MGT411

Money and Banking (MGT411)
Assignment # 1

Question No 1:
Determine the future value of an investment of Rs.100 for 12 months at the following
Interest rates:
a- 5%
b- 1%

Solution:

First of all the formula of future value= FV = PV (1 + i)n
(a) 5%
Now we can put the value
FV= 100(1+5%)12
= 100(1+0.05)12
= 100(1.05)12
= 100 * 1.7959
= 179.5857
(b) 1%
FV=100(1+1%) 12
=100(1+0.01)12
=100(1.01)12
=100(1.1269)
=112.69

Question No 2:

Solution:
According to the data given below, calculate the GDP deflator and inflation rate.

Years
Nominal GDP
Real GDP
GDP deflator
Inflation rate
1997
60000
60000
100
n.a
1998
70100
65200
107.51533
1.07516
1999
81200
74600
108.848
1.01239


GDP deflator = (Nominal GDP/ Real GDP) x 100
Inflation Rate= Current year GDP deflator / Previous year GDP deflator


Question 3
a. Compute the expected value of a Rs.1000 investment both in dollars and as a percentage over the coming year. Answer:State of the Economy....Probability.....RETURN..............PayoffHigh Growth................ 0.3............. +30%............. [1000+ (1000x30%)] 1300Normal Growth.............. 0.4............... +12%............ [1000+ (1000x12%)] 1120Recession................... 0.2.............. -15%............... [1000+ (1000x-15%)] 850Given this we can construct the expected payoff from this investmentEXPECTED VALUE = EV = SUM OF (PROBABILITY X PAYOFF) =(1300x0.3) + (1120x0.4) + (850x0.2)EV = Rs.1008EXPECTED RETURN = 0.3(30%)+0.2(12%)+0.1(-15%) = 10.8%(b). Compute the standard deviation of the return as a percentage over the coming year. Answer: Here is the computation of the standard deviation for this investmentSD = √Sum of (Return – expected return )2 x Probability SD = √ 0.3(30-10.8%) 2+0.4(12-10.8%)2 +0.1(-15-10.8%)2= √ 0.3(368.64) +0.4(1.44)+0.2(665.64)= √ 110.592+0.576+133.128= √ 177.732SD= 15.6%c. If the risk-free rate of return is 7 percent, what is the risk premium for a stock-market investment? Answer: The risk premium is a return over the risk free rate that is brought on by the risk in the investment. In this example, all of the extra return is generated by risk so the risk premium isRisk Premium = Expected profit – Risk-free return =10.8% - 7%= 3.8%