SEMESTER SPRING 2013

MONEY & BANKING (MGT411)

ASSIGNMENT NO. 01

DUE DATE: MAY 06, 2013

MARKS: 20

 

ASSIGNMENT:

Learning Objectives:

• The first question will enable the students to understand two different methods, to measure inflation rate from consumer perspective as well as the producer prospective.

• The second question will enable the students to understand and implement the concept of Time Value of Money from individual’s financial planning perspective.

CASE:

Inflation is a concept that always remains the key issue in every era of human kind. It is a situation where the prices of the commodities go high and high. It is very important for both the economists and the financial wizards for multiple reasons. Economists remain concerned about it for the reason that they need to consider the prices of all the commodities and the situation of market for all the masses and organizations. Financial managers also remain concerned about it for the reason as their utmost concern is to manage and balance their records of financial transactions. It is due to inflation that the prices of commodities vary from time to time and the quantity of money necessary to purchase a product one day may not be enough to buy the same quantity some other day. Therefore organizations need to frugally play their cards so that they may invest money and their investment and calculations may help them in the long run as well.

								Prices			Prices			Prices
	Sr.no.		Basket		Kg			(2010)			(2011)			(2012)
	1		Wheat			2			50			52	55
	2		Wheat flour			2			60			58	65
	3		Rice basmti broken			2			90			85	95

	4		Rice irri‐6	2		70			65			75
	5		Masur pulse washed	1		120			125			125
	6		Moong pulse washed	1		140			140			145
	7		Mash pulse washed	1		170			170			175
	8		Gram pulse washed	1		70			70			70
	9		Beef	1		210			215			210
	10		Mutton	1		380			385			390
	Other Figures							2010 Rs			2011 Rs			2012 Rs
	Includes:							(bn.)			(bn.)			(bn.)
	11		Nominal GDP			180			215			245
	12		Real GDP			165			195			220

Question 1

After analyzing the above tables, you are required to calculate the inflation rate of year 2012(from consumption and production prospective), considering the “preceding year” as base year. (10 marks)


Question 2

a. 20 years ago, your father invested an amount at 5% interest. Now he gave you received amount Rs. 8, 00,000. You are planning to purchase your Dream House after 15 years.

• Today, you invest the amount at 15 %, given to you by your father.

• 2 years back you won a lottery of Rs. 2, 00, 000 which you had invested immediately at 10% interest for your Dream.

You will be able to purchase your Dream house with receiving of the two investments and make your dream comes true exactly according to your planning.

Calculate the amount which was invested by your father? What is the cost of your Dream House? (5 marks)

b. Today, your brother invested the amount of Rs. 10, 000 at 9 % interest for 10 years. You are interested to have the same amount as your brother at the end of 10 years, but you have only one option of 7.5 % interest. How much more money, you will need to invest to get the same amount at the end of 10 years like your brother. (5 marks)

IMPORTANT:

24 hours extra / grace period after the due date is usually available to overcome uploading 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.

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.

REFERENCING GUIDELINES:

• Use APA style for referencing and citation. For guidance search “APA reference style” in Google and read various websites containing information for better understanding or visit http://linguistics.byu.edu/faculty/henrichsenl/apa/APA01.html

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.

Note related to load shedding: Please be proactive

Dear students!

As you know that Pre Mid‐Term semester activities have started and load shedding problem is also prevailing in our country. Keeping in view the fact, you all are advised to post your activities as early as possible without waiting for the due date. For your convenience; activity schedule has already been uploaded on VULMS for the current semester, therefore no excuse will be entertained after due date of assignments, quizzes or GDBs.

IDEA Solution

Cost of Basket in 2012

 

=          Wheat + Wheat Flour + Rice Basmati broken + Rice Irri-6 + Masur Pulse Washed + Moong Pulse Washed + Mash Pulse Washed + Gram pulse washed + Beef + Mutton

 

=          55+65+95+75+125+145+175+70+210+390

=          1405Rs

 

Cost of Basket in 2011

 

=          52+58+85+65+125+140+170+70+215+385

=          1365RS

 

Inflation Rate Consumption Prospective

 

Inflation Rate                =          1405/1365*100

      =          3%

Inflation Rate Production Prospective

 

GDP Deflator               =          245/220*100

      =          111.36

So Inflation Rate           =          11.36%

 

Q No 02:-

 

Answer:-

 

a)

To find the amount this was invested by my father

 

F.V                                      =              800000

Interest Rate                         =              5%

Time period                          =              20 years

 

So the present value              =              ?

 

As we know that

 

FV                                       =              PV (1+i) ^ n

8000000                              =              PV (1+0.05) ^ 20

PV                                       =              800000 / (1.05) ^ 20

              =              80000/2.653

              =              301545.42Rs

 

My Father invested 301545.42 Rs before 20 years and got 800000Rs now.

 

Total Cost of Dream House

 

= 800000Rs investment @15% at for 15 years + 200000Rs investment @ 10% for 17 years

 

i.          FV n    =          PV (1+i) ^ n

=          800000(1.15) ^15

=          6509600Rs

ii.          FV n    =          PV (1+i) ^ n

=          200000(1.1) ^17

=          1010800Rs

Total Cost        =          6509600 + 1010800

=          7520400Rs

 

b)

If my brother invests 10,000Rs for 10 years @ 9 % then

 

Future Value     =          PV(1+i)^n

=          10,000(1.09)^10

=          23,670Rs

 

I want to have same amount so

FV       =          23670RS

n          =          10

i           =          7.5%

PV       =          ?

 

FV       =          PV(1+i)^n

23670  =          PV(1.075)^10

PV       =          23670/(1.075)^10

=          23670/2.061

=          11485Rs

So I will invest

 

11485-10000   =          1485 Rs