Professional Documents
Culture Documents
MODULE A
PRESENTATION
BY
Cma Sunil Kumar Mohan
cmaskmohan@gmail.com
9839736168
JAIIB-Accounting & Finance for Bankers
MODULE-A
BUSINESS MATHEMATICS and finance
5/13/18 S K MOHAN 2
Calculation of Interest
• Simple
• Compound
• Rule of 72
• Sinking fund method
• Annuities ordinary annuity and annuity due
• Amortization of debts (EMI)
• Perpetuities (infinite series of payment made at fixed
intervals )
5/13/18 S K MOHAN 3
Calculation of Simple and compound Interest-1
• Total repayment = Principle + interest
• Rate of Interest
– Simple Interest = Principle X time period X rate
– When interest earns interest , it is called Compounded interest
– Fixed Interest rate and floating interest rate
– Front end and back end interest
– Teaser rate of interest
• In how many years will take to double your money with
specific rate of interest is called RULE 72.
• An annuity is a series of payments made at fixed intervals .
types of annuities are :-
– Ordinary annuity and ( payment at the end of period)
– Annuity Due ( Payment at beginning of each period)
– Present value and Future value of both annuities are different
5/13/18 S K MOHAN 4
Simple Interest
• 'Simple' interest or 'flat rate' interest is the amount of interest paid
each year in a fixed percentage of the amount borrowed or lent at the
start.
• Formula for calculating simple interest :
Interest = Principal x Rate x Time (PRT), where:
• 'Interest' is the total amount of interest paid
'Principal' is the amount lent or borrowed
'Rate' is the percentage of the principal charged as interest each year.
'Time' is the time in years of the loan.
• Example :
• Principal: 'P' = Rs. 50,000, Interest rate: 'R' = 10% = 0.10, Repayment
time: T = 3 years. Find the amount of interest paid.
• Interest = PRT
= 50,000x0.10x3
= Rs. 15,000
5/13/18 S K MOHAN 5
• Simple Intt :-- P x R x T
• A sum of money amount to Rs.2,240 @ 4% simple interest in 3
years. Find the interest on the same sum for 6 months @ 3.5%
p.a.
• a. Rs. 35
• b. Rs. 40
• c. Rs. 45
• d. Rs. 50
• Ans – a
• A=P(1+rt)= 2240=P(1+4/100 X3)=28/25
• 2240/28*25=2000
• 3.5% of 2000= 70 and six month is rs.35/-
5/13/18 S K MOHAN 6
• At 5% per annum simple interest, Rahul borrowed Rs. 500.
What amount will he pay to clear the debt after 4 years ?
– A. 750
– B. 700
– C. 650
– D. 600
• Ans - D
• Explanation:
• We need to calculate the total amount to be paid by him
after 4 years, So it will be
• Principal + simple interest.
• So,=>500+500*5*4/100
• =>Rs.600
5/13/18 S K MOHAN 7
Compound Interest
• Compound interest is paid on the original principal and accumulated part of
interest.
• A=P(1+r)n
• P = the principal
A = the amount of money accumulated after n years
r = Annual the rate
n = number of years that interest is compounded
• Formula for calculating compound interest :
• A = P(1 +r/n)^nt, where
• P = the principal
A = the amount deposited
r = the rate (expressed as fraction, e.g. 6 per cent = 0.06)
n = number of times per year that interest is compounded
t = number of years invested
• Frequently compounding of Interest. If the interest is compounded :
Annually = P (1 + r)
Quarterly = P (1 + r/4)^4
Monthly = P (1 + r/12)^12
5/13/18 S K MOHAN 8
• What is the principal amount which earns Rs. 264 as compound
interest for the second year @ 10% p.a.?
– a. Rs. 2,000
– b. Rs. 2,200
– c. Rs. 2,400
– d. Rs. 2,600
• Ans - c
• Solution :
• A = P(1+r/100) n
– In the formula, A represents the final amount in the account after n years at interest rate 'r' with
starting amount 'p'.
– P 2nd year = 2640
– A 1st Year = 2640
• P 1st = (2640/110*100) = 2400
• Rs. 400 at 5% p.a. compound interest will amount to Rs. 441 in......
– a. 1 year
– b. 2 years
– c. 3 years
– d. 4 years
• 5/13/18
Ans – b S K MOHAN 9
• Find the compound interest on Rs 160000 for one year at the
rate of 20% per annum, if the interest is compounded
quarterly.
• Solution:
• Given:
• P = Rs 160,000
• R = 20 % p. a.
• n = 1 year
• We know that:
• A = P(1+R/400)4n
• A = 160000(1+20/400)4
• A = 160000(1.05)4
• A = Rs 19,4481
• Now, CI = A – P = Rs 19,448.1 – Rs 16,000 = Rs 3,4481
• Mewa Lal borrowed Rs 20000 from his friend Rooplal at 18%
per annum simple interest. He lent it to Rampal at the same
rate but compounded annually. Find his gain after 2 years.
• Solution:
• SI for Mewa Lal = P*R*T = 20000×18/100×2 = Rs 7,200
• Thus, he has to pay Rs 7,200 as interest after borrowing CI for
Mewa Lal = A – P
• = 20000(1+18/100)2 – 20,000
• = 20000(1.18)2 – 20,000
• = 27,848- 20,000
• = Rs 7,848
• He gained Rs 7,848 as interest after lending. His gain in the
whole transaction
• = Rs 7,848 – Rs 7,200 = Rs 648
• Rohit deposited Rs 8000 with a finance company for 3 years at
an interest of 15% per annum. What is the compound interest
that Rohit gets after 3 years?
• Solution:
• We know that amount A at the end of n years at the rate of R% per
annum is given by = A = P(1+R/100)n
• Given:
• P = Rs 8,000
• R = 15% p.a.
• n = 3 years.
• Now,
• A = 8000(1+15/100)3
• A = 8000(115/100)3
• A = Rs. 12,167
• And, CI = A – P = Rs 12,167 – Rs 8,000 = Rs 4,167
• In a laboratory, the count of bacteria in a certain experiment was increasing at
the rate of 2.5% per hour. Find the bacteria at the end of 2 hours if the count was
initially 5,06,000.
• Ans. Here, Principal (P) = 5,06,000, Rate of Interest (R) = 2.5%, Time = 2 hours
• After 2 hours, number of bacteria,
• Amount (A) =
•
• =
• =
• 5,31,616.25
• Hence, number of bacteria after two hours are 531616 (approx.).
• Qus. If the simple interest on a sum of money at 5% per annum for 3 years is Rs. 1200, find
the compound interest on the same sum for the same period at the same rate.
5/13/18 S K MOHAN 20
• A sum of money doubles itself at compound
interest in 15 years it will become 8 time in
• A) 60 B)80 C)45 D ) 40
5/13/18 S K MOHAN 21
Calculation of Simple and compound Interest-2
• Interest that is paid on the original principal amount and also
on the accumulated part of the interest , is called
» Yield on Maturity
» Annuities
» Compound interest
– interest
– NOA
• On an amount of Rs.50000/- lent on 8% interest. On which of the
following compounding periods, the interest amount will be
highest
– Half yearly compounding
– Yearly
– Quarterly
– Monthly
– Weekly
5/13/18 S K MOHAN 22
• What will be the compound interest on Rs. 25000 after 3
years at the rate of 12 % per annum?
– a. Rs 10123.20
b. Rs 10123.30
c. Rs 10123.40
d. Rs 10123.50
• Ans - a
• Explanation:
• A=P(1+r)n
• = (25000×(1+12/100)^3)
= 25000×(28/25)^3
= 35123.20
• So Compound interest will be 35123.20 - 25000
• = Rs 10123.20
5/13/18 S K MOHAN 23
Sinking Fund
5/13/18 S K MOHAN 35
• A more simplistic way of expressing the
distinction is to say that payments made under an
ordinary annuity occur at the end of the period
• while payments made under an annuity due
occur at the beginning of the period.
5/13/18 S K MOHAN 36
Calculating the Value of an Annuity Due
5/13/18 S K MOHAN 37
• Present Value of an Annuity
calculate the PV of an ordinary annuity of 50 per year over 3 years at 7% as...
...
• and the present value of an annuity due under the same terms is calculated
as...
..
• the PV of the annuity due is greater than the PV of the ordinary annuity; by
9.18.
5/13/18 S K MOHAN 38
• Future Value of an Annuity
calculate the FV of an ordinary annuity of 25 per year
over 3 years at 9% as...
•
...and again the FV of the annuity due is greater than
the FV of the ordinary annuity; by 7.38.
5/13/18 S K MOHAN 39
• Example :
• 1. Calculate the present value on Jan 1, 2015 of an annuity of
5,000 paid at the end of each month of the calendar year 2015.
The annual interest rate is 12%.
• Solution
We have,
Periodic Payment R = 5,000
Number of Periods n = 12
Interest Rate i = 12%/12 = 1%
Present Value
PV = 5000 × (1-(1+1%)^(-12))/1%
= 5000 × (1-1.01^-12)/1%
= 5000 × (1-0.88745)/1%
= 5000 × 0.11255/1%
= 5000 × 11.255
= 56,275.40
5/13/18 S K MOHAN 40
• A certain amount was invested on Jan 1, 2015 such that it generated a
periodic payment of 10,000 at the beginning of each month of the
calendar year 2015. The interest rate on the investment was 13.2%.
Calculate the original investment and the interest earned.
• Solution
Periodic Payment R = 10,000
Number of Periods n = 12
Interest Rate i = 13.2%/12 = 1.1%
Original Investment = PV of annuity due on Jan 1, 2015
= 10,000 × (1-(1+1.1%)^(-12))/1.1% × (1+1.1%)
= 10,000 × (1-1.011^-12)/0.011 × 1.011
= 10,000 × (1-0.876973)/0.011 × 1.011
= 10,000 × 0.123027/0.011 × 1.011
= 10,000 × 11.184289 × 1.011
= 1,13,073.20
Interest Earned = 10,000 × 12 − 1,13,073.20
•
= 1,20,000 – 1,13,073.20 = 6926.80
5/13/18 S K MOHAN 41
SUMMARY OF ANNUITIES FORMULAS
• FUTURE VALUE OF INVESTMENT AT THE END OF PERIOD,
FVOA (Future Value of Ordinary Annuity) is applied.
• FVOA = (C ÷ R) x { (1 + R)^T - 1 }
• FUTURE VALUE OF INVESTMENT AT THE BEGINNING OF
PERIOD, FVAD (Future Value of Annuity Due) is applied.
– FVAD = (C ÷ R) x { (1 + R)^T - 1 } x (1 + R)
• PRESENT VALUE OF INVESTMENT AT THE END OF PERIOD,
PVOA (Present Value of Ordinary Annuity) is applied.
• PVOA = (C ÷ R) x { (1 + R)^T - 1 } ÷ (1 + R)^T
• PRESENT VALUE OF INVESTMENT AT THE BEGINNING OF
PERIOD, PVAD (Present Value of Annuity Due) is applied.
• PVAD = (C ÷ R) x { (1 + R)^T - 1 } x (1 + R) ÷ (1 + R)^T
5/13/18 S K MOHAN 42
Present Value
5/13/18 S K MOHAN 44
• Future Value
The value of an asset or cash at a specified date in the future that is equivalent in value to a specified
sum today. It refers to a method of calculating how much the present value (PV) of an asset or
cash will be worth at a specific time in the future. There are two ways to calculate FV:
1) For an asset with simple annual interest: = Original Investment x (1+(interest rate*number of years))
• .2) For an asset with interest compounded annually: = Original Investment x ((1+interest rate)^number
of years)
Example:
1) 10,000 invested for 5 years with simple annual interest of 10% would have a future value of
FV = 10000(1+(0.10*5))
= 10000(1+0.50)
= 10000*1.5
= 15000
2) 10,000 invested for 5 years at 10%, compounded annually has a future value of :
FV = 10000(1+0.10)^5)
= 10000(1.10)^5
= 10000*1.61051
= 16105.10
5/13/18 S K MOHAN 45
Calculation of Simple and compound Interest-3
5/13/18 S K MOHAN 46
• When a debt is amortised by equal payment at equal payment
intervals, the debt becomes
» Annuity
» Future value of annuity
– Present value of annuity
– Discounted value of annuity
– NOA
5/13/18 S K MOHAN 47
• When amount is accumulated by means of equal periodic
contribution with the objective of using it for a specific
purpose , this is called
» Specific Reserve
» Special reserve
» Time deposit
» Sinking fund
» Annuity
5/13/18 S K MOHAN 49
Bonds
• What are bonds and what is relation between purchaser and issuer
• Who issues bonds
• Types of bonds
• Straight Bonds or Fixed rate bonds
• Zero Coupon Bonds
• Deep Discount Bonds
• Floating rate Bonds – linked with reference rate of interest e.g. LIBOR , MIBOR ,
• Convertible bonds
• Inflation –indexed Bonds
• Other index bonds - equity link etc
• High yield bond ( JUNK BON DS ) rated below investment grade
• Assets Backed Securities Bonds
• Subordinate bonds – lower priority at the time of liquidation
• Perpetual Bonds -- no maturity date
• Bearer bonds – indira vikas patra
• government bonds also called Treasury Bonds
• Bond Valuation
• Present value method of Bond valuation
• Bond value with Semi –annual Coupons (Interest)
5/13/18 S K MOHAN 50
Terms related to Bonds
• Face value -----
– Straight bonds
– face value of Zero Coupon bonds
• Coupon rate
• Maturity
• Term to Maturity
• Market Value
• Discount rate
• Yield
• Current Yield
• Yield To Maturity
5/13/18 S K MOHAN 51
YTM
• YTM is a annual return which an investors
gets ,if he holds the bonds till maturity .
• In other world it is an internal rate of interest
(IRR) which an investors received on bonds,
which he has purchased in current market
value holds it till maturity
5/13/18 S K MOHAN 52
Assumption at the time of calculation of YTM
• Bond once purchased will be held till maturity
• Cash flow will be received and there will be no default
• All cash flow are immediately reinvested (else where) at the
rate which is equal to the promised Y T M
• Important terms :-
• PVIF:-Present value interest factor;- it represent the discount
value of Rs. One for a period concerned of interest rate
• PVIFA:-Present value interest factor of annuity :-it represent the
present value of an ordinary annuity for the period concern and
interest rate
• Current Yield = coupon interest/ current market price
• Call option= Right to repay the bond before maturity date
• Put option=holder has right to force the issuer to repay the bond
5/13/18 S K MOHAN 53
Theorems for bonds value
5/13/18 S K MOHAN 57
• 12% , 4 years bonds of Rs.100 each were
purchased by Mr. Y for Rs.100 . If the market
interest rate decreases by 1% what will be the
market price
• Solution
• 12xPVIFA (11% for 4 years) + 100(PVIF 11%,4 )=
12X3.10245)+100x(0.65873) = 37.22 + 65.87 =
103.09
5/13/18 S K MOHAN 58
Problem on YTM
5/13/18 S K MOHAN 59
• Solution
• If kd is the yield to maturity then,
• 850 = 80 (PVIFA kd per cent, 9 yrs) + 1,000 (PVIF kd, 9 yrs)
• To calculate the value of kd, we have to try several values:
• = 80 (PVIFA 12 per cent, 9) + 1,000 (PVIF 12 per cent, 9)
• = 80x 5.328+ 1,000 x (0.361)
• = 426.24 + 361 =787.24
• Since, the above value is less than 850, we have to try with value less than 12
per cent. Let us try with kd =10 per cent
• = 80 (PVIFA 10 per cent, 9) + 1,000 (PVIF 10 per cent, 9) = 80
• x 5.759 + 1.000 * 0.424 = 884.72
• From the above it is clear that kd lies between 10% and 12%. Now we have to
use linear interpolation in the range of 10% and 12%. Using it, we find that kd is
equal to the following:
• (884.72-850) / (884.72-787.24)
• 34.72 / 97.48 = 10%.+
• .71=10.71%
• Therefore, the yield to maturity is 10.71%
5/13/18 S K MOHAN 60
• For two bonds X and Y having face value of Rs. 1.000, coupon rate of
10 per cent each, years to maturity is three and six years
respectively.
• Market value of bond X at YTM of 10 per cent is
– 100 PVIFA (10 per cent, 3) + 1.000 PVIF (10 per cent, 3) = 1,000
• Market Value of Bond Y at YTM of 10 per cent is
– 100 PVIFA (10 per cent, 6) + 1,000 PVIF (10 per cent, 6) = 1,000
• Now market value of bond X at YTM of 11 per cent is
– 100 PVIFA (11 per cent, 3) + 1,000 PVIF (11 per cent, 3) = 975
• And Market Value of Bond Y at YTM of 11 per cent is
– 100 PVIFA (11 per cent, 6) + 1,000 PVIF (11 per cent, 6) = 958
• Change in price for X on increasing YTM by 1 per cent is (1,000 -
975)/l,000 = 2.5 per cent
• Change in price for Y on increasing YTM by 1 per cent is (1,000 -
958)/1,000 = 4.2 per cent
5/13/18 S K MOHAN 61
• A bond of face value of Rs. 1,000 par value X bond with a coupon
rate of 12 per cent maturity period of six years and YTM of 10 per
cent. The market value of the bond will be Rs. 1,087.
– Consider another identical bond Y but with differing YTM of 20 per cent.
The market value of this bond will be Rs. 734.
• If the YTM increase by 20 per cent, i.e. YTM of bond X rises to 12
per cent (10 x 1.2) and bond Y rises to 24 per cent (i.e., 20 x 1.2)
then the market value of both bonds will change to:
– Bond X: 120 PVIFA (12 per cent, 6) + 1,000 PVIF (12 per cent. 6) =
Rs. 1,000
– Bond Y: 120 PVIFA (24 per cent, 6) + 1,000 PVIF (24 per cent, 6) =
638
– Market value of X bond with a lower YTM decreased by 8 per cent
– whereas in case of Y bond with an higher YTM the decrease is 13
per cent.
5/13/18 S K MOHAN 62
Yield to Maturity , Bonds Pricing
• Debt capital mainly consist of which of the following
» Bank borrowing
» Term loans and bank borrowing
» Bank term loan and debenture
– Bonds and debentures
– Bonds and bank term loan s
5/13/18 S K MOHAN 63
• A bond carries a specific rate of interest which is known as
» Fixed dividend
» Variable dividend
» Commission
» Discount
» Coupon rate
• The amount represented by the bonds , that a company has to pay
back to the bonds holder at the end of term of bond , is called
– Premium on bonds
– Value of the bond
– Maturity value of the bonds
– Face value
– NOA
5/13/18 S K MOHAN 64
BONDS Valuation
• A bond with face value Rs’5000/-carrries a coupon rate of 12%
Market price of this bond is quoted at Rs.4500/- what is the current
yield of the bond
• 0.12*5000 =13.3%
• 4500
• Bond is a type of long term, interest bearing note payable on
maturity F
• When the require rate of return (kd) is greater than the coupon rate
bond price will trading at discount to face value T
• An secure bond is a debenture bond T
• A convertible bond is a bond that can be converted to cash at any
given time T
• The value which bond holder gets on maturity is called Redemption
value T
• When the expected rate of return(market discount rate)is lesser than
coupon rate bond price will rise T
5/13/18 S K MOHAN 65
• If a 7% coupon bond ( Rs.1000) is trading for Rs.
975.00, it has a current yield of ___ percent.
» 7.01
» 6.83
» 7.23
» 8.13
» 7.18
5/13/18 S K MOHAN 66
DURATION OF BOND
• The holding period for which the interest rate risk
disappears, is known as the duration of the bond.
• There is a simple way of computing the desired
holding period (duration), which is as follows:
– 1. Determine the cash flows from holding the bond.
– 2. Determine the present value of these cash flows by
discounting the flows with discount rate (YTM).
– 3. Multiply each of the present values by respective
numbers of years left before the present value is
received.
– 4. Sum these products up and divide by the present
value to get the duration of the bond.
5/13/18 S K MOHAN 67
Problem
5/13/18 S K MOHAN 68
5/13/18 S K MOHAN 69
470804.38/108424.72=4.3422234
5/13/18 S K MOHAN 70
Capital Budgeting
5/13/18 S K MOHAN 71
Steps to capital budgeting
5/13/18 S K MOHAN 72
• What is the difference between independent
and mutually exclusive projects?
• Projects are:
• independent, if the cash flows of one are
unaffected by the acceptance of the other. --
In other words A project whose acceptance (or
rejection) does not prevent the acceptance of
other projects under consideration
• mutually exclusive, if the cash flows of one
can be adversely impacted by the acceptance
of the other.
5/13/18 S K MOHAN 73
Capital
Capital Budgeting
Budgeting Techniques
Techniques
5/13/18 S K MOHAN 74
Proposed
Proposed Project
Project Data
Data
5/13/18 S K MOHAN 75
Independent Project
For this project, assume that it is independent of any other
potential projects that JRD may undertake.
5/13/18 S K MOHAN 76
Payback
Payback Period
Period (PBP)
(PBP)
0 1 2 3 4 5
-40 K 10 K 12 K 15 K 10 K 7K
5/13/18 S K MOHAN 77
Payback Solution (
Year Cash out Flow Cash inflow Cumulative cash inflow
0 40000 (B)
1 10000 10000
2 12000 22000
3 (A) 15000 37000 ©
4 10000 (D) 47000
5 70000 54000
PBP = a + ( b - c ) / d
= 3 + (40 - 37) / 10= 3 + (3) / 10 = 3.3
Years
5/13/18 S K MOHAN 78
Payback Solution Alternative
year Cash Cumulative Cash Flows
flow
0 --40000 -40000
1 10000 -30000
2 12000 -18000
3 15000 -3000
4 10000 +7000
5 7000 +14000
5/13/18 S K MOHAN 79
PBP Acceptance Criterion
5/13/18 S K MOHAN 80
Internal Rate of Return (IRR)
5/13/18 S K MOHAN 81
IRR Solution
RS.40,000 =
Rs.10,000 + Rs.12,000 +
(1+IRR)1 (1+IRR)2
Rs.15,000 + Rs.10,000 + Rs.7,000
(1+IRR)3 (1+IRR)4 (1+IRR)5
5/13/18 S K MOHAN 83
IRR Solution (Try 15%)
5/13/18 S K MOHAN 84
IRR Solution (Interpolate)
15%-10% X {41444-40000}
41444-36841
== 0.05X1444 = 0.0157
4603
IRR Will be =0.10+0.0157=0.1157 i.e. 11.57%
5/13/18 S K MOHAN 85
IRR Acceptance Criterion
5/13/18 S K MOHAN 87
• (a) What is the NPV if the appropriate discount rate is 10%?
• You can either discount each individual cash flow or recognize that the
• Rs. 1,000 cash flows are just a twelve year annuity. So,
• PV = a/i[l -1/(1 +i)n]
• PV= 1,000/0.1 [1 - 1/(1.1)12] = PV = Rs. 6,814
• Adding this to the original investment gives an NPV of
• NPV = Rs. 6,814 - Rs. 6,000 = NPV =Rs. 814
• (b) What is the NPV if the appropriate discount rate is 12%?
• PV= 1,000/0.12 [1 -1/(1.12)12] = PV = Rs. 6,194
• Adding this to the original investment gives an NPV of
• NPV = Rs. 6,194-Rs. 6,000 = NPV=Rs. 194
• (c) What is the NPV if the appropriate discount rate is 15%?
• PV= 1,000/0.15 [1-1/(1.15)12] = PV = Rs. 5,421
• Adding this to the original investment gives an NPV of
• NPV = Rs. 5,421-Rs. 6,000
5/13/18 S K MOHAN 88
Net Present Value (NPV)
JRD has determined that the appropriate discount rate (k) for this
project is 13%.
5/13/18 S K MOHAN 90
NPV
NPV Solution
Solution
NPV = Rs.10,000(PVIF13%,1) + Rs12,000(PVIF13%,2) +
Rs15,000(PVIF13%,3) + Rs10,000(PVIF13%,4) + Rs
7,000(PVIF13%,5) - Rs40,000
NPV = Rs10,000(.885) + Rs12,000(.783) +
Rs15,000(.693) + Rs10,000(.613) + Rs 7,000(.543) -
Rs40,000
NPV = Rs8,850 + Rs9,396 + Rs10,395 + Rs6,130
+ Rs3,801 - Rs40,000
=- Rs1,428
5/13/18 S K MOHAN 91
NPV Acceptance Criterion
The management of JRD has determined
that the required rate is 13% for projects
of this type.
Should this project be accepted?
i. investment can be made as the cash inflow is Rs. 40000 in 4 years and cash outflow
is Rs. 30000.
ii. The investment can be made as the present value of cash inflow is positive.
iii. The investment cannot be made because NPV is negative
iv. NOA
5/13/18 S K MOHAN 93
DEPRECIATION
• I. Internal Causes
• Wear and tear
• Disuse : When a machine is kept continuously idle, it becomes potentially less useful
• Time Factor: Lease, copy-right, patents are acquired for a fixed period of time. On the expiry of the
fixed period of time, the assets cease to exist.
5/13/18 S K MOHAN 95
Factors of depreciation
5/13/18 S K MOHAN 96
METHODS OF Calculating DEPRECIATION
• 1. Straight line method or fixed installment method.
• 2. Written down value method or diminishing balance
method
• 3. Annuity method.
• 4. Depreciation Fund method.
• 5. Insurance Policy method.
• 6. Revaluation method.
• 7. Sum of year’s Digit Method
5/13/18 S K MOHAN 98
Illustration
• To calculate depreciation charges using the sum of the years' digits method, take the expected life of an asset (in
years) count back to one and add the figures together.
• This is a method of calculating depreciation of an asset that assumes a higher depreciation
charge and a greater tax benefit in the early years of an asset's life.
• Illustration
• 10 years useful life = 1 0+ 9 + 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 Sum of the years = 55
• In the first year, the asset would be depreciated 10/55 in value [the fraction 10/55 is equal to
18.18%]
• the first year,
• Second year 9/55 [ 16.36%]
• 8/55 [ 14.54%] the third year, and so on. Going back to our
• Illustration from the straight-line discussion: a Rs. 5,000 computer with a Rs. 200 salvage value
and 3 years useful life would be calculated as follows:
• 3 years useful life = 3 + 2 + 1 Sum of the years = 6
• Taking Rs. 5,000 - Rs. 200, we have a depreciable base of Rs. 4,800.
• In the first year, the computer would be depreciated by 3/6, i.e [50%], the second year, by 2/6
[33.33%] and the third and final year by the remaining 1/6 [16.67%].
• This would have translated into depreciation charges of Rs. 2,400 the first year, Rs. 1,599.84 the
second year, and Rs. 800.16 the third year.
• The straight -line Illustration would have simply charged Rs. 1,600 each year, distributed evenly
over the three years useful life.
5/13/18 S K MOHAN 111
Recording Depreciation
• Depreciation is directly charged against the asset by debiting Depreciation
account and crediting the Asset account. Depreciation account is closed by
transferring to Profit and Loss account at the end of the year. The entries will
be as under:
• 1) For the amount of depreciation to be provided at the end of the
• year:
• Depreciation A/c….. Dr. with the amount
• To Asset A/c. of depreciation
• Asset Account will be shown at cost less depreciation i.e., written down value
at the end of the year in the Balance sheet.
5/13/18 S K MOHAN 112
Illustration : 2
4. Directives to Authorized Persons are given by RBI through the following series of
circulars,
◦ (a) A.D. (MA) (b) A.D. (Dim) (c) A.P. (DIR) (d) A.P. (MA) (e) NOA
5. Non-Exchange Dealing branches are classified as category branches.
(a) A (b) B (c) C (d) B or C (e) NOA
• Direct Method
• Indirect Method
1. Clean Inward remittances (MT, TT, DD) where cover has TTB
already been provided in NOSTRO
1. Realization of instruments sent on collection. TTB
1. Cancellation of DD/MT/TT etc., Payment of FCNR deposit TTB
1. Cancellation of Forward Sale contract. TTB
1. Purchase/discounting of bills and other instruments BB
i. Where bank has to claim cover after payment.
ii. Where drawing bank at one centre remits cover for credit
to a different centre.
1. Foreign currency notes and Travellers cheques It is a
specific
*** AT THE DISCRETION OF THE AUTHORISED DEALER version
of B B
rate ***
• Other than Bill, T C , Currency purchase of other transaction as per FADAI we have
to deduct 0.15% or 0.125% from TTB
If Premium -----
Add premium
( Transit and usance period rounded of to lower
month
If Discount ------
Less Forward Discount
( Transit and usance rounded to higher month
Less exchange margin -----
39.2607
Round off to the nearest multiple of 0.0025 , the rate quoted to
the customer would be Rs.39.2600
Customer account will be credited with USD 85000 x39.2600 =
33,37,100
Interest charges on 33,37,100 @10% for 25 days is Rs.22,857
ANS (i) Rs.45.75 (TT Selling), (ii) Rs.45.05 (Bills Buying), (iii) Rs.45.15 (TT Buying), (iv)
Rs.45.75 (TT Selling), (v) Rs.45.85 (Bills Selling
5/13/18 SKMOHAN 169
1. Forward differential is known as:
a. swap rate
b. arbitrage rate
c. forward rate
d. spot rate
2. An exporter presented sight bills valuing US $ 50000 for purchase on
31.3.2015. What rate will you quote and what amount will be paid to the
customer taking into account the following assumptions:
Exchange margin is 0.15%
Inter-bank spot rate 1 USD = 43.5525 / 5650
April forward discount 0.6000 / 0.5700
Solution : The bank will quote bills buying rate i.e. = 43.55250
Less : discount for one month = 0.60000
One month forward rate = 42.95250
Less : 0.15% exchange margin on 42.9525 = 0.06443
Bills buying rate = 42.88807
Amount payable to exporter in Rupees = 2144404.
5/13/18 SKMOHAN 170
Cross rates:
A cross rate is the currency exchange rate between
two currencies when neither are official currencies of the
country in which the exchange rate quote is given.
Foreign exchange traders use the term to refer
to currency quotes that do not involve the U.S. dollar,
regardless of what country the quote is provided in
GBP/AUD = 1.73449,
AUD/JPY = 0.85535
If Premium -----
Add premium
( for forward period ,Transit and usance period
rounded of to lower month
If Discount ------
Less Forward Discount
(for forward period ,Transit and usance rounded to
higher month
Less exchange margin -----
If Premium -----
Add premium( for forward period ,
If Discount ------
Less Forward Discount (for forward period ,
Where ‗n‘ is the number of months till maturity of the forward contract
suppose that the forward rate (60 days) for the Rupee is 49.05/$ whereas the spot rate for
it is 48.20/$ . The forward premium on Indian Rupee will be
on the other hand, the forward rate for the Rupee is 47.80/$, the forward discount on it
will be
– REMEMBER
– Forward margin is given in ascending order --- premium add
to spot rate ( AA =Ascending order ADD)
– Descending order deduct from spot rate ( DD = Descending
= deduct )
5/13/18 SKMOHAN 192
• You have received on 15th jan a TT from
your New York correspondent for USD
10000 for credit to your customer account .
The interbank rate is as follow
• Spot usd 1 = Rs.49.3500/.3700
• spot feb .2500/.2600
• You are require exchange margin @
0.080% calculate the rate to be applied
and the rupee amount to be credited to the
customer’s account
Calculate TT B rate
inter bank buying rate 48.3500
deduct exchange margin of 0.080 of 48.3500 0.0386
48.31132
– (a) within two days (b) next day (c) within 3 days (d) next working day (e) NOA
2. Currency position does not include one of the following.
– (a) Encashment of foreign currency notes (b) Booking forward contract (c)
Delivery under forward purchase contract (d) Sale of foreign currency notes
(e) NOA
3. Arbitrage is a process of simultaneous buying and selling of foreign
exchange for the sake of making profit from the difference of .
– (a) An exchange rate at two centers (b) Forward margin at two centers (c)
Interest rates at two centers (d) a+b+c (e) NOA