MGT411 MONEY AND BANKING ASSIGNMENT No.1 Fall Semester 2012

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MGT411 MONEY AND BANKING ASSIGNMENT No.1 Fall Semester 2012


FALL 2012
MONEY AND BANKING (MGT411)
ASSIGNMENT # 1
DUE DATE: NOVEMBER 29, 2012 MARKS: 20
Learning Objectives:
 The first question will enable the students to understand the concepts regarding time value of
money and bond valuation.
 The second questions will enable the students to understand the various measure of inflation and
calculate the inflation rate in an economy.
Question No. 1:
a) Today, most of the people in our country acknowledge the importance of education in our lives.
Therefore, Mr. Akram is also planning to provide the best education to his son. In this regard, he is
planning to set aside a handsome amount for his son education. Suppose the university fee of his
son after 10 years will be Rs.200, 000. His bank is offering him 12% interest rate compounded
annually. How much amount he has to deposit in his bank account today in order to get Rs.200, 000
from his bank after 10 years? (5 marks)
b) Suppose you have some extra funds with you and you want to make investment in bonds with those
funds. Currently a 6% coupon bond with face value of Rs.1, 000 is selling at Rs.850. If you want to
keep that bond till its maturity (which is one year), then what will be the yield to maturity of this
bond? (5 marks)
Question No. 2:
a) Define GDP deflator and explain how it differs from CPI (Consumer Price Index) although both are
used to measure inflation rate in an economy? (4 marks)
b) Suppose you are given the responsibility to calculate the inflation rate prevailing in an economy.
You, along with your team members, collect the following data related to that particular economy:
Years Nominal GDP Real GDP
2009 Rs. 48,300 Rs. 46,200
2010 54,400 51,000
2011 59,300 53,000
How you will measure the inflation rate based on the above data? (6 marks)
Note: You are required to provide complete working and formulas while calculating GDP deflator
and Inflation rate.
IMPORTANT:
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difficulties. This extra time should only be used to meet the emergencies and above mentioned due
dates should always be treated as final to avoid any inconvenience.
SOLUTION GUIDELINES:
Please read the following instructions carefully before preparing the assignment solution:
 Do prepare the solution after completely reading and understanding the questions.
 Put your genuine efforts in order to understand the concepts thoroughly.
 Provide complete calculations for all parts of the questions.
OTHER IMPORTANT INSTRUCTIONS:
DEADLINE:
 Make sure to upload the solution file before the due date on VULMS.
 Any submission made via email after the due date will not be accepted.
FORMATTING GUIDELINES:
 Use the font style “Times New Roman” or “Arial” and font size “12”.
 It is advised to compose your document in MS-Word format.
 You may also compose your assignment in Open Office format.
 Use black and blue font colors only.
RULES FOR MARKING
Please note that your assignment will not be graded or graded as Zero (0), if:
 It is submitted after the due date.
 The file you uploaded does not open or is corrupt.
 It is in any format other than MS-Word or Open Office; e.g. Excel, PowerPoint, PDF etc.
 It is cheated or copied from other students, internet, books, journals etc.

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Idea Solution :

Question: 1
a) Today, most of the people in our country acknowledge the importance of education in our lives. Therefore, Mr. Akram is also planning to provide the best education to his son. In this regard, he is planning to set aside a handsome amount for his son education. Suppose the university fee of his son after 10 years will be Rs.200, 000. His bank is offering him 12% interest rate compounded annually. How much amount he has to deposit in his bank account today in order to get Rs.200, 000 from his bank after 10 years? Solution:
Present value =FV/ (1+i) ^n
Hence: FV= future value=2, 00,000 I =interest rate =12% n= number of years
= Future value / (1+interest) ^Number of Years = By putting the values in the PV formula: =2, 00,000 / (1+12%) ^10Year =2, 00,000/ (1.12) ^10Years =2, 00,000/3.105848
Ans: Present Value = 64394.65
B) Suppose you have some extra funds with you and you want to make investment in bonds with those funds. Currently a 6% coupon bond with face value of Rs.1, 000 is selling at Rs.850. If you want to keep that bond till its maturity (which is one year), then what will be the yield to maturity of this bond? Solution:
Face value= Rs1, 000/- Selling price =Rs850/- Coupon bond =6% Maturity date= 1 year
Hence:
1000-850=150 150/1year=150 150+60=210 1000-150=850 210/850x100 Ans= Yields to maturity=24.7%
Question No. 2: a) Define GDP deflator and explain how it differs from CPI (Consumer Price Index) although both are used to measure inflation rate in an economy?
Solution: These are the differences between the CPI and the GDP Deflator:
s. no GDP Deflator CPI (Consumer Price Index)
1 It measures or reflects the prices of all the
goods and the services which are produced
within the countries.
It measures or reflects the price of all the goods
and the Services which are purchased by the
consumers.
2 It includes only domestic goods. It includes anything bought by consumers including
foreign goods.
B) Suppose you are given the responsibility to calculate the inflation rate prevailing in an economy. You,
along with your team members, collect the following data related to that particular economy:
Solution:
Definition:
GDP deflator is call price implicit of GDP which measures of the prices of outputs in the based years. It also
reflects what happened on the overalls levels of the prices in economy.
S. NO YEAR NOMINAL GDP REAL GDP GDP DEFLATOR= (Nominal
GDP / Real GDP) × 100
INFLATION RATE= {(CPI current
period – CPI preceding period) /
CPI preceding period
)}X100
1 2009 48300 46200 104.58 N.A
2 2010 54400 51000 106.70 2.08
3 2011 59300 53000 (111.8 4.9
Extra calculation:
2009
GDP Deflator = (Nominal GDP / Real GDP) × 100
= (4830 / 46200) x100
= (104545) x100
GDP Deflator 09 = 104.54
2010
GDP Deflator = (5440/51000) x 100
= (106666) x100
GDP Deflator 10 = 106.67
2011 GDP Deflator = (59300/53000) x100 = (11188679) x100 GDP Deflator 11 =111.9 Inflation rate: Formula: Inflation rate = {(CPI current period – CPI preceding period) / CPI preceding period} X100
2009 = inflation rate = n.a
2010= inflation rate = (106.67-104.54)/104.54)x100= 2.0375
2011= inflation rate= (111.89-106.67)/106.67) x100 =4.9