FB PT1 Set 1 Solutions

Please click on the particular cell to see the calculation 1 Option 1 Option 2 Option 3 Option 4 Solution

3hich o# the #ollo!in4 type o# compoundin4 !ill %e most %ene#icial #rom a lender5s perspecti6e$ #or a 4i6en interest rate7 Compounded daily Compounded semi-annually Compounded quarterly Compounded annually Greater the #requency o# compoundin4$ 4reater the e##ecti6e return or yield& 8here#ore$ daily compoundin4 !ill yield hi4hest interest to Bank&

Sharma traders !ants to %orro! 's& )/ lakhs #or  years$ #or his %usiness requirements& 9e approached  %anks !ho quoted him  di##erent rates$ !ith di##erent compoundin4&

2

:ind out !hich one !ould %e the %est choice #or Sharma traders& Option 1 Option 2 Option 3 Option 4

Solution

3 Option 1 Option 2 Option 3 Option 4

Solution

SYM Bank   AVG Bank  IDC Bank  IDC and AVG Both !ill cost same Bank  IDC Bank   AVG Bank  SYM Bank  "ut o# the three options$ least interest is paid in case o# SYM %ank&  An in6estment in land requires an initial initial outlay o# I' + million& It promises to pay I' +&)* million in one year& 3hat is the net present 6alue (PV, o# the in6estment& Assume a market interest rate o# )/;& I' ()*$)*)&*+, I' )*$)*)&*+ I' .)$*)*&)* I' (.)$*)*&)*, Initial outlay  A#ter ) year Interest 'ate Present Value (+)*////0(()1/&),2),, NPV (Present Value  Initial Outla!"

4

Option 1 Option 2 Option 3 Option 4

Solution

Saura%h has %ou4ht a li#e insurance endo!ment policy #or )? years& 9e has to pay an annual premium o# I' ./$/// #or )? years& 9e !ill recei6e I' )? lakhs on maturity (i&e& one year a#ter all premiums are made,& 9e !ill also recei6e I' +/$/// on e6ery =th year$ as 5cash %ack5 %onus& 3hat returns !ill he 4et on this policy7 I# he is 4ettin4 an interest o# <; on other in6estment a6enues$ !ill it %e ad6isa%le #or him to 4o #or this insurance policy7 ote Saura%h !ants to use insurance as a pure in6estment product& o$ as he !ill 4et a return o# .&<=; on insurance policy o$ as he !ill 4et a return o# >&<+; on his insurance policy  Yes$ as the return he !ill 4et$ is <&*;  Yes$ as the return he !ill 4et$ is *;  #ear / ) +  = ? . > * < )/ )) )+ ) )= )? I$$  Since I'' is less than <;$ PV #or this in6estment at a discount rate o# <; (the alternati ne4ati6e and Saura%h should not in6est in insurance policy&

% Option 1 Option 2 Option 3 Option 4 Solution

 You ha6e %ou4ht shares o# In#osys at a price o# 's& )+//& You are e@posed to market risk& o!$ !hat can you in#er #rom this7  You may incur losses due to chan4e in share price&  You may incur losses due to chan4e in market interest rates&  You may incur losses due to chan4e in e@chan4e rates&  You may incur losses due to chan4e in %rokera4e rates char4ed %y %rokers& I# prices #all %elo! the purchased price$ you !ill incur loss& 8his is kno!n as equity risk0market risk&

:ollo!in4 are the returns o# = stocks$ #or the past #i6e years& Mano$ an in6estor$ !ants to in6est in a stock !hich !ill 4i6e him 4ood returns !ith minimum risk& Can you su44est in !hich o# the #ollo!in4 stocks$ should Mano in6est7



Option 1 Option 2 Option 3 Option 4

Stock Stock Stock Stock

A  B C D

Solution  Year )  Year +  Year   Year =  Year ?  'erage Standard )eiation $eturn* +nit o, risk 

-

Option 1 Option 2 Option 3 Option 4

Solution

.

Option 1 Option 2

'onak is a !holesaler !ho stocks 4oods in his 4odo!n& 9e !ants to protect himsel# #rom the risk o# loss$ due to #ire or any natural calamity& So he decided to purchase insurance& 3hat should %e the ma@imum amount he should %e !illin4 to pay as annual premium7 It is o%ser6ed that on an a6era4e$ he su##er such loss once in = years and the a6era4e loss amount is I' ) lakh& I' +?$/// I' ) lakh I' )/$/// I' = lakhs 8he pro%a%ility o# loss is once in = years i&e& /&+?& 8he quantum o# loss  I' ) lakh& 9ence$ ma@imum amount o# premium he !ould %e !illin4 to pay  I' ) lakh  /&+?  I' +?$///& Me4ha has taken an education loan$ #or !hich all repayments includin4 interest$ !ill start a#ter + years& 8he Bank has to sho! the interest earned yearly in its %ooks& So$ !hich o# the #ollo!in4 is0are true7

Bank !ill credit its 5interest income5 account and a correspondin4 de%it entry !ill %e made$ in the 5interest recei6a%le5 account& 8he %ank !ill not make any accountin4 entry until Me4ha actually starts repayin4&

Option 3 Option 4

Solution

/ Option 1 Option 2 Option 3 Option 4

Solution

3hen Me4ha pays$ the %ank !ill credit 5interest recei6a%les5 account and de%it cash account& 8he %ank !ill credit its 5interest income5 account yearly$ and a correspondin4 de%it entry !ill %e made in Me4ha5s loan account& Bank !ill create a suspense account #or interest recei6a%les till the time Me4ha starts repayin4& So$ in order to sho! the interest income annually$ Bank !ill credit the interest income account and de%it the interest recei6a%les account&  A#ter Me4ha starts repayin4$ Bank !ill make the nulli#yin4 credit entry in interest recei6a%le account and de%it the cash account&  AM Etd&$ a so#t!are company$ has %ou4ht computers !orth 's& +/ Eakhs& 8he payment !as made throu4h a cheque& 3hat !ill %e the e##ect in the %ooks o# AM Etd&7 Bank account- Credited$ :i@ed Assets - De%ited Bank account- De%ited$ :i@ed Assets - Credited Bank account- De%ited$ :i@ed Assets - De%ited Bank account- Credited$ :i@ed Assets - Credited I# there is an increase in assets$ it is de%ited$ and !hen there is a decrease asset account is credited& 9ere$ Bank %alance is an asset$ so %ank account !ill %e credited as the %alance is reduced& :i@ed asset account !ill %e de%ited as assets ha6e increased& Hse the data %elo! to ans!er the #ollo!in4 question

10

9o! much is the PA87 Option 1 Option 2 Option 3 Option 4

I' I' I' I'

)++&// )++&*? )+/&<* )+/&)

million million million million

Solution

otal $eenue Eess Direct cost Eess Sellin4$ General F administrati6e e@pense

Eess Depreciation Add "ther income arnings e,ore interest & ta Eess Interest @penses arning a,ter ta Eess 8a@ (+?; o# ).>&+, P'

11 Option 1 Option 2 Option 3 Option 4

Solution

12 Option 1 Option 2 Option 3 Option 4

Solution

'M e!elers sold e!elry !orth I' =/ lakhs$ out o# !hich ?/; !as sold on credit$ in the last quarter& It has reported depreciation o# I' + lakhs #or this quarter& PA8 #or this period !as ? lakhs& Calculate the cash %alance o# 'M e!elers$ assumin4 no other transactions and Jero openin4 %alance& (- I' ) lakhs, (-I' + lakhs, I' +> lakhs I' + lakhs Cash %alance PA8 1 oncash e@penses - on cash income&  (? 1 + - (?/;=/,, lakhs  (-) lakhs, PG Bank has total assets o# I' +/$/// crore reported in the last #iscal year& 8his year$ PG %ank earned a net pro#it o# )/// crores$ !hile their interest e@pense !as +/// crores& 3hat !ould %e the total assets #or this #iscal year #or PG Bank$ assumin4 no other additions0reductions7 I' +)$/// cr I' )*$/// cr I' +/$/// cr I' +$/// cr Pro#it o# I' )/// cr !ill %e added in o!ner5s equity$ there#ore$ total lia%ilities !ill increase %y )/// cr$ on the asset side$ this !ill re#lect either in the cash account or the recei6a%les account& So$ total assets !ill also increase %y the same amount& Interest e@pense is a part o# Income statement and !ill %e considered !hile calculatin4 the et pro#it$ so it !ill not %e seperately included in the Balance sheet&

Finance & Banking Fundementals India !!!&learn!ith#lip&com

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Stock ' )*; )?; ).; )); ?; ); ?; +&?

Stock B )=; )); -?; <; +/; )/; <; )&/.

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Stock ) <; )/; *; )/; >; <; ); >&++

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