Simple retirement planning model!!!

Suppose an investor wishes to have Rs. 1 crore at the time of retirement, which is 25 years away, how much money does he n
interest rate is 15% compounded annually
Modelling best practices
Assumptions 1) Keep the model as simple as poss
2) Assumptions grounding (garbage
FV ₹ 10,000,000.00 3) structure - documentation, assump
Time 25 years 4) Efficient/ accurate: Use $ placehol
Interest rate 10% 5) No hard coding
Compounded annual 6) color coding

Work engine

PV (using excel fn) $ -922,959.98 by formula

₹ 922,959.98 PV = FV/(1+i)^N
Output PV = FV/(1+i/m)^(N x m)
Proportion
Principal $ 922,959.98 9%
Interest (compounding$ 9,077,040.02 91%
Total $ 10,000,000.00 100%

# of years
$ 922,959.98 This is built using datatable
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 much money does he need to set aside today if the appropriate'

model as simple as possible (but no simpler)

ons grounding (garbage in garbage in)
- documentation, assumption, work engine, output)
accurate: Use $ placeholder to reference cells wherever appropriate

1+i/m)^(N x m)

to retirement for 1 Cr
 to retirement for 1 Cr

23 25 27 29 31 33 35 37 39 41
Future Value of a single sum : FV = PV(1+I/Y)N

Calculate the Future Value of Rs. 500 investment at the end of 20 years if it earns an anually compounded
rate of return 6%
Soln. Compute FV using the calculator and following values :
N = 20
I/Y = 6
PV = 500
CPT -> FV = -1603.57, -ve sign indicates money has to be invested.

Present Value of a single sum : PV = FV/ (1+I/Y)N

Calculate the PV of Rs. 500 that would be received in 10 years with a discout rate of 7%

Soln. Calculate using the calculator :

N = 10
FV = 500 ($ 254.17)
I/Y = 7
CPT-> PV = -254.175 The negative shows money has to be invested.

Ordinary Annuity :

Calculate the future value of an ordinary annuity that pays Rs. 200 per year at the end of each year for next 20 year,
given a rate of Interest of 5%

Soln. 0 1 2 3 20

…….
…..

200 200 200 200

6,613.19

N = 20
PMT = - 200, Negative sign indicates the amount that has to be invested at the end of every year for next 20 years.
PV = 0
I/Y = 5
CPT -> FV = 6,613.19

PV of an ordinary annuity later the time = 1

Calculate the Present value of an annuity that pays Rs. 200 per year at the end of each year for 5 years, beginning 2 years
from now given a rate of return of 5%
0 1 2 3 4 5 6

200 200 200 200 200

PV = 824.66 PV = - 865.95

FV = 865.95
865.
95
 FV =
865.
95

This problem can be done in two steps :

a). Calculate the PV for the ordinary annuity :

N=5
PMT = 200
I/Y = 5
FV = 0
CPT -> PV = - 865.95 , -ve sign indicates money has to be invested.

b). Then discounting this value for 1 year :

FV = 865.95
N=1
I/Y = 5
PMT = 0
CPT -> PV = 824.66

One has to invest 824.66 today in order to earn an annuity of Rs. 200 for 5 years beginning at the
end of two years from now.

PV Of an annuity due
Q. Given a discount rate of 10%, what is the present value of a 3-year annuity that makes a series of Rs.200 payments at the
beginning of each of the next three years, starting today ?

Ans. First, let`s solve this problem using the calculator`s BGN mode. Set your calculator to the BGN mode
([2nd] [BGN} [2nd] [SET] [2nd] [Quit] on the TI or [g] [BEG] on the HP), enter the relevant data, and compute PV.
N=3;
I/Y=10;
PMT=-200;
CPT- PVAD=Rs.273.55

0 1 2 3

+200 +200 +200

PV = 697.37

Alternatively, this problem can be solved by leaving your calculator in the END mode. First, compute the PV of an ordinary
3-year annuity. Then multiply this PV by (1+I/Y). To use this approach, enter the relevant inputs and compute PV.
N=3; I/Y=10; PMT=-100; CPT-> PVAO=Rs. 248.69
PVAD = PVAO x (1+I/Y) =Rs. 633.97 x 1.10 = Rs. 697.37

Present Value of a perpetuity

Q. Assume the preffered stock of Khaitan Corporation pays Rs. 6 per year in annual dividends and plans to follow this
dividend policy forever. Given an 10% rate of return, what is the value of Kodon`s preffered stock?
Ans. Given that the value of the stock is the PV of all future dividends, we have :
PVperpetuity =6/0.1=Rs. 60
Thus, if an investor requires an 10% rate of return, the investor should be willing to pay Rs. 60 for each share of
Khaitan's preffered stock.
Computing the FV of an uneven cash flow series

Q. Using a rate of return of 10%, compute the fututre value of the 6-year uneven cash flow stream described above
at the end of the sixth year.
Ans. The FV for the cash flow stream is determined by first computing the FV of each individual cash flow, then summing the
FVs of the individual cash flows. Note that we need to preerve the signs of the cash flows.
FV1: PV=_1,000; I/Y=10; N=5; CPT->FV=FV1=-1,610.51
FV2: PV=_500; I/Y=10; N=4; CPT->FV=FV2=-732.05
FV3: PV=0; I/Y=10; N=3; CPT->FV=FV3=0.00
FV4: PV=4000; I/Y=10; N=2; CPT->FV=FV=4,840.00
FV5: PV=3,500; I/Y=10; N=1; CPT->FV=FV5=3,850.00
FV6: PV=2,000; I/Y=10; N=0; CPT->FV=FV6=2,000.00
FV of cash flow stream Sum of FVindividual 8,347.44

Computing PV of an uneven cash flow series

Q. Compute the present value of this 6-year uneven cash flow stream described above using a 10% rate of return.

Ans. This problem is solved by first computing the PV of each individual cash flow, then summing the pVs of the individual cash
flows, which yield the PV of the cash flow stream. Again the signs of te cash flows are preserved.
PV1: FV=-1,000; I/Y=10; N=1; CPT->PV=PV1=-909.09
PV2: FV=-500; I/Y=10; N=2; CPT->PV=PV2=-413.22
PV3: FV=0; I/Y=10; N=3; CPT->PV=PV3=0
PV4: FV=4,000; I/Y=10; N=4; CPT->PV=PV4=2,732.05
PV5: FV=3,500; I/Y=10; N=5; CPT->PV=PV5=2,173.22
PV6: FV=2,000; I/Y=10; N=6; CPT->PV=PV6=1,128.95
PV of cash flow stream Sum of PVindividual $4,711.91

It is also possible to compute PV of an uneven cash flow stream by using the cash flow (CF) keys and the net present value
( NPV ) function on your calculator. This procedure is illustrated in the tables in Figure below. In the figure, we have omitted the
FO1, F02, etc. values because they are all equal to 1. The Fn variable indicates how many times a particular cash flow amount
is repeated.

Fig.: NPV Calculator Keystrokes-TI BAII Plus

Key Strokes Explanation Display

[CF] [2nd] [CLR WORK] Clear CF Memory Registers CFO = 0.00000
0 [ENTER] Initial Cash Outlay CFO = 0.00000
[ ] 1,000 [+/-] [ENTER] Period 1 Cash Flow C01 = -1,000.00000
[ ] [ ] 500 [+/-] [ENTER] Period 2 Cash Flow C02 = - 500.00000
[ ] [ ] 0 [ENTER] Period 3 Cash Flow C03 = 0.00000
[ ] [ ] 4,000 [ENTER] Period 4 Cash Flow C04 = 4,000.00000
[ ] [ ] 3,500 [ENTER] Period 5 Cash Flow C05 = 3,500.00000
[ ] [ ] 2,000 [ENTER] Period 6 Cash flow C06 = 2,000.00000
[NPV] 10 [ENTER] 10% Discount Rate I = 10.00000
[ ] [CPT] Calculate NPV NPV = 4,711.91226

Note that the BAII Plus Professional will give the NFV of 8,347.44 also if you press the key.

The effects of compounding frequency on FV and PV

Q. Compute the FV and PV of a Rs. 1,000 single sum for an investment horizon of one year using a stated annual interest rate
of 6.0% with a range of compounding periods.
Ans. Fig. Compounding Frequency Effect
Compounding Frequency Interest Rate per Period Effective Rate of InterestFuture Value Present Value
Annual (m=1) 6.00% 6.00% $1,060.00 $943.40
Semiannual (m=2) 3 6.09% 1,060.90 942.596
Quarterly (m=4) 1.5 6.136 1,061.36 942.184
Monthly (m=12) 0.5 6.168 1,061.68 941.905
Daily (m=365) 0.016438 6.183 1,061.83 941.769

There are two ways to use your financial calculator to compute PVs and Fvs under different compounding frequencies:

1. Adjust the number of periods per year per year (P/Y) mode on your calculator to correspond to the compounding
frequency (e.g., for quarterly, P/Y = 4).
2. Keep the calculator in the annual compounding mode (P/Y=1) and enter I/Y as the interest rate per compounding period,and
N as the number of compounding period in the investment horizon. Letting m equal the number of compounding periods per year,
the basic formulas for the calculator input data are determined as :
I/Y = the annual interest rate /m ,
N= the number of years x m

The computations for the FV and PV amounts in the given fig. are:

PVA: FV=-1,000; I/Y=6/1=6; N=1x1=1: CPT->PV=PVA=943.396

PVS: FV=-1,000; I/Y=6/2=3; N=1x2=2: CPT->PV=PVS=942.596
PVQ: FV=-1,000; I/Y=6/4=1.5; N=1x4=4: CPT->PV=PVQ=942.184
PVM: FV=-1,000; I/Y=6/12=0.5; N=1x12=12: CPT->PV=PVM =941.905
PVD: FV=-1,000; I/Y=6/365=0.016438; N=1x365=365: CPT->PV=PVD =941.769
FVA: PV=-1,000; I/Y=6/1=6; N=1x1=1: CPT->FV=FVA=1,060.00
FVS: PV=-1,000; I/Y=6/2=3; N=1x2=2: CPT->FV=FVS=1,060.90
FVQ: PV=-1,000; I/Y=6/4=1.5; N=1x4=4: CPT->FV=FVQ=1,061.36
FVM: PV=-1,000; I/Y=6/12=0.5; N=1x12=12: CPT->FV=FVM=1,061.68
FVD: PV=-1,000; I/Y=6/365=0.016438; N=1x365=365: CPT->FV=FVD=1,061.83

Loan payment calculation: quarterly payments

Q. A company plans to borrow Rs.80,000 for five years. The company`s bank will lend the money at a rate of 10% and requires
that the loan be paid off in quarterly payments for next five years. Calculate the amount of the payment that the company must .
make in order to fuly amortize this loan in five years
Ans. To determine the annual loan payment, input the relevant data and compute PMT.
N=20 ( 5*4)
I/Y=10/4 =2.5
PV=-80,000
CPT-> PMT=Rs. 5,131.77

Thus, the loan can be paid off in Twenty equal quarterly payments of Rs. 5,131.77. Please note that FV=0 in this computation;
The loan will be fully paid off (amortized) after the Twenty payents have been made.

Constructing an amortization schedule

Q. Constuct an amortization schedule to show the interest and principal componenets of the end-of-year payments for a 10%,
5-year, Rs. 20,000 loan.

Ans. The first step in soving this problem is to compute the amount of the loan payments. This is done by entering the
relevant data and computing PMT:
N=5
I/Y=10%
PV=-Rs. 20,000
CPT->PMT= Rs. 5275.95 5275.95

Period Beginning Balance Payment Interest Principal

Component (1) Component (2)
1 Rs. 20000 5275.95 2000 3275.95
2 Rs. 16,724.05 5275.95 1672.41 3,603.55
3 13,120.51 5275.95 1312.05 3,963.90
4 9,156.61 5275.95 915.66 4,360.29
5 4,796.32 5275.95 479.63 4,796.32

1. Interest component = beginning balance x periodic interest rate. In period 3, the interest component of the payment is
Rs. 13,120.51 x 0.10=Rs. 1312.051

2. Principal component = payment-interest. For example, the perod 4 principal component is 5275.95-1312.05=3963.90

3. The ending balance in a given period, t, is the period`s beginning balance minus the principal component
of the payment, where the beginning balance for period t is the ending balance from period t-1. For example,
the period 2 ending balance equals Rs. 8,362.03-Rs. 1,801.77=Rs. 6,560.26,which becomes the period 3 beginning
balance.

Principal and interest component of a specific loan payment

Q. Suppose you borrowed Rs. 5,000 at 10% interest to be paid semiannually over 10 years. Calculate the amount of the
outstanding balance for the loan after the second payment is made.

Ans. First the amunt of the payment must be determined by entering the relevant information and compuing he payment.
PV=-Rs. 5000
I/Y=10/2=5
N=10 x 2=20
CPT->PMT=Rs. 401.22
The principal and interest component of the second payment can e determined using the following process:

Payment 1: Interest=(Rs.5,000)(0.05)=Rs. 250

Principal=401.22-250=151.22

Payment 2: Interest=(5,000-151.22)(0.05)=242.44
Principal=401.22-242.44= 158.78

Remaining balance = 5000 - 151.22 - 158.78 = 4690

Computing the required payment to fund an annuity due

Q. Suppose you must make five annual Rs. 2,000 payments, the first one starting at the beginning of year 4(end of year 3).
To accumulate the money to make these payments you want three equal payments into an investment account, the first to be
made one year from today. Assuming a 10% rate of return, what is the amount of these three payments ?

Soln. The time line for this annuity problem is shown below :

0 1 2 3 4 5 6 7

-2,000 -2,000 -2,000 2000 -2000

FV3=$4,169.87

PMT1-3 1,260 1,260 1,260

The first step in this type of problem is to determine the amount of money that must be available at the beginning of year 4 in
order to satisfy the payment requirements.

Leave your calculator in the END mode and compute the PV of a 5-year ordinary annuity and multiply by 1.10.
N=5
I/Y=10
PMT=-2,000
CPT->PV=7,581.57x1.1=PV3=Rs. 8339.93
PV3 becomes the FV that you need three years from today from your three equal end-of-year eposits. To determine the amount
of the three payments necessary to meet this funding requirement, be sure that your calculator is in the END mode, input the
relevant data, and compute PMT.

N=3
I/Y=10
FV=-8339.93
CPT->PMT=Rs. 2,5196.61

Funding A retirement Plan

Q. Assume a 35 year-old investor wants to retire in 25 years at the age of 60. She expects to earn 12.5% on her investments
prior to her retirement and 10% thereafter. How much must she deposit at the end of each year for the next 25 years in order to
be able to withdraw Rs. 45,000 per year at the beginning of each year for the 30 years from age 60 to 90 ?

Ans. This is a two-step problem. First determine the amount that must be on deposit in the retirement account at the end of year
25 in order to fund the 30-year, Rs. 45,000 annuity due. Second, compute the annuity payments that must be made to achieve .
the required amount

Step 1 : Compute the amount required to meet the desired withdrawls.

The required amount is the present value of the Rs. 25,000, 30-year annuity due at the eginning of year 26 (end of year 25).
This can be determined by entering the relevant data, with the calculator in the END mode, and computing PV.
N=29
I/Y=10
PMT=-Rs. 45,000
CPT->PV=Rs. Rs. 421,632 (for 29 years)

Now add the first annuity payment to get Rs. 421,632 + Rs. 45,000= Rs. 466,632.66 The investor will need Rs. 466,632.66
at the end of year 25.
Step 2 : The annuity payment that must be made to accumulate the required amount over 25 years can be determined by
entering the relevant data and computing PMT.
N=25
I/Y=12.5
FV=466,632.66
CPT->PMT= - 3240.04

Thus, the investor must deposit Rs. 3240.04 per year at the end of each of the next 25 years in order to
accumulate Rs. 466,632.66. With this amount she will be able to withdraw Rs. 45,000 per year for the following 30 years.
yments at the
e individual cash

ave omitted the

sh flow amount

ual interest rate

ding period,and
periods per year,

% and requires
company must .

Ending
Balance (3)
Rs. 16,724.05
13,120.51
9,156.61
4,796.32
0.00
mine the amount

ears in order to

t the end of year

ade to achieve .
Computing NPV

Q. Calculate the NPV of an investment project with an initial cost of Rs. 10 million and positive cash flows of Rs. 2
at the end of year 1, Rs. 8 million at the end of year 2, and Rs. 10 million at the end of year . Use 10% as the disc

Ans. The NPV for this project is the sum of the PVs of the project`s individual cash flows and is determined as follow
NPV = -Rs. 10.0 + Rs. 2/1.10 + Rs. 8/(1.10)2 + Rs. 10/(1.10)3
= Rs. 5.94 million

The procedures for calculating NPV with a TI BAII Plus and an HP12C hand=held financial calculator are presented
below:

Figure: Calculating NPV with the TI Business Analyst II Plus

Key Strokes Explanation Display

[CF] [2nd] [CLR WORK] Clear CF Memory Registers CF0=0.00
5[+/-] [ENTER] Initial Cash Outlay CF0=-10.00
[ ] 1.6 ENTER] Period 1 Cash Flow C01=2.00
[ ] [ ] 2.4 [ENTER] Period 2 Cash Flow C02=8.00
[ ] [ ] 2.8 [ENTER] Period 3 Cash Flow C03=10.00
[NPV] 12 [ENTER] 12% discount rate I=10.00000
[ ] [CPT] Calculate NPV NPV=5.9429

Computing IRR

Q. What is the IRR for the investment described in the preceding example?

Ans. Substituting the investment`s cash flows into the IRR equation results in the following equation:
0= -10.0+ 2/(1+IRR) + 8/(1+IRR)2 + 10/(1+IRR)3

Solving this equation yields an IRR=34.614%.

It is possible to solve IRR problems throuh a trial and error process. That is, keep guessing IRRs until you get the o
provides an NPV equal to zero. Practically speaking, a financial calculator or an elecronic spreadsheet can and sho
employed. The procedures for computing IRR with the TI BA II Plus :

Key Strokes Explanation Display

[CF] [2nd] [CLR WORK] Clear Memory Registers CF0=0.00
5[+/-] [ENTER] Initial Cash Outlay CF0=-10.00
[ ] 1.6 [ENTER] Period 1 Cash Flow C01=2.00
[ ] [ ] 2.4 [ENTER] Period 2 Cash Flow C02=8.00
[ ] [ ] 2.8 [ENTER] Period 3 Cash Flow C03=10.000
[IRR] [CPT] Calculate IRR IRR=34.614

Conflicting decisions between NPV and IRR

Q. Assume NPV and IRR analysis of two mutually exclusive projects produced the results shown in Fig. below. As i
 IRR criteria recommends that Project A should be accepted. On the other hand, the NPV criteria indicates accept
project B. Which project should be selected?

Figure : Ranking Reversals with NPV and IRR

Project Investment at t=0 Cash Flow at t=1 IRR

A Rs. -10,000 Rs. 16,000 60%
B Rs. - 60,000 Rs. 80,000 33%

Ans. Investing in project A increases shareholder wealth by Rs. 4,545.45, while investing in project B increases sha
wealth by Rs. 12,727.27. Since the overall goal of the firm is to maximise shareholder wealth, project B should be
because it adds the most value to the firm.

- -
d positive cash flows of Rs. 2 million
of year . Use 10% as the discount rate.

ws and is determined as follows:

ncial calculator are presented in Figures

wing equation:

ssing IRRs until you get the one that

onic spreadsheet can and should be

ults shown in Fig. below. As indicated, the

NPV criteria indicates acceptance of

NPV at 10%
Rs. 4545.45
Rs. 12,727.27

ng in project B increases shareholder

r wealth, project B should be selected
Experiential Learning!!! Basic elements in financial modeling

Simple Lump Sum

What is the FV of an initial $1000 after 3 years if the discount rate is 12%
Assumptions: 1st method
PV $ 1,000 Time Cash flow Beginning Bal
Time 3 Years 0 $ 1,000.00
Interest rate 12% compounded annually 1 $ 1,000
2 $ 1,120
FV ($ 1,404.93) (3rd method) 3 $ 1,254
Excel Functions - FV 4 $ 1,405
($ 1,404.93) 5 $ 1,574
6 $ 1,762
7 $ 1,974
8 $ 2,211
9 $ 2,476
10 $ 2,773

Ordinary Annuity Color coding scheme:

1. Assumptions/ Input Input
A Annuity amount 1000 Calculation
I or r Discount rate 12% Annual Output
"m" Compounding fre 1 (per year) Principles:
n Time 3 years 1) Keep the model as simple
2. Work engine 2) Structure - assumptions,
3) Color coding, giving comm
(1st method) treating each cf as a lumpsum and adding it up 4) While replicating a formul

Time Cash flow PV

0 using lumpsum formula excel function
1 1000 892.8571 PV = FV/(1+r/m)^(n x m) ($ 892.86)
2 1000 797.1939 ($ 797.19)
3 1000 711.7802 ($ 711.78)
3. Output Total Ordinary 2401.83 2401.831 ($ 2,401.83)
Due 2690.05
2nd Method (using excel function)

PV ($2,401.83) ordinary annuity

($2,690.05) Annuity due
3rd method (using formula)
A 1000
r 12%
N 3

Ordinary PV $2,401.83 Annuity formula H/W

Due PV 2690.05 annuity du Give one extra period interest to get the answer for Ann

Annuity Due
Assumptions
Annuity amount 100
 Discount rate 10%
Time 3 years

Work engine Another method for annuity

a) first cf is already in PV ter
Time PV b) remaining (n-1) cf's can b
0 100 100
1 100 90.90909 a)
2 100 82.64463 b)
3
Total 273.55 total
PV ($273.55)

PV $2,642.01

Ex 2.An individual deposits $10,000 at the beginning of each of the next 10 years, starting today, into an account paying
9 percent interest compounded annually.
The amount of money in the account at the end of 10 years will be closest to:
Discount rate
FV(ordinar ($ 151,929.30)
Time Cash flow PV(CF)
FV(due) ($ 165,602.93) =FV(ordinary)*(1+r)

Ex 3.An investment promises to pay $100 one year from today, $200 two years from today, and $300 three year
If the required rate of return is 14 percent, compounded annually, the value of this investment today is closest to:

Discount rate

Time Cash flow

 Financial Calculator co
you have $100 with you
m is the compounding frequency let us say we go to ICIC
Periodic FV = PV x (1 + r/m) ^(n x m) we have to give the mon
Annual FV = PV x (1 + r) ^n PV we have put +$100;
interest Ending Balance Formula (2nd method)
Time FV after 3 years then what
120 $ 1,120.00 1 1120.00 that means it is an inflow
134.4 $ 1,254.40 2 1254.40 therefore it means -ve s
150.528 $ 1,404.93 3 1404.93
168.59136 $ 1,573.52 4 1573.52 this is a convention follo
188.822323 $ 1,762.34 5 1762.34 as a calculator (financia
211.481002 $ 1,973.82 6 1973.82
236.858722 $ 2,210.68 7 2210.68
265.281769 $ 2,475.96 8 2475.96
297.115581 $ 2,773.08 9 2773.08
332.769451 $ 3,105.85 10 3105.85

Keep the model as simple as possibe (and NO simpler)

Structure - assumptions, calc, output
Color coding, giving comments
While replicating a formula use placeholder ($)

FV ₹ -3,374.40 Ordinary
FV ₹ -3,779.33 Due

§PV = A[(1 – 1/(1+r)^N]/ r

to get the answer for Annuity Due
nother method for annuity due:
first cf is already in PV terms
remaining (n-1) cf's can be treated as ordinary annuity

100
$ 173.55

$ 273.55

, into an account paying

ll be closest to:

FV(ordinary)*(1+r)

oday, and $300 three years from today.

day is closest to:
Financial Calculator convention - Why you see -ve sign in answer for Excel function like PV
you have $100 with you today and you want to invest it
let us say we go to ICICI bank (in NY city) and we deposit it
we have to give the money to the bank, it is a cash outflow
PV we have put +$100; in other words we are giving +ve sign to outflow

after 3 years then what happens? ICICI bank will return the money back to you
that means it is an inflow; then calculator says OK you gave + sign to outflow
therefore it means -ve sign for inflow back to you

this is a convention followed by all financial calculator and since excel was built
as a calculator (financial) it is also following the same convention
Suppose an investor wishes to have Rs. 1 Crores at the time of retirement, which is 20 years away, how much money does he
interest rate is 10% compounded annually

FV 1000000 lakhs
Time 20 years
Interest rate 10%
Compounded annual $ 148,643.63

PV ₹ -148,643.63

Simple retirement planning model!!!

away, how much money does he need to set aside today if the appropriate'
1)
What’s the value of a 3-year, 12% annual coupon bond if kd = 10%? Discount rate > Coupon

Assumptions: 1) Premium > 1000

Maturity 3 years 2) Par 1000
YTM Discount rate: 10% market 3) Discount < 1000
Coupon rate 12%

Coupon amount $ 120 §PV = A[(1 – 1

Principal $ 1,000 Par Value

Method 1 1) Annuity $120, 3 years, 10% Method 2

$ 298.42 1.404928 $ 1,049.74

2) lumpsum: $1000, 3 years, 10%

$ 751.31

Price 1+2
$ 1,049.74

2)

•Suppose that we have a 3-year, 6% semiannual coupon bond. Calculate th

Data given/ Assumptions:

Compounding frequency 2

(APR, NominalPeriodic
Years Semiannual terms
Maturity 3 6
Coupon rate 6% 3%
YTM 12% 6%

Par value $ 1,000

Coupon $ 30 (every 6 months)

Model: 1st method

Time Semiannual CF's PV(CF's)
0 0
0.5 1 $ 30 28.301886792
1 2 $ 30 26.6998932
1.5 3 $ 30 25.188578491
2 4 $ 30 23.762809897
2.5 5 $ 30 22.417745186
3 6 $ 1,030 726.10935665

Total 852.48027022
 (try as homework) 2nd method
Annuity + lumpsun

3rd method Excel Functio $ 852.48

3)

•Suppose that we have a 5-year, Zero Coupon bond. Calculate the value of

Compounding frequency 2 per year

Annual Semiannual compounding
Time 5 10
YTM 8% 0.04
Par 1000 1000

PV ₹ -680.58 ₹ -675.56

4)
•Assume a preferred stock A has a$100 par value and a dividend of $8 a year. Because of inflatio
Thus, the value of this preferred stock A is……

5)
•What is the value of a stock that last year paid a $1 dividend. You think next year’s dividend will
The required return or the discount rate is 11%.
23.51351351

6)
•Assuming a holding period of three years with the following estimated dividend payments: Year
Assume an estimated sale price of $36, three years from now. Required rate of return is 1
Discount rate 12% Excel FunctioFormula
Year CF PV(CF) PV(CF)
1 1.5 ₹ 1.34 1.339286
2 1.75 ₹ 1.40 1.395089
3 38 ₹ 27.05 27.04765
 Price ₹ 29.7820 29.7820
7)
•What is the value of the stock that paid $2 dividend last year if dividends are expected to grow
Div(0) 2
g 5% forever!!! ===> Gordon model
k 12%
P(0) =Div(1)/(K- g)

Div(1) =Div(0) x (1+g) 2.1

P(0) 30.00
8)
scount rate > Coupon

Discount rate < Coupon rate

Discount rate = Coupon rate
Discount rate > Coupon rate

§PV = A[(1 – 1/(1+r)^N]/ r

Method 3 using form using PV function

time Coupon Principal CF PV(CF)
1 $ 120 $ 120 109.0909 $ 109.09
2 $ 120 $ 120 99.17355 $ 99.17
3 $ 120 $ 1,000 $ 1,120 841.4726 $ 841.47
4 0 $ 0.00
5 0 $ 0.00
6 0 $ 0.00
7 0 $ 0.00
8 0 $ 0.00
9 0 $ 0.00
10 0 $ 0.00

Total 1049.737 1049.737

bond. Calculate the value of the bond with a YTM of 12%.

culate the value of the bond with a YTM of 8%.

year. Because of inflation, uncertainties and tax advantage, the required rate of return is 9%.

next year’s dividend will be 10% higher and the stock will be selling for $25 at year-end.

dividend payments: Year 1 = $1.50; Year 2 = 1.75 and Year 3 = 2.00.

uired rate of return is 12%.
ds are expected to grow at 5% forever? The required rate of return is 12%
1)
What’s the value of a 2-year, 10% semiannual coupon bond if kd = 10%? 0.002

Assumptions:
Compounding frequency 2 in a year delta(interediscount rate price
Maturity 2 years 0% 9.8% $ 1,004
Maturity 4 semi 10% $ 1,000
Discount rate 10% annual 0% 10.2% $ 996
Discount rate (periodic) 5% market
Coupon rate 10% effective durati 1.772925
Coupon rate (periodic) 5%
Coupon amount (periodic) $ 50
Principal $ 1,000 Par Value

Method 1 1) Annuity $50, 4 semiannual, 10% Method 2

$ 176.89 $ 996.46

2) lumpsum: $1000, 10 years, 10%

$ 819.58

Price 1+2
$ 996.46

2)

•Suppose that we have a 3-year, 6% semiannual coupon bond. Calculate th

Data given/ Assumptions:
Years Semi
Maturity 3 6
Coupon rate 6% 3%
YTM 12% 6%

Par value $ 1,000

Coupon $ 30 (every 6 months)

Model: 1st method

Time Semiannual CF's PV(CF's)
0 0 ???
0.5 1 $ 30 28.301886792
1 2 $ 30 26.6998932
1.5 3 $ 30 25.188578491
2 4 $ 30 23.762809897
2.5 5 $ 30 22.417745186
3 6 $ 1,030 726.10935665

Total 852.48027022
 2nd method you do as homework
Annuity + lumpsun

3rd method Excel Functio $ 852.48

3)

•Suppose that we have a 5-year, Zero Coupon bond. Calculate the value of

4)
•Assume a preferred stock A has a$100 par value and a dividend of $8 a year. Because of inflatio
Thus, the value of this preferred stock A is……

5)
•What is the value of a stock that last year paid a $1 dividend. You think next year’s dividend will
The required return or the discount rate is 11%.

6)
•Assuming a holding period of three years with the following estimated dividend payments: Year
Assume an estimated sale price of $57, three years from now. Required rate of return is 1

7)
•What is the value of the stock that paid $2 dividend last year if dividends are expected to grow
8)
 Method 4 (using formula)
§PV = A[(1 – 1/(1+r)^N]/ r
1) annuity

delta (price) 176.8865

0.355% premium
0.000% par 2) par value
-0.354% discount
819.5758

3) total

996.4623

Method 3 using form using PV function

time CF PV(CF)
1 $ 50 47.57374 $ 47.57
2 $ 50 45.26521 $ 45.27
3 $ 50 43.06871 $ 43.07
4 $ 1,050 860.5546 $ 860.55
5 0 $ 0.00
6 0 $ 0.00
7 0 $ 0.00
8 0 $ 0.00
9 0 $ 0.00
10 0 $ 0.00

Total 996.46 996.46

bond. Calculate the value of the bond with a YTM of 12%.

culate the value of the bond with a YTM of 8%.

year. Because of inflation, uncertainties and tax advantage, the required rate of return is 9%.

next year’s dividend will be 10% higher and the stock will be selling for $25 at year-end.

dividend payments: Year 1 = $1.10; Year 2 = 1.25 and Year 3 = 1.50.

uired rate of return is 15%.

ds are expected to grow at 5% forever? The required rate of return is 12%

 •What is the value of a stock that last year paid a $1 dividend. You
10% higher and the stock will be selling for $25 at year-end.
Assumptions:
Last year dividend $1
Growth for nxt yr 10% higher
Stock price after 1 yr $ 25
required return 11%

Time Dividend Sale price Total CF PV (CF)

0 0 $ 0.00
1 1.1 $ 25 26.1 $ 23.51

Total $ 23.51
d a $1 dividend. You think next year’s dividend will be
$25 at year-end. The required return or the discount rate is 11%.
 •Assuming a holding period of three years with the follo
Year 1 = $1.10; Year 2 = 1.25 and Year 3 = 1.50. Assume an estimated sale price of $57, three years fro

Assumptions:

Growth for nxt yr 10% higher

Stock price after 3 yrs $ 57
required return 15%

Time Dividend Sale priceTotal CF PV (CF)

0 0 $ 0.00
1 1.1 1.1 $ 0.96
2 1.25 1.25 $ 0.95
3 1.5 $ 57 58.5 $ 38.46

Total $ 40.37
with the following estimated dividend payments:
ce of $57, three years from now. Required rate of return is 15%.
 ($ 1,516.31)

Time CFs
0 -1000
1 400 ($ 310.92)
2 400 ($ 241.68)
3 400 ($ 187.86)
4 400 ($ 146.03)
5 400 ($ 113.51)
($ 1,000.00)

IRR 28.65%
Assumptions
Sandeep's portfolio will be distributed as follows:
Asset classes Weight Returns
equity 70% 15%
bonds 20% 10%
bank deposit 10% 5%

Average 13.00%

Time 30 years
Interest (annual) 13.00%
Current Savings ₹ -
Target 10000000

Work engine
Time horizon 360 months
FV 10000000
Interest 1.08% per month
PV 0

Output
SIP monthly contribution ₹ -2,286.62
Proportion
Total Saving ₹ 10,000,000.00 100%
Pricipal ₹ 823,182.69 8%
Interest ₹ 9,176,817.31 92%
 input
calc
output Sandeep wants to do retirement planning
10.500% 30 years to35 years old
2.000% Systematic Investment Plan
0.500% Rs. 1 lakh per month
???
13.000% 1 crore rupees in his retirement savings account
zero savings

Inflow +ve

Proportion
Pricipal
8%
outflow -ve
Proportion Interest
92%