a) “Write a short note on time value of money.”
b) Mr. Ram Prasad deposit Rs. 10, 000 at the end of evry year for 5 years into his deposit account for 5 years. It earns a compound interest of 8% per annum.
1) Find out the amount of the end of the five years.
2) In case the interest is accrued for every half year, find out the sum of the end of the period.
3) What is the difference if he deposit Rs. 10,000 at the beginning of every year and the interest is compound half yearly?
Answer – a) Time value of money is the value of a unit of money at different time intervals. The value of money received today is more than its value received at a later date. In other words, the value of money changes over a period of time since a rupee received today has more value; rational investors would prefer current receipts to future receipts. That is why this phenomenon is also referred to as “Time preference of money”/ Some times it occurred as time value of money.
b) = 10000 FVIFA (8%, 5y)
= 10000 x 11.734
=117340
1) 117340
2) 157340
3) 4000
c) Mr. Arvind desires to purchase 10 bonds whose face value of each bond being Rs. 10,000 and the maturity period being five years. The nominal rate of interest is 9% and the required rate of return is 13% what is the price should be willing to pay how to purchase the bonds?
Answer – c) Interest payable 1000 x 9% = Rs. 90
Principal repayment is Rs. 1000
Required rate of return is 13%
VO = 1 x PVIFA (kd, n) + F x PVIF (kd, n)
Value of the bond = 90 x PVIFA (13%, 5y) + 1000 x PVIF (13%, 5y)
= 80 x 3.791 + 1000 x 0.621
=303.28 + 621
=Rs. 924.28
b) VO = 1 x PVIFA (KD, n) + F x PVIF (kd, n)
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