ASSIGNMENT-1

Q1) Explain the following terms with proper formulae and

examples:
a) Simple Interest
When a person borrows some amount of money from other person or institution,
the borrower has to pay some charge to the lender for the use of the money. This
charge is called interest. The interest depends on two things viz., the period for
which the money is borrowed and secondly the rate of interest.
The sum borrowed is called principal, time for which it is borrowed s called term. The
total sum returned by the borrower i.e. principal together with interest is called
amount.
When interest is calculated on the original principal, whatever the term may be, it is
called as simple interest.
If P denotes the principal,
n denotes term in years,
r denotes rate of interest % per annum (p.c.p.a.),
I denotes simple interest,
𝐏.𝐫.𝐧
then we have a simple formula I =
𝟏𝟎𝟎

amount A is found by adding interest to the principal.

𝑷.𝒓.𝒏. 𝐫.𝐧.
Thus, A = P+I = P+ = P(1+ )
𝟏𝟎𝟎 𝟏𝟎𝟎

b) Compound Interest
When interest is added to the principal at the end of each period and the total so
obtained is treated as the principal for the next period then the interest s0 obtained is
called compound interest. In general, the compound interest on a given sum will be
greater than the simple interest on the same sum for the same period. (rate of
interest being same)
In case of calculation of compound interest, it is convenient to find amount first and
then C.I. is given by subtracting principal from the amount.
Amount by Compound Interest,
𝒓
A= P(𝟏 + )𝒏
𝟏𝟎𝟎
Formula of Compound Interest,
C.I.= A - P
𝒓
C.I.= P [ (𝟏 + )𝒏 − 𝟏 ]
𝟏𝟎𝟎

c)Immediate Annuity
An annuity is a series of payments at fixed intervals, guaranteed for a fixed number
of years or the lifetime of one or more individuals.
Similar to a pension, the money is paid out of an investment contract under which
the annuitant(s) deposit certain sums in a lump sum or in instalments) with an
annuity guarantor (usually a government agency or an insurance company).The
amount paid back includes principal and interest.
lf payments of an annuity are made at the beginning of each period then the
annuity is called annuity due and when payments are made at the end of each
period, then the annuity is called immediate annuity
Formula:
Let , P= Present value
x= Periodic instalment
n= Number of instalments
i= Rate of (compound) interest per rupee per period
𝒙
P= [ 1- (𝟏 + 𝒊)−𝒏 ]
𝒊

If A denotes amount of an immediate annuity then,

𝒙
A= [ (𝟏 + 𝒊)𝒏 -1 ]
𝒊
𝟏 𝟏 𝐢
( - )=
𝐏 𝑨 𝐱

d) Perpetuity
A perpetuity, also called perpetual annuity a promises to pay a certain amount of
money to its owner forever.
Though a perpetuity may promise to pay you forever, its value isn't infinite.The bulk
of the value of a perpetuity comes from the payments that you receive in the near
future, rather than those you might receive 100 or even 200 years from now.
Formula:
𝐱
P=
𝐢

e) Equated Monthly Installment

Of late we find more and more people purchasing vehicles and homes by taking
loans from the bank. The repayment is generally made in monthly installments over
a period of one year, two years, five years etc. This monthly installment of repayment
is called equated monthly installment (EMI). There are two ways by which banks or
housing finance companies charge interest.
1.Reducing balancing method
𝒙
P= [ 1- (𝟏 + 𝒊)−𝒏 ]
𝒊

2.Flat Interest Rate

𝐫.𝐧.
A= P(1+ )
𝟏𝟎𝟎
𝐀
EMI= , where k= Number of months
𝐊
f) Population Growth
The formula for C.I. can also be used in the cases of uniform periodical increase
or decrease at a constant rate. They are known as problems on growth and decay
respectively.
For the problems on growth, the formulae for amount viz.
𝒓
A= 𝐏(𝟏 + )𝒏
𝟏𝟎𝟎
gives the total quantity at the end of n periods when the rate of growth is r% per
period.

g) Depreciating Price/value
The formula for C.I. can also be used in the cases of uniform periodical
increase or decrease at a constant rate. They are known as problems on growth and
decay respectively.
𝑟 𝑟
In the case of problems on decay, we replace by - in the formula for
100 100
compound interest.
Thus, for depreciated value at the end of n periods we use the formula,
𝒓 𝒏
V= P(𝟏 − )
𝟏𝟎𝟎

h) Annuity Due
Under this annuity, the payment of instalment starts from the time of contract. The
first payment is made as soon as the contract is finalized. The premium is generally
paid in single amount but can be paid in instalments as is discussed in the deferred
annuity. The difference between the annuity due and immediate annuity is that the
payment for each period is paid in its beginning under the annuity due contract while
at the end of the period in the immediate annuity contract.
If payments of an annuity are made at the beginning of every period then the
annuity is called annuity due.

𝒙(𝟏+𝒊)
A'= [ (𝟏 + 𝒊)𝒏 -1 ]
𝒊

𝒙(𝟏+𝒊)
P'= [ 1- (𝟏 + 𝒊)−𝒏 ]
𝒊

𝟏 𝟏 𝐢
( - )=
𝐏′ 𝐀′ 𝐱(𝟏+𝐢)

A'= P'(𝟏 + 𝒊)𝒏

i) Effective rate of interest
The effective rate of interest, effective annual interest rate, annual equivalent
rate or simply effective rate is the interest rate on a loan or financial product restated
from the nominal interest rate and expressed as the equivalent interest rate if
compound interest was payable annually in arrears.
The effective interest rate is calculated as if compounded annually. The effective rate
is calculated in the following way, where r is the effective annual rate, i the nominal
rate, and n the number of compounding periods per year (for example, 12 for
monthly compounding):
𝒊
r = (𝟏 + )𝒏 -1
𝒏

f) Nominal rate of interest

The nominal interest rate, also known as an Annualised Percentage Rate or
APR, is the periodic interest rate multiplied by the number of periods per year.
For example, a nominal annual interest rate of 12% based on monthly
compounding means a 1% interest rate per month (compounded).
A nominal interest rate for compounding periods less than a year is always lower
than the equivalent rate with annual compounding (this immediately follows from
elementary algebraic manipulations of the formula for compound interest).
Q2) Explain the following terms.
a) Capital
Capital is the life blood of any business organisation. Capital can be in cash
or kind. A sole trader introduces capital out of his own pocket. Similarly the partners
also bring capital from their own pockets. But is case of company form of business
organisation, the capital is raised through the issue of shares.
As per Section 2(84) of companies Act 2013
“Share is the share in the capital of a company and includes stock as well.”
'Share Capital' means the capital raised by a company by issue of shares. In case
of Company is divided into small parts known as shares. This is why it is known as
'Share Capital'.
-According to Companies Act, Company can issue two types of shares namely
Equity Shares and Preference Shares.

b) Stock exchange
Shares and debentures are transferable assets. They are bought and sold in
"Stock Exchanges". A stock exchange is a form of exchange, which provides
services for stock brokers and traders to trade stocks, honds and other securities.
Stock exchanges also provide facilities for issue and redemption of securities and
other financial instruments and
Capital events including payment of income and dividends.
In India there are two prominent stock exchanges, the Bombay Stock
Exchange (BSE) and National Stock Exchange (NSE).
Bombay Stock Exchange, known as BSE limited is the oldest stock exchange in
entire Asia. It is located at Jeejee bhoy towers, Dalal street in fort, Mumbai. It has
largest number of companies of the world listed on it. As per March 2012 there are
more than 5000 Indian companies listed on BSE. The BSE sensex which is also
known as BSE-30 (weighed average of 30 leading companies) is most commonly
used term while referring to trading volume in India and Asea. The total capital of all
shares listed on BSE in 2012 was approximately 50000 crores. In term of share
volume NSE is almost twice that of BSE.

c) Equity share
Equity shares ware formerly called 'ordinary’shares. They have no special
rights attached to them. The holders of these shares are paid dividend after the
claims of the preference shares holders are satisfied. The rate of the dividend is not
fixed; it varies from year-to-year depending on the profits of the company. In some
years they may have to go without dividend while in others they may get a very high
rate of dividend. An equity share is also called a "scrip".
Equity shareholders are the risk bearers and therefore the real owners of the
company and can get dividend after payment of all expenses and dividend to
preference shareholders
d) Face value
The face value is the nominal value of the shares, that is, their original cost,
as mentioned in the share certificate. It is just an accounting value that could either
be Re 1, Rs 2, Rs 5, Rs 10, or even Rs 100. The price stated on the body of share or
debenture is called its face value (F.V.) or nominal value. NOTE: Shares are not
sold on face value.

e)Market value
The price at which a debenture or share is actually bought or sold is called
market value or cash value of the share. The market value of the shares is decided
as per the market conditions, which is dynamic while face value remains static.
Market value is also commonly used to refer to the market capitalization of a publicly
traded company, and is calculated by multiplying the number of its outstanding
shares by the current share price. Market value is easiest to determine for exchange-
traded instruments such as stocks and futures, since their market prices are widely
disseminated and easily available.

lf the face value and market value of a share are equal, the share is said to be "at
par".
If the market value is more than the face value of a share, the share is said to be "at
premium".
If the face value is more than the market value of a share, the share is said to be "at
discount".
(NOTE: But in practical terms, the shares are never issued at a discount.)

f) Dividend
The net profit made by the company every year is ascertained from its Profit and
Loss Account prepared at the end of the year. Out of the net profits, dividend at a
specified rate is paid on preference shares
Arrears of dividend, if any, on cumulative preference shares are also paid, if the
amount of profit permits. The balance is then utilised for payment of dividend on
equity shares. Dividend may be declared as fixed amount per share or as a
percentage of the capital of the company.
There are five types of dividends:
1. Cash Dividend
2. Stock Dividend
3. Property Dividend
4. Scrip Dividend
5. Liquidating Dividend

g) Bonus Shares
Sometimes a company rewards its shareholders by issuing free shares to them
in proportion of the shares held by them. These free shares are called bonus
shares. They are entitled for all rights, that an ordinary shares has. In this way, the
holding of a person increases and the amount corresponding to bonus shares is
capitalized. The company can use this amount for capital expenditure. Bonus shares
are issued in some ratio. The ratio a:b means a free shares for b shares held.

h) Preference shares
Preference shares are those shares which have right with respect to payment
of dividend and repayment of capital of winding of the company. Thus preference
shareholders enjoy preferential rights in case of payment of dividend and repayment
of Capital. Preference shareholders get fixed rate of dividend before giving dividend
to equity shareholders. Preference shareholders are not real owners of the
company. On the basis of additional rights or benefits preference shares can be
further classified as follows -
1) Cumulative and Non-cumulative Preference Shares
2) Redeemable and Irredeemable Preference Shares
3) Participative and Non-participative Preference Shares
4) Convertible and Non-convertible Preference shares

i) Types of dividends
There are in total five types of dividends:
1. Cash Dividend
2. Stock Dividend
3. Property Dividend
4. Scrip Dividend
5. Liquidating Dividend
1) Cash Dividend
Cash dividend is the most popular form of dividend payout. In this, company
issues the dividend to all shareholders where the money is deposited in the bank
accounts of shareholders as per the holdings of the investors. Usually there is a
predefined process for the dividend declaration.
2) Stock Dividend
If any company issues additional shares to common shareholders without any
consideration then the action becomes stock dividend. If the company issues less
than 25% of the previously issued stocks then it will be treated as the stock dividend.
If the issuance of new shares is more than 25% of the last issue shares then it is
treated as the stocksplit.
3)Property Dividend
Any company can issue any non-monetary dividend to its shareholders. The
issued property dividend would be recorded against the current market price of the
asset distributed. As the market price of the asset is expected to be either above or
below the book value therefore it would either incur profit or loss and accordingly
would be entered in the books. This interpretation of the distributed asset may force
businesses to intentionally issue the property dividend to manipulate the taxable
income.
4)Scrip Dividend
When any company doesn’t have enough funds to pay dividend then it may
choose to pay dividend in the form of promissory note to pay the shareholders at a
later date. This essentially creates a note payable.

5) Liquidating Dividend.
When the board of the company thinks of returning the original capital invested
by the shareholders then it is known as the liquidating dividend. This may happen
due to the fact the company intends to wrap up the business.

j) Return on investment
Return on investment (ROI) or return on costs (ROC) is a ratio between net
income (over a period) and investment (costs resulting from an investment of some
resources at a point in time). A high ROI means the investment's gains compare
favourably to its cost. As a performance measure, ROI is used to evaluate the
efficiency of an investment or to compare the efficiencies of several different
investments. In economic terms, it is one way of relating profits to
capital invested.
Return on investment can be calculated in different ways depending on the goal and
application. But the most commonly used formula is,
𝑷𝒓𝒐𝒇𝒊𝒕
Return on investment(ROI)= x 100
𝑰𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕