J B GUPTA CLASSES

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Copyright: Dr JB Gupta

APPENDIX A

MATHEMATICS OF FINANCE
Logarithms

Logarithms are of great use in calculations. They simplify typical calculations.

With the help of Logarithms, we can make such calculations which other wise are
difficult to make. Logarithms are of two types (i) simple Logarithms
(mathematically called as log base to 10) (ii) natural log (mathematically called as
natural log). In this note we shall be studying simple logarithms.

The logarithm of a number consists of two parts – characteristic and mantissa.

Characteristic is determined without any table. Mantissa is determined using log
tables.

Finding characteristic of a number 1 or greater than 1: In this case characteristic

is equal to “number of digits before decimal” minus “one”.
Number 7 56 567 5678 56432 5670.23 167.89
Characteristic 0 1 2 3 4 3 2

Finding characteristic of a number less than one : In this case characteristic is

negative. Negative sign is written in the form of bar. For example -1 is written
as 1 , -2 is written as 2 , -3 is written as 3 . Write the number (of which
characteristic is to be determined) in proper decimal form. In this case
characteristic is number of zeros before and just after decimal.

Number .9 .08 .007 .0006 .00006 .00908 .002003

Number in proper 0.9 0.08 0.007 0.0006 0.00006 0.00908 0.002003
Decimal form
Characteristic ī -2 -3 -4 -5 -3 -3

Mantissa is determined using log tables. Mantissa is always positive. For

determining Mantissa decimal is ignored. Before finding Mantissa, the number (of
which mantissa is to be determined) should be reduced to four digits by
approximation.

Number 233 2655 456.8 0.89 0.00902

Characteristic 2 3 2 ī -3
 2

Mantissa .3674 .4240 .6598 .9494 .9552

Logarithms 2.3674 3.4240 2.6598 -0.0506 -2.0448

Antilog is determined using Antilog tables. The table is consulted only for
Mantissa part. Place of decimal is “characteristic plus one”. This place is counted
from left hand side.

Number 233 2655 456.8 0.89 0.00902

Log 2.3674 3.4240 2.6598 -1+.9494 -3+.9552

Antilog 233.0 2655 456.8 .8900 .009020

Q. No. 1: Find log of (i) 2 (ii) 56 (iii) 567 (iv) 5678 (v) 56.78 (vi) 0.543 (vii)
55556.67
Answer
(i) log 2 = 0.3010
(ii) log 56 = 1.7482
(iii) log 567 = 2.7536
(iv) log 5678 = 3.7542
(v) log 56.78 = 1.7542
(vi) log 0.543 = -1+.7348
(vii) log 55556.67 = 4.7448

Q. No. 2:2 Find Antilog of above log values.

Answer
(i) AL 0.3010 = 2.000
(ii) AL 1.7482 = 56.01
(iii) AL 2.7536 = 567.0
(iv) AL 3.7542 = 5678.00
(v) AL 1.7542 = 56.78
(vi) AL -1+.7348= .5430
(vii) AL 4.7448 = 55560.00

Finding the values of ex / e-x

Remember loge = 0.4343
Q. No. 3 : Find the values of e3 ; e1.40 ; e0.10 ; e0.005 ; e-3 ; e-1.60 ;
e-0.15 ; e-0.06 using the tables of these values.
Answer
(i) e3 = 20.0855 (ii) e1.40 = 4.0552
 3

(iii) e0.10 = 1.1052

(iv) e0.005 = ?
e0 = 1
e0.01 = 1.0101
For 0.01↑ in e’s power, RHS ↑ by 0.01005
For 1 ↑ in e’s power, RHS ↑ by 0.01005/0.01 i.e. 1.005
For .005 ↑ in e’s power, RHS↑ by 1.005 x .005 i.e..005025
e(0+0.005) = 1 +0.005025
e0.005 = 1.005025
(v) e-3 = 0.0498 (vi) e-1.60 = 0.2019
(vii) e-0.15 = 0.8607
(viii) e-0.06 = 0.9418
Q. No. 4 : Find the values of e3 ; e1.40 ; e0.10 ; e0.005 ; e-3 ; e-1.60 ; e-
0.15
; e-0.06 using the log tables .
Answer
(i) e3 = AL (log e3 ) = AL (3 X 0.4343) = AL (1.3029) = 20.08
1.40 1.40
(ii) e = AL (log e ) = AL (1.40 X 0.4343 ) = AL (0.6080) = 4.055
0.10 0.10
(iii) e = AL (log e ) = AL (0.10 X 0.4343 ) = AL (0.0434) = 1.105
0.005 0.005
(iv) e = AL (log e ) = AL (0.005x0.4343) =AL(0.0022) = 1.005
-3 -3
(v) e = AL (log e ) = AL ( -3x 0.4343) = AL(-1.3029) =
AL (-2 + 0.6971) = 0.04978
-1.60
(vi) e = AL (log e-1.60 ) = AL( -1.60X0.4343) = AL (-0.6949)
= AL( -1 + 0.3051) = 0.2018
-0.15
(vii) e = AL (log e-0.15 ) = AL(-0.15x0.4343) = AL(-0.0651)
= AL(-1 + 0.9349) = 0.8608
-0.06
(viii) e = AL(log e-0.06) = AL(-0.06X0.4343) = AL(-0.0261)
= AL(-1 + .9739) = 0.9417
Discounting
Finance managers generally take decisions on the basis of cash flows i.e. cash
coming in and cash going out because of the proposal under consideration. Cash
received or paid at different points of time has got different value because of
 4

existence of interest. To make these cash flows of different points of time

comparable, we find present value of future cash flows. (This process of finding
present value of future cash flows is known as discounting)
To find present value of future cash flows, we multiply future cash flows with
their relevant present value factors.
PVF 1 i.e. present value factor 1 i.e. present value of rupee one to be received
1
 1
or paid after 1 period =  
1+r
2
 1 
Similarly, PVF 2 =  
1 + r
3
 1 
PVF 3 =   And so on…
1 + r

Suppose, rate of interest is 10% per period:

PVF 1 i.e. present value of rupee one to be received or paid after one period
1
 1 
=   i.e. 0.909
 1.10 
PVF 2 i.e. present value of rupee one to be received or paid after two
2
 1 
periods =   i.e. 0.826
 1.10 
PVF 3 i.e. present value of rupee one to be received or paid after 3 periods
3
 1 
=   i.e. 0.751
 1.10 
Suppose for doing a job today, a professional will receive Rs.10,000 after one
year from today, Rs.20,000 after two years from today and Rs.30,000 after three
years from today Assuming that rate of interest is 20%, find the present value of
what he receives.
In this case rate of interest is annual, the ‘period’ is year. Hence,
1
 1 
present value factors are as follows: PVF 1 =   =0.833
 1.20 
2
 1 
PVF 2 =   =0.694
 1.20 
3
 1 
PVF 3 =   =0.579
 1.20 
 5

Hence, the present value of what he receives is equal to [(10,000x0.833)

+(20,000x0.694)+(30,000x0.579)] i.e. Rs.39,580.
If cash flow is equal amount year after year, to find present value we multiply
that equal amount of cash flow with annuity which is sum of present value
factors. For example, if in the case mentioned in the above paragraph, he was to
receive Rs.20,000 annually for three years (i.e. at the end of each year), the
present value is Rs. 20,000 x (0.833+0.694+ 0.579)= 42,120.
If interest is compounded half yearly, the rate of interest should be taken for half
year and the period should be taken in terms of number of half-year(s). For
example, if rate of interest is 20% p.a. compounded half yearly, find (i) present
value of rupee one to be received after two years (ii) present value of rupee one
to be received after four years and (iii) present value of rupee one to be received
after six years.
4
 1 
Answer (i)   =0.683
 1.10 
8
 1 
(ii)   =0.467
 1.10 
12
 1 
(iii)   =0.319
 1.10 
Suppose, a person is to receive Rs20,000 after two years from today, Rs.20,000
after four years from today and Rs.20,000 after six years from today. Find the
present value of what he receives if rate of interest is 20% p.a. compounded half
yearly. The answer is Rs. 20,000 x (0.683+0.467+ 0.319) i.e. Rs 29, 380.

If interest is compounded quarterly, the rate of interest should be taken for a

quarter, and the period should be taken in terms of number of quarter(s).
Similarly, if interest is compounded monthly, the rate of interest should be taken
for a month, and the period should be taken in terms of number of month(s)

Q. No. 5: Rate of interest 20% p.a. A person is to receive Rs.1,00,000 after one
year from today. What is the present value of what he receives if interest is
compounded annually? What if half yearly? What if quarterly?

Answer
1
 1 
If annually, it is 1,00,000 x   =83,300
 1.20 
2
 1 
If half yearly, it is 1,00,000 x   =82,600
 1.10 
 6

4
 1 
If quarterly, it is 1,00,000 x   =82,300
 1.05 

For “Options and Futures” it is assumed that interest is compounded

continuously.( Why this assumption? This question will be answered while
discussing the topic of Options and Futures)

The year is assumed to be divided into infinite small parts and it is also assumed
that interest compounds after each such small part of the year. (foot note 1) 1

In this case, the rate of interest for each such small period will be r/∞ (footnote
2)2 and the number of periods will be ∞.
Hence, the present value factor will be equal to:
1
PVF = ————————
[(1) + (r / ∞)]∞
-rt
The mathematicians have provided its solution as equal to e .
Where r is annual interest rate; t=part /number of year(s).(For example if cash is
to be received or paid after six months, t = 0.50;if after 3 months, t = 0.25; if
after 1year, t= 1 ; if after 2years, t= 2)

Q. No. 6:
6: Find the present value of Rs.1,00,000 to be received after 1 year if rate
of interest is 20% p.a. continuously compounding.

Answer
To find this value, we have to find the value of e-0.20x1
= Antilog(-0.20.log e ) =A.L.(-.20x.4343) =A.L.(-.08686)
( )
=A.L. 1 .91314 = 0.8187. (Footnote 3 )
3

Hence, present value = Rs.1,00,000(.8187) i.e. Rs.81870.

Q. No. 7:
7 A person is to receive Rs.1,00,000 after six months.
Find the present value of what he receives in interest rate is 20% p.a. c.c.

1
In case of half yearly compounding, the year is divided into two parts; in case of
quarterly compounding the year is divided into four parts; in case of monthly
compounding the year is divided into 12 parts; in this case i.e. continuously
compounding it is assumed that the year is divided into infinite small parts
2
In case of half yearly compounding, r is taken as annual interest/2, in case of
quarterly compounding it is taken as annual interest/4, in case of monthly
compounding it is taken as annual interest rate /12; in this case i.e. continuously
compounding, it is taken as annual interest/∞
3 -x
Alternatively, we can find this value in the table of values for e .
 7

-.20 x .5
Answer PV = 1,00,000.e = 90,480

Compounding
Compounding is the process of obtaining the amount to which today’s rupee will
grow in future for the given rate of interest. We can understand compounding
with the help of Q.No.8.

Q. No. 8 : A person invests Rs.1,00,000 for one year at interest rate of 20% p.a..
What amount he will receive after one year if interest is compounded
(a) annually (b) half yearly (c) quarterly and (d) continuously .(ignore tax)

Answer
1
(a) = 1,00,000(1.20) =1,20,000
2
(b) = 1,00,000(1.10) =1,21,000
4
(c) = 1,00,000(1.05) =1,21,551
20 x 1
(d) = 1,00,000.e. =1,22,140

Q. No. 9 : A finance company accepts deposits for any period of choice of the
depositor. Rate of interest is 10% p.a. compounded half yearly. What total amount
(principal and interest) a person will receive after 3 months if he has deposited
Rs 2,00,000 for three months? (ignore TDS)
Answer
Amount to be received after 3 months = 2,00,000(1.05)(1/2) = 2,04,939
Alternative solution :
Let interest rate per rupee for 3 months = x
1(1+x)(1+x) = 1.05
x =0.024695
Amount to be received = 2,00,000(1.024695) = 2,04,939

Q. No. 10: Under VARISTHA BIMA YOJANA, interest is 9% p.a. compounded or

payable monthly. An investor wants that he should get Rs.24,000 p.a. as interest
( payable at the end of each year ). What amount of investment is required? How
your answer change if he wants Rs.12,000 per half year , as interest , ( payable
at the end of each half year)? What should be the investment, if he wants Rs
6,000 per quarter, as interest, (payable at the end of each quarter)? Ignore tax.
Answer
(a) Interest requirement is annual:
Let amount of investment required be Rs X.
X(1+.0075)12 = X+24,000
X =2,55,864

(b) Interest requirement is half-yearly:

Let amount of investment required be Rs. X.
X(1.0075)6 = X+12,000
 8

X = 2,61,713
(c) Interest requirement is quarterly
Let the amount of investment required be X:
X(1.0075)3 = X + 6,000
X = 2,64,678
Q. No. 11: Find the total amount (principal + interest) to be received on maturity
in each of the following cases:
Amt. of Invest. Period Interest rate
(a) 1,000 1 year 10% p.a.
(b) 1,000 1 year 10% p.a. annually compounded
(c) 1,000 2 years 10% p.a.
(d) 1,000 2 years 10% p.a. annually compounded
(e) 1,000 6 months 21%p.a.
(f) 1,000 6 months 21% p.a. annually compounded
(g) 1,000 2 ½ years 10%p.a.
(h) 1,000 2 ½ years 10% p.a. annually compounded
(i) 1,000 3 months 10% p.a. annually compounded

Answer
(a) 1,100 (b) 1,100 (c) 1,000 +100 +110 =1,210

(d) 1,000+100+110 =1,210

(e) 1,000 +105 = 1,105

(f) let interest rate per rupee for 6 months = x

100(1+x)(1+x) = 121
100(1+x)2 =121
x= 0.10
Hence, total amount on maturity = 1,000 +100 =1,100
Alternative solution :
Amount to be received after 6 months = 1,000(1+.21)(1/2) = 1,00

(g) 1,000 +100 +110 + 60.50 = 1,270.50

(h) let interest rate per rupee for 6 months = x

100(1+x)(1+x) =110
2
100(1+x) = 110 x =0.048809
Amount to be received on maturity = 1,000 +100+110 + (.048809)(1210)
= 1,269.06
Alternative solution :
(2.50)
Amount to be received on maturity = 1,000(1.10)
(2) (0.50)
= 1,000[(1.10) (1.10) ] = 1,269.06
 9

(i) let interest rate per rupee for 3 months = x

100(1+x)(1+x)(1+x)(1+x) =110
4
100(1+x) =110
x = 0.024114
Hence total amount to be received on maturity = 1,000 +24.11 = 1,024.11
Alternative solution :
(0.25)
Amount to be received on maturity = 1,000(1.10) = 1,024.11

Q. No. 12 A finance company accepts deposits for any period of choice of the
depositor. Rate of interest is 12% p.a. What total amount (principal and interest)
a person will receive after 13 months if he has deposited Rs 2,00,000 for 13
months?

Answer
100 + 12 + 1.12 = 113.12

Q. No. 13 An investor deposits Rs.5,000 to get Rs.5,400 at the end of 1 year.

Find the % return per annum if it is expressed as (a) Annual compounding (b)Half-
yearly compounding (c) Quarterly compounding (d) monthly compounding (v) cc.
Answer
Answe
(i) Let annual compounding interest rate = r
5000(1+r) = 5400
1+r = 1.08
r = 0.08 = 8%.
Return is 8% p.a. annually compounding.
(ii) Let half-yearly compounding interest rate = r
5000(1+r)2 = 5400
1+r = 1.0392
r = 0.0392 = 3.92%.
Return is 7.84 % p.a. half-yearly compounding.
(iii) Let quarterly compounding interest rate = r
5000(1+r)4 = 5400
1+r = 1.0194265
r = 0.0194265 = 1.94265%.
Return is 7.7706 % p.a. quarterly compounding.
(iv) Let monthly compounding interest rate = r
5000(1+r)12 = 5400
(1+r)12 = 1.08
12log(1+r) = log 1.08
12log(1+r) = 0.0334
log(1+r) = 0.0028
 10

1+r = 1.007
r = 0.007 = 0.7%
Return is 8.40 % p.a. monthly compounding.

(v) Let cc rate = r

5000.er.1 = 5400
er.1 = 1.08
er = 1.08
r.loge = log 1.08
r( 0.4343) = 0.0334
r = 0.07690 = 7.69%. Return is 7.69% p.a. cc.

Q. No. 14 You deposit $ 1,00,000 with a financial institution for 5 years. The
agreed rate of interest on the deposit is 12% p.a. c.c. The interest is to be paid
monthly. What amount of interest you will receive at the end of each month?

Answer
Answe
Interest at the end of each month = 100000.e0.01 - 100000 = 1010

Q. No. 15: An investor invested Rs.100 for 2 months. Find the amount he will get
on maturity assuming (i) interest is 12 p.a. (ii) 12% p.a. monthly compounded (iii)
12 % p.a. annually compounded.
Answer
(i) 102
(ii) 100 + 1 +1.01 = 102.01
(iii) Let monthly compounded interest ( per rupee ) = x
1(1+x)12 = 1.12
12
(1+x) = 1.12
12.log(1+x) = log 1.12
log (1+x) = (log 1.12)/12 =(0.0492) / 12 = 0.0041
1+x = AL(.0041) = 1.009
x =0.009
Amt. to be received on maturity =100+0.90+(100.90)(0.009)=101.81

EQUALIZING
It is process of converting zero period cash flow to a number of equal amounts.
For this period, the zero period cash flow (i.e. present value of cash flow) is
divided by sum of relevant present value factors. We shall be understanding this
concept with he help of a few questions.

Q. No. 16:
(a) Borrowed Rs. 1,00,000 at interest of 10% p.a. on 1.1.2004. Repayable in five
equal annual installments with interest. The first installment to be paid on
31.12.2004. Find the amount of each installment.
 11

Answer :
Date Amount of installment (Rs.)
31.12.2004 20,000 (Principal) +10,000 (interest) = 30,000
31.12.2005 20,000 (Principal) + 8,000 (interest) = 28,000
31.12.2006 20,000 (Principal) + 6,000 (interest) = 26,000
31.12.2007 20,000 (Principal) + 4,000 (interest) = 24,000
31.12.2008 20,000 (Principal) + 2,000 (interest) = 22,000

(b) Borrowed Rs. 1,00,000 at interest of 10% p.a. on 1.1.2004. Repayable in five
equal annual installments including interest. The first installment to be paid on
31.12.2004. Find the amount of each installment. Also find the amount of interest
included in each installment.

Answer : 1,00,000
Amount of each installment = -------------- = 26,378
3.791
Amount due Payment towards Payment towards
Principal Interest
1.1.2004 1,00,000
31.12.2004 -16,378 16,378 10,000
1.1.2005 83,622
31.12.2005 -18,016 18,016 8,362
1.1.2006 65,606
31.12.2006 -19,817 19,817 6,561
1.1.2007 45,789
31.12.2008 -21,799 21,799 4,579
1.1.2008 23,990
31.12.2008 -23990 23,990 2,388 (Bal. fig.)
1.1.2008 nil
(c) Borrowed Rs. 1,00,000 at interest of 10% p.a. on 1.1.2004. Repayable in five
equal annual payments including interest. The first payment to be made on
1.1.2004 itself. Find the amount of each payment. Also find the amount of
interest included in each payment.
Answer :
1,00,000
Amount of each payment = ----------- = 23,981
1 +3.17

Amount due Payment towards Payment towards

Principal Interest
1.1.2004 Bal. 1,00,000
1.1.2004 Payment -23,981 23,981 Nil
1.1.2004 Bal. 76,019
 12

1.1.2005 Payment -16,379 16,379 7,602

1.1.2005 Bal. 59,640
1.1.2006 Payment -18,017 18,017 5,964
1.1.2006 Bal. 41,623
1.1.2007 Payment -19,819 19,819 4,162
1.1.2007 Bal. 21,804
1.1.2008 Payment -21,804 21,804 2,177
1.1.2008 Balance nil

Q. No. 17 : X Ltd. acquires a machine on lease for a period of five years, cost of
the machine Rs.5,00,000, life 5 years, scrap value after 5 years nil. The lessor
expects a 10% (Pre-tax) return. What should be the lease rental if (i) lease rental
is equal annual amount payable in the beginning of each year (ii) lease rental is
equal annual amount payable at the end of each year (iii) lease rental is to be
paid in four equal amounts, first amount at the end of second year, next at the
end of third year, next at the end of fourth year and finally at the end of fifth
year (iv) Rs.1,00,000 to paid at the end of 3rd year and balance to be paid by way
of two equal installments one at the end of 4th year and other at the end of 5th
year.
Answer (i)
5,00,000
Annual lease rent = --------- = 1,19,904
1+3.17
Answer (ii)
5,00,000
Annual lease rent = --------- = 1,31,891
3.791

Answer (iii)
5,00,000
Annual lease rent = ---------------------------- = 1,73,551
0.826 + 0.751 + 0.683 + 0.621

Answer (iv) :
Net amount due at the end of 3rd year = 6,65,500-1,00,000 = 5,65,500

Amount of 2 equal annual installments :

5,65,500
= -------------- = 3,25,937
0.909 + 0.826
(Rs.3,25,937 to paid at the end of each of 4th year and 5th year of the lease)
 13

Alternative solution :
Net amount due at the end of 3rd year = 6,65,500-1,00,000 = 5,65,500
Present value of this amount = 5,65,500 x 0.751 = 4,24,691

Amount of 2 equal annual installments :

4,24,691
= -------------- = 3,25,683
0.683 + 0.621
(Rs.3,25,683 to paid at the end of each of 4th year and 5th year of the lease)
{Note
Note : The difference in the two answers is due to calculation approximations.
The difference can be eliminated or reduced by increasing the number of decimal
places of present value factors}

Q. No. 18 : Borrowed Rs.1,00,000. Repayable in six equal monthly installments

(including interest), first installment to be paid at the end of I month, second
installment at the end of II month and so on. Find the amount of each installment
assuming (i) interest is 12 p.a. (ii) 12% p.a. monthly compounded.

Answer (i) Amount of each installment :

1,00,000
= ------------------------------------ = 17,244.35
[1/(1.01)]+[1/(1.02)]+……+[1/(1.06)]
Answer (ii) Amount of each installment :
1,00,000
= ------------------------------------ = 17,256.26
[1/(1.01)1]+[1/(1.01)2]+……+[1/(1.01)6]
Q.No.19(a) A person borrowed Rs.1,00,000 on 1st January 2007. Interest rate
Q.No.19(a)
12% p.a. monthly compounded. He has to repay this amount in 60 monthly equal
installments including interest. Find the amount of each installment.
(b) How your answer will change if the number of installments is 180 instead of
60?
Answer(a)
Annuity for 60 months at 12% p.a. monthly compounded =
[{1/(1.01)1}………..+{1/(1.01)20}]
+ [{1/(1.01)21}+ ………..+{1/(1.01)40}]
+ [{1/(1.01)41}+ ………..+{1/(1.01)60}]

=[{1/(1.01)1}+ ………..+{1/(1.01)20}]
+ {1/(1.01)20} [{1/(1.01)1}+ .………..+{1/(1.01)20}]
+ {1/(1.01)40} [{1/(1.01)1}+ ………..+{1/(1.01)20}]

= 18.046 + .820 [18.046] + (.820)2 [18.046] = 44.9778504

AMOUNT OF INSTALLMENT = 1,00,000/44.9778504 = 2223.32

Answer (b)
 14

Annuity for 180 months at 12% p.a. monthly compounded =

[{1/(1.01)1}+ ...........+{1/(1.01)60}] + +[{1/(1.01)61}+ ...........+{1/(1.01)120}]
+ [{1/(1.01) }+ ...........+{1/(1.01)180}]
120

=[{1/(1.01)1}+ ...........+{1/(1.01)60}]
+ [1/(1.01)60]x[{1/(1.01)1}+ ...........+{1/(1.01)60}]
+ [1/(1.01)120]x [{1/(1.01)1}+ ...........+{1/(1.01)60}]

= 44.9778504 + (0.820)3 {44.9778504} + (0.820)6{44.9778504}

= 44.9778504 + 0.551368 {44.9778504} + 0.30400667142{44.9778504}

=83.4507644067

AMOUNT OF INSTALLMENT = 1,00,000 / 83.4507644067 = Rs.1198.31

Q. No. 20:
20 Mansukha borrows Rs. 1,00,000 from rural money lender. Interest rate
24% p.a. annually compounded. The loan is to be repaid in 24 monthly
installments including installments, the first installment being paid at the end of
1st month. Find the equated monthly installment (EMA.)
Answer : As we have to pay monthly installment, we have to calculate the
monthly compounded interest rate.
Let monthly compounded interest rate for rupee one = x
(1+x)(1+x)(1+x)(1+x)(1+x)(1+x) (1+x)(1+x)(1+x) (1+x)(1+x)(1+x)
= 1.24
12
(1+x) = 1.24
log(1+x)12= log1.24
12.log(1+x) = 0.0934
log(1+x) = 0.0078 Taking antilog on both the sides,
1+x = = 1.018 x = 0.018 = 1.80%
1,00,000 1,00,000
EMI = ___________________________________________ =---------- = 5168
1 1 19.35
------ + …………………………+-----
(1.018)1 (1.018)24

Q. No. 21: Murali has been contributing Rs15,000 per year to each of the
following two schemes of a Mutual fund for getting post retirement annuity ; (i)
Debt fund (ii) Equity Fund. The current value of each of the two investments Rs.
1m. She plans to retire after 25 years from today and her life expectancy is 15
years after the retirement. The debt fund is expected to earn 3% p.a. while the
expected return on the equity fund is 6% p.a. What shall be her retirement
annuity? She is planning to increase her annual contribution to the debt fund so
that she may get a total annuity, from both the funds, of Rs. 8,00,000. Calculate
the increase in the annual contribution.
 15

Answer Present value of funds accumulated after 25 years ( debt fund)

15000[(1.03)25+(1.03)24+……………+(1.03)1 ]
10,00,000+ ------------------------------------
[(1.03)25

1 1 1
10,00,000+ 15,000 [ 1 + ----- + -------+ …………+------]
(1.03)1 (1.03)2 (1.03)24

10,00,000 + 15000[ 1 + 16.9355] = 12,69,033

12,69,033
Annuity = -------------------------------
1 1
------ + …………………………+-----
(1.03)25 (1.03)39

12,69,033
Annuity = -------------------------------------------
1 1 1
--------- x[------ + ……………………+-----]
(1.03) 24 (1.03)1 (1.03)15

12,69,033
Annuity = ----------------------------- = 2,16,107
(0.4919)(1.9379)

Present value of funds accumulated after 25 years ( equity fund)

1 1 1
10,00,000+ 15,000 [ 1 + ----- + -------+ …………+------]
(1.06)1 (1.06)2 (1.06)24

10,00,000 + 15000[ 1 + 12.5504] = 11,88,256

11,88,256
Annuity = -------------------------------------------
1 1 1
--------- x[------ + ……………………+-----]
(1.06) 24 (1.06)1 (1.06)15

11,88,256
 16

Annuity = ----------------------------- = 495334

(0.2470)(9.7122)

Total annuity from existing fund 2,16,107 + 4.95,334 = 7,11,441

Target annuity 8,00,000
Short fall 88559

Let she invests Rs.x annually for 25 years in debt fund to get the annuity of
Rs.88,559.

88559 = x(17.9355) / 5.87225 = 28,995

Murali should invest Rs. 28,995 annually for 25 years, in debt fund, to get the
additional amount of annuity. If this action is taken, she will get the annuity of Rs.
8,00,000 for 15 years after her retirement.

Normal distribution
It is a statistical method of finding the probability. We use it when we are given
or we can calculate mean and standard deviation. Under this approach,
probability is equal to area under Normal curve.

The following three statements about Normal distribution are referred as

empirical rule :
(1) About 68% of the values described by a normal curve are within ± one
standard deviation of the mean.
(2) About 95% of the values described by a normal curve are within ±two
Standard deviations of the mean.
(3) About 99.7% of the values described by a normal curve are within three
Standard deviations of the mean.

Area under Normal curve is calculated with the help of z .

X - mean
z = ------------
SD

For this purpose, we consult the table “ Areas under Normal curve” ( also
referred as Areas under standard normal distribution)

Remember :
Table gives us area from z=0 to a particular value of z.

Q. No. 22
22(a) Find the area for z = 1.26 Answer : 0.3962
(b) Find the area for z = -1.26 Answer : 0.3962
(c) Find the area to the right of z = 1.50
 17

Answer : 0.50 – 0.4332 = 0.0668

(d) Find the area to the left of z = 1.50
Answer : 0.50 + 0.4332= 0.9333
(e) Find the area to the left of z = -1.57
Answer : 0.50 -0.4418 = 0.0582
(f) Find the area between z = -1 to z = +1
Answer : 0.3413 + 0.3413 = 0.6826

Q. No. 23 Mean marks of 100 students =60, SD =5, Find p of a randomly selected
student securing above 70.
Answer
70 - 60
z = ----------- = 2
5
p = 0.50 -0.4772 = 0.0228

X
40 45 50 55 60 65 70 75 80

-3 -2 -1 0 1 2 3 Z

Q. No. 24 Mean height of 50 soldiers = 170 cms., s.d. =10. Find the p of a
randomly selected soldier being less than 160.

Answer
160 - 170
z = ----------- = -1
10
 18

p = 0.50 – 0.3413 = 0.1587

Q. No. 25:
25 A family uses a gas cylinder on an average for 40 days, s.d.10. Find
the p that the cylinder purchased today will be used for 30 to 50 days.

Answer
For 30 days use :
30 - 40
z = ----------- = -1
10
For 50 days use :
50 - 40
z = ----------- = +1
10
p = 0.3413 + 0.3413 = 0.6826

(Extra practice questions are given at the end of the chapter)

Geometric mean
GM is the most suitable mean to find the rate of change over a period of time.
GM of a and b = (a x b)1/2

GM of a, b and c = (a x b x c)1/3

GM of a , b, c and d = (a x b x c x d)1/4

Finding the average rate of change over a period of time is being explained with
the help of following examples:

(a) Find the average rate of change in price level over a period of 3 years if
prices increased by 10% in the I year, 20% in the II year and 30% in the III year.

(b) A company paid the following equity dividend per share :

Year Dividend per share (Rs.)

20X1 2.00
20X2 2.50
20X3 3.00
20X4 3.30
20X5 3.60
 19

Find the rate of growth of dividend over 20X1 to 20X5.

Sum of Infinite Geometric Progression Series

Let the series be : a1 + a2 + a3 + a4 + a5+ ……… up to infinity

The series is referred as GP if (a2 /a1 ) = (a3 /a2 ) = (a4 /a3 ) and so on.

Sum of infinite GP = [(a) / (1-r)] Where a = first term

r = common ratio i.e. (a2 /a1 ) or (a3 /a2 ) or (a4 /a3 ).

Example : Find the sum of [( 1 ) / (1.10)1] +[( 1 ) / (1.10)2]+

[( 1 ) / (1.10)3] +[( 1 ) / (1.10)3] + ……… up to infinity.

[( 1 ) / (1.10)1]

Sum = ----------------- = 10

1- [(1) /(1.10)]

RULE OF 72

As per this rule, the time required to double the value of an investment is roughly
“72” / “interest rate in percent”.

(a) You invest Rs.1,00,000 at 12% p.a. annually compounded. Find the
approximate period in which the investment will double its value. ( Answer : 6
years)

(b) You invest Rs.1,00,000 at 10% p.a. half yearly compounded. Find the
approximate period in which the investment will double its value. ( Answer :
7.20 years)

(c) You invest Rs.1,00,000 at 8% p.a. quarterly compounded. Find the

approximate period in which the investment will double its value. ( Answer :
9 years)

(d) You invest Rs.1,00,000 at 6% p.a. monthly compounded. Find the approximate
period in which the investment will double its value. (Answer : 12 years

RULE OF 69
As per this rule, the time required to double the value of an investment is roughly
“69” / “interest rate in percent”, when the interest is continuously compounded.
 20

You invest Rs.1,00,000 at 12% p.a. continuously compounded. Find the

approximate period in which the investment will double its value. ( Answer: 5.75
years)

DIMINISHING BALANCE DEPRECIATION RATE

Where, Original cost (1-r)n = scrap value

r = Diminishing balance method depreciation rate, n = life of asset

Example: Original cost Rs. 1,00,000 . Life of the asset:10 years. Scrap value
after 10 years: Rs. 10,000. Find depreciation rate by (i) SLM (ii) WDV. State the
relationship between straight line rate and WDV rate.

SLM rate = 9 %
Calculation of WDV rate:
100000 (1-r)10 = 10,000
10
(1-r) = 0.10
10.log(1-r) = - 1
Log(1-r) = -0.10
Log (1-r) = -1 +0.90
(1-r) = 0.7943
r = 0.2057 = 20.57 %
Relationship between straight line rate and WDV rate: WDV depreciation rate is
generally between 2 to 3 times of straight line rate. (We can say that WDV rate
is about 2.50 times of straight line; in other words we can say that straight line
rate is about 40 % of diminishing rate).

EXTRA PRACTICE ( Must Do)

Q. No. 26:
26 If marks secured by the students in an exam are normally distributed
with a mean of 32 and a standard deviation of 4, what is the probability that a
student selected at random secures (a) greater than 35? (b) Greater than 40? (c)
Between 29 and 35?

Answer(a)
Answer(a)
35 - 32
z = ----------- = 0.75
4

p = 0.50 – 0.2734 = 0.2266

 21

X
16 20 24 28 32 36 40 44 48

-3 -2 -1 0 1 2 3 Z

Answer(b) 40 -32
z = ----------- = 2
4

p = 0.50 – 0.4772 = 0.0228

X
16 20 24 28 32 36 40 44 48

-3 -2 -1 0 1 2 3 Z

Answer(c) 35 - 32
z = ----------- = 0.75
4

29 - 32
 22

z = ----------- = -0.75
4
p = 0.2734 + 0.2734 = 0.5468

X
16 20 24 28 32 36 40 44 48

-3 -2 -1 0 1 2 3 Z

Q. No 27:
27: A study of sleeping hours of 100 BA Final students reveals average of 6
hours with SD of 1. What is the probability that a randomly selected student sleeps for
more than 8 hours?
Answer 8-6
z = ----------- = 2
1
p = 0.5000 – 0.4772 = 0.0228

X
2 3 4 5 6 7 8 9 10

-3 -2 -1 0 1 2 3 Z

Q. No. 28 You know that the weight of 700 people chosen at random follows a normal
distribution with a mean of 80 Kg and a standard deviation of 10 Kg. What’s the
probability that the average weight a person selected at random exceeds 85 Kgs.
 23

Answer 85 - 80
z = ----------- = 0.5
10
P = 0.3085

X
40 50 60 70 80 90 100 110 120

-3 -2 -1 0 1 2 3 Z