Professional Documents
Culture Documents
Class Questions Solutions
Class Questions Solutions
1. Mr. A had taken a loan of Rs. 40 lakh in July 2010 at a floating rate of interest
of 10% p.a for tenure of 20 years from a housing finance company. The
company sent a notice raising the interest rate to 10.75% p.a. effective
January 2012 thereby increasing EMI. He decides to refinance the loan at
10.25% from a bank which charges a processing fee of 1% of loan sanctioned.
What absolute amount he stands to save in the remaining tenure if the
outstanding loan amount as at end of March 2012 is refinanced so that the
new loan terminates as per original tenure?
Solution:
2. A familys monthly expenditure is Rs. 40,000. The earner accounts for 15% of
the expense. He wants to cover his familys inflation adjusted expenses for
the next 40 years considering average inflation at 5.5% p.a. and the
investment return at 7.5% p.a. The approximate life insurance needed
is____________
Solution:
Calculation of insurance required
Particulars Amount
(INR)
PV (Net monthly family expenses) 1,14,84,27
(WNo. 1 & 2) 3.3
3. Your client is 32 years old & has Rs. 25,00,000 in loan liabilities. He has a non
working spouse of age 30 & children of age 7 years & 5 years. Additionally,
the client wants higher education for each of his children to the tune of Rs.
30,00,000 after 15 years & marriage expenses of Rs. 15,00,000 after 20 years
(both are considered at current costs). The present household expenses are
Rs. 50,000 per month, which includes housing loan EMI of Rs. 15,000. The
client consumes, Rs. 8,000 per month as personal expenses. He also wants to
provide for 50 years living expenses for his spouse. He has an insurance cover
of Rs. 40,00,000 presently & his financial investments are Rs. 15,00,000. The
additional quantum of life insurance cover is ____________ (Assume:- All
expenses required are inflation adjusted at an average inflation of 5% p.a. &
the claim amount invested to yield is 8% p.a.)
Solution:
4. The factory was made 6 years ago for 80 lakhs. The construction cost is
increasing at 8% per annum. Depreciation is at 6%/annum using Straight Line
Method. What value is likely to be insurable under fire on Market Value Basis
Solution:
S B
N 6
I 8
Pv -8olacs
Pmt O
Fv ?12694994
p/y 1
c/y 1
12694994-4590197(1264994*6%*6)=3305204
5. A company XYZ paid dividends of Rs. 2 recently on its common stock.
Dividend is expected to grow by 20% year on year for the next 3 years after
which it is expected to stabilize at 10% growth. If your requirements of the
return from company stock is 15%. What is the maximum price that you
would pay today to buy the stock?
Solution:
Do 2
D1 2.4 (2*1.2)
D2 2.88 (2.4*1.2)
(2.88*1.2
D3 3.456 )
STEP 1
Find NPV in calculator for cash flow below
1 0
2 2.4
3 2.88
4 3.456
NPV Rs. 6.54
STEP 2
Use Formula:
(D*(1+G))/(R-G)
STEP 3
Find PV of above figure
Rs. 76.032 is NPV as on 4th year so find its
PV as on date
n 4
i 15%
Rs.
PV -43.47
PMT 0
FV 76.032
11.You advise your client aged 31 years to accumulate corpus of for retirement.
The client already has in Balanced MF scheme Rs. 1.60 lakh which you advise
to extend to achieve this goal. You advise him to start SIP of Rs. 5,000 every
month till his age of 35 years, thereafter increase the same to Rs. 7,500 p.m.
till his age 40 years, Rs. 10,000 p.m. between 40 50 years, and Rs. 15,000
p.m. between 50 56 years. You advise him to switch 25% of outstanding
Balanced MF portfolio every year to Liquid schemes from age 57 until full
redemption on retirement at age 60. How much of the retirement corpus
would he be able to accumulate? (Rate of return Balanced MF 9% p.a., Liquid
MF 5.5% p.a.)
12.Your client aged 34 now requires at his retirement age of 60 years a corpus to
sustain an annuity of Rs. 55,000 p.m. (current cost) inflation linked for a post-
retirement life of 25 years up to which he expects to live. You estimate that his
goal would be achieved by investing corpus at a return of 8%. Your client
apprises you that he would additionally like to start a Trust with a donation of
Rs. 1 crore (value then) on his reaching age 70 years and would bequeath
posthumously a further amount of Rs. 1 crore (value then) for his son. He asks
you whether this arrangement would be feasible by taking a little more risk
while investing the retirement corpus. You estimate by taking 1% additional
return than envisaged and opine that ______. (Consider inflation at 5.5%)
13.The higher education costs per annum are Rs. 3 lakh at present costs. The
costs are escalating @9% per annum. Mr. A estimates for his son that such
funds would be required for 5 years after 6 years from now. He starts
accumulating funds immediately in a systematic manner every month in an
equity mutual fund scheme. He would switch equivalent funds required for a
particular year to liquid mutual fund scheme one year in advance. The funds
would continue to be accumulated for a period up to the last switch to liquid
fund. What should be the SIP amount in the equity growth fund? (Take
expected return from equity growth funds @12% p.a. and from liquid fund
@6% p.a.)
Problem Type 1:
Situation:
Current household expenses of a couple 50,000 Rs. p.m.
Current age of Earning member 35 years
Current age of dependent spouse 32 years
Retirement age of Earning member 58 years
Life expectancy of Earning member 75 years
Life Expectany of dependent spouse 80 years
12,000,0
Accumulation from existing investments 00 Rs.
Goal:
They would require regular monthly inflation-linked stream of income equivalent to their
current household expenses till the life of Earning member and thereafter 60% of that
income till the spouse survives. The corpus is supposed to be invested at 7% p.a. What
additional monthly amount to be invested with immediate effect in an
investment yielding 11% p.a. to attain the desired corpus? (given inflation
throughout is 5.5% p.a.)
Problem Type 2:
Situation:
Today's date is 1st April, 2013:
Current age of First Child 4 years
Current age of Second Child 1 year
Goal:
Education expenses are required for each child at their respective age of 18 (Rs. 4 lakh at
current cost) and for four subsequent years (Rs. 3 lakh p.a. at current cost). Expenses
escalate at 5.5% p.a. All withdrawals are made in the beginning of the financial year.
What monthly amount is to be invested at 11% p.a. with immediate effect up to
one year prior to the required expenses for the First Child to achive this goal?
Problem Type 3:
A personal loan of Rs. 3 lakh is availed on credit card at 14% p.a. interest for tenure of 2
years. The credit card company charged processing fees of 1% of the loan amount. The
interest on monthly reducing balance basis was charged in the credit card. What is the
annual effective rate of interest paid in this transaction?
Problem Type 4:
Situation:
Employee's Gross salary per 1,000,0 Rs.
annum 00
Estimated tax during the year 210,00 Rs.
0
Family's monthly expenses 25,000 (including expenses incurred on
household from official account)
Insurance premium (annual) 20,000 Rs.
Existing insurance cover 6,000,0 Rs.
00
Investment yield available on 10% p.a.
investing funds till retirement
Number of remaining years to 28 years
retirement
Goal:
The anticipated increase in the Employee's post-tax salary is 5% year on year. The
employee consumes 25% of regular household expenses on self. What should be
the amount of additional insurance required to replace the Employee's
income contribution to his family for his remaining years employment?
Problem Type 5:
Situation:
Retirement age of the individual 60 yrs
Life expectancy of the individual 80 yrs
A deferred annuity pension plan offers optional one-third commutation on the date
of vesting and life certain level annuity. The level annuity from uncommuted
amount is Rs. 60,000 per month. The vesting sum of Rs. 1.5 crore is estimated on
retirement of the individual .
Goal:
If the individual opts to commute one-third of the expected vested amount and
settles for life annuity from the remaining amount, at what rate of return the
commuted amount shall be invested to yield a total income of Rs. 90,000
per month till he survives?
Problem Type 6:
Situation:
Current age of Mr. A 28 years
Current age of the spouse of Mr. A 26 years
Retirement age of Mr. A 60 years
Current house hold expenses Rs. Per month
25,000
Life expectancy of each of Mr. A and 80 years
spouse
Post-retire xpenses needed till Spouse's 75%
survival as % of pre-retire. exp.
Current investment available to be utilized Rs.
towards retirement corpus 300,000
Mr. A desires to have additional cushion of Rs. 1 crore as terminal value from the
date of last survivor towards bequest. The retirement solution can be managed at
yield of 12% p.a. in the initial 10 years, moderated to return 9% p.a. in the next 10
years. In the remaining years to retirement and continuing into retirement the funds
could be managed to yield 7% p.a. Inflation is considerd 5.5% p.a. in the pre-
retirement period and is expected to moderate at 4% p.a. in the post-retirement
period. Estimate the viability of achieving this goal by investing Rs. 62,000
p.a. in the current available investment, starting immediately, which
would be incremented by 5% in the beginning of every year. You analyze
that _______.
Problem Type 7:
Situation: Bond valuation and return
Problem Type 8:
Situation:
Client's current age 28 years
Age from which annual holidays to begin 45 years
(continuing lifelong)
Funds required at current costs 50,000 Rs. P.a.
Cost escalation for holiday expenses 7% p.a.
Age of retirement 58 years
Life expectancy 75 years
Holiday expenses to be contained post- 30,000 Rs. P.a.
retirement (at current costs) to
Goal:
The client would start investing immediately a certain amount on a quarterly basis
in investments yielding 11% p.a. up to the period of drawing expenses for holiday
for the first time. Once the corpus is built-up, the funds for holidays for 5-year block
periods would be switched to safe investments yielding 8% p.a. from which yearly
expenses would be drawn. What is the amount of quarterly investment?
Problem Type 9:
Situation:
Current household expenses of a couple 50,000 Rs. p.m.
Current age of the client 33 years
Current age of dependent spouse 30 years
Retirement age of the client 58 years
Life expectancy of the client 78 years
Life Expectany of dependent spouse 80 years
Goal:
The client wants to know the corpus required at his retirement which would be
sufficient to sustain inflation-linked monthly expenses equivalent to their pre-
retirement household expenses till the expected life of his spouse. The retirement
corpus so accumulated shall be invested at 7% p.a. return while teh ruling inflation
would be 5.5% p.a.. You estimate the corpus to be _________.