Loan Amortization
Practice Questions (Time Value of Money)
Introduction-Fundamentals of Risk & Return
Definitions-Risk & Return
Calculation of Expected return
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Here, the interest portion of the installment is gradually decreasing over the term and the ending
balance of the principal at the 4th year is zero.
Example: You have borrowed a personnel loan of Rs 80,000 from Sampath bank. The loan
requires 8% interest and 4 end of year payments. Prepare a loan amortization schedule.
(15.2 Finance end exam-05 marks)
Practice questions
1) Peris Company (Pvt) Ltd contemplates (consider/think) buying a property three years
from today which will cost them Rs. 1,200,000/=. They wish to set aside a sum of money
today. Money used to finance this purchase will be placed in a savings account paying
interest at a rate of 8% per annum. How much should they save money today?
2) Suppose you have an opportunity to invest in a financial asset that will pay Rs. 250/= at
the end of every year for the next 10 years. You expect a return of 15% compounded
annually. What is the maximum value that you are prepared to pay to obtain the financial
asset today?
3) Niranga invested Rs. 8,000/= savings account at Peoples Bank last year at a
compounding interest rate of 12% per annum. She wishes to withdraw money next year
including the interest accrued and planning to invest the whole withdrawal in Sampath
Bank which gives 12% per annum. If Sampath Bank is going to pay interest quarterly,
what would be the total withdrawal after 5 years from today?
4) Ravi is a marketing manager who has a saving of Rs. 500,000/= today. He had saved Rs.
50,000/= each, every year, for the last 10 years from his job. However he has kept this
money with him rather than investing it. Taniya showed him that he had lost the value of
money due to the opportunity cost involved in retaining that money rather than investing
it. If the annual interest rate was 14%, determine the loss he experience today by holding
the money in liquid form.
5) Sapumal has purchased a property for Rs. 2,000,000. A down payment of Rs. 1,500,000
is paid at the beginning of the mortgage and the balance is to be repaid over 5 years at a
20% per annum interest rate.
a. What will be the periodic payment on this mortgage if the installments are to be
made every semi annum?
b. Determine the future value of total payment to acquire the property at the 5th year.
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03.Fundamentals of Risk and Return I
01. Introduction
In this chapter we are going to discuss about two key factors in finance, i.e., Risk and Return. It
is well known that greater returns are exposed to greater risks. In the current market there are
different types of investments that the investor can invest in, depending on their risk appetite or
tolerance level. If the same concept is put in other words, investors would willing to take more
risk only that is compensated with high returns –a safe rupee is worth more than a risky rupee! It
implies that the investor will expose himself to a higher risk only if he gets additional rupee
(return) than he would get through a safe investment.
Defining Return
Return can be understood as the total gain (or loss) experienced by an investor from investing in
an asset in a given period of time.
Rate of Return
When an investor purchases a security he can earn returns in 2 ways. i.e., interest or dividend
income and capital gain or loss. e.g. If you purchased in a share for Rs. 150/= at the beginning of
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2013. By the end of the year the value of the share has appreciated foe Rs. 160/=. Also, during
the period the company paid a dividend of Rs. Rs. 20/= per share. The rate of return of the
security can be calculated as follows;
Rate of Return = Capital Gain + Dividend = Rate of Capital Gain + Rate of interest/ dividend
Initial Share Price
Example 01
You have purchased Hemas PLC shares when stood at Rs.100/= per share 1 year ago. The stock
is currently trading at Rs. 95/= per share. Assume you have just received a Rs. 10/= dividend.
What was the return earned over the past year?
E(R) = ∑ Pi . Ri
𝑖=0
Key: E(R) = the expected return on the stock; n = the number of conditions; Pi = the probability
of condition i; Ri = the return on the stock in state i
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