,000×1.20) and will be able to consume $42,000 (=$48,000 +
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, $12,000 - $18,000). Thus, by investing in the project Jill can consume the same today and an
additional $6,000 next year.
3. A 10 year, 12 % semiannual coupon bond, with a par value of Rs 1,000 may be called in 4 years at a
call price of Rs 1,060. The bond sells for Rs 1,100 (Assume that the bond has just been issued)
a) What is the bond’s approx YTM ? [2]
b) What is the bond’s current yield? [1]
c) What is the bond’s capital gain or loss yield? [1]
d) What is the bond’s approx yield to call? [2]
Answer:
M-P
C n
a) Approx YTM to get AYTM = 10.31%
M 2P
3
b) Current Yield = C / P = 120/1100 = 10.91%. Or find out semiannual current yield by using C
= 60 and later multiplying the rate by 2 to make it annual.
c) Capital Gain/Loss Yield = YTM – Current Yield = 10.31% - 10.91% = (0.79%) Loss.
Capital gain or loss yield should also be always reported on annual form.
Call Price - P
C
Approx YTC n = 10.12%
Call price 2P
d)
3
Alternatively, you can find YTM by using semiannual data, C = 60, n = 20 and then report the answer
in annual form by multiplying the semiannual YTM by 2. Same can be done in case of YTC using C=
60, n = 8 and them multiplying the rate by 2 to make it annual percentage rate.
4. Phoenix Company borrows Rs 500,000 at an interest rate of 14 %. The loan is to be repaid in 4
equal installments payable at the end of each of the next 4 years. Prepare a loan amortization
schedule.
Answer:
Equated annual installment = 500000 / PVIFA(14%,4)
= .914
= Rs.171,585
Loan Amortisation Schedule
Beginning Annual Principal Remaining
2|Page
Level: Masters Full Marks: 100
Program: MBAe Section B Pass Marks: 60
Course: Financial Management Time: 3 Hrs.
Term: III
Candidates are required to be original and fair in the presentation of their answers.
The figures in the parenthesis indicate the marks for respective question.
Attempt all the questions
Section A
Attempt all questions
Each question carries 6 marks [5 x 6 =30]
1. You have to pay $12,000 a year in school fees at the end of each of the next six years. If the
interest rate is 8%, how much do you need to set aside today to cover these bills? [3]
Answer:
Find out the PV of $ 12,000 as 6 years annuity. Answer – $ Rs 55476
You have invested $60,476 at 8%. After paying the above school fees, how much would remain at
the end of the six years? [3]
Answer:
$ 60,476 and $ 55476 are at the same point of time and hence law of subtraction applies
Difference is $ 5,000. Find out the FV of $ 5000 after 6 years.
Answer - $ 7934.37
2. Jill has $40,000 on hand and expects her income next year to be $48,000. She would like to
consume $50,000 today by borrowing the additional $10,000 from a bank at the market rate of
20%. A friend, however, suggests that she should instead borrow $15,000 from the bank and
invest the additional $5,000 in an investment project that will return $12,000 in one year. The
friend believes that this will make Jill better off. What should Jill do?
Answer:
If Jill borrows $10,000 at 20 % to satisfy her consumption plan, then next year she will pay back
$12,000 (=$10,000 × 1.20) and have $36,000 (=$48,000 - $12,000) to consume. On the other hand, if
she follows her friend's advise and borrows $15,000 and invests $5,000 in the project, then next year
she will pay back $18,000 (=$15,000×1.20) and will be able to consume $42,000 (=$48,000 +
1|Page
, $12,000 - $18,000). Thus, by investing in the project Jill can consume the same today and an
additional $6,000 next year.
3. A 10 year, 12 % semiannual coupon bond, with a par value of Rs 1,000 may be called in 4 years at a
call price of Rs 1,060. The bond sells for Rs 1,100 (Assume that the bond has just been issued)
a) What is the bond’s approx YTM ? [2]
b) What is the bond’s current yield? [1]
c) What is the bond’s capital gain or loss yield? [1]
d) What is the bond’s approx yield to call? [2]
Answer:
M-P
C n
a) Approx YTM to get AYTM = 10.31%
M 2P
3
b) Current Yield = C / P = 120/1100 = 10.91%. Or find out semiannual current yield by using C
= 60 and later multiplying the rate by 2 to make it annual.
c) Capital Gain/Loss Yield = YTM – Current Yield = 10.31% - 10.91% = (0.79%) Loss.
Capital gain or loss yield should also be always reported on annual form.
Call Price - P
C
Approx YTC n = 10.12%
Call price 2P
d)
3
Alternatively, you can find YTM by using semiannual data, C = 60, n = 20 and then report the answer
in annual form by multiplying the semiannual YTM by 2. Same can be done in case of YTC using C=
60, n = 8 and them multiplying the rate by 2 to make it annual percentage rate.
4. Phoenix Company borrows Rs 500,000 at an interest rate of 14 %. The loan is to be repaid in 4
equal installments payable at the end of each of the next 4 years. Prepare a loan amortization
schedule.
Answer:
Equated annual installment = 500000 / PVIFA(14%,4)
= .914
= Rs.171,585
Loan Amortisation Schedule
Beginning Annual Principal Remaining
2|Page
