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Miscellaneous

MAGAZINE|JUL15,2009

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21MustKnowCalculations
InvestingFormulae
Introduction
Personalfinanceisallaboutmanaging,investingandsavingmoney.Otherthanthese,oneotherthing
neededistoknowtheexactvalueofyourmoneybecausevariousexternalfactorscanhaveanimpactonthe
valueofyourmoney.Forinstance,Rs1,000nowwouldbeworthlessfiveyearslater.
Anotherreasonisthatgainsandlossesarenotsimplefunctionsandcanchangeunderdifferent
circumstances.Therefore,itisimportanttoknowhowtocalculatecertainfigurestounderstandtheactual
worthofaninvestment.
Sometimes,calculationsmaybedoneinadifferentwayorusingadifferentformula.Eventhesameformula
canbeuseddifferentlytoarriveatacertainresult.
Wepresentafewoftenusedmoneymanagementformulaebyansweringsomecommonquestions.In
addition,thesecondsectionisanextensiveworksheettohelpyouknowthestatusofyourfinances.
Howtouse
Thesecalculationscanbedonemanuallyalso,butdoingtheminanMSexcelsheetismucheasier.Thefirst
stepwouldbetoopenanexcelsheet.Doremembertotype=inanyboxandthentypeouttheformula.
Withoutthe=sign,theformulawillnotwork.Onceyouhaveinsertedthevalues,hittheenterkeytoview
theresult.
SectionI
Maturityvalueontermdeposits
Q:IwanttoinvestRs75,000inabankfixeddepositfor10yearsat9percentinterestperannum.How
muchwillIgetonmaturity?
Whenyouinvestinafixeddepositforacertainperiod,thefinalmaturityamountcanbecalculatedusingthe
compoundinterestformula.Theinterestearnedisafixedpercentageperannumbutbanksusuallycompound
iteveryquarter.Therefore,onegetsmoreonquarterlycompoundingratherthanfromannualcompounding.
Formula:Maturityvalue=P*(1+R%)^N
Here,Pistheamountinvested(Rs75,000)
Ristherateofinterestchargedperannum(9percent)
Nisthetimedurationinyears(10years)
Thisformulaisforannualcompounding.But,sincebankscompoundquarterly,theformulabecomes:
=P*(1+R/4)^(4*N)
Whatyouneedtotypeis=75000*(1+9%/4)^(4*10)
Whenyouhitenterthevalue1,82,639willshowinthecell.Thisisthematurityvalue.
Maturityvalueonrecurringdeposit
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Q:Mydaughteris10yearsold.IwanttostartarecurringdepositinabankofRs2,000amonth.The
interestrateis8percentperannumcompoundedquarterly.HowmuchwillIgetwhensheturns20?
Theformulausedis:
P[(1+R)n1]
M=
1(1+R)1/3
Formula:Maturityvalue=P*((1+R)^N1)/(1(1+R)^(1/3))
Pistheamountinvestedeachmonth(Rs2,000).
Ristheinterestrate(8percent).However,asitiscompoundedquarterlytheinterestratewouldbe=8
/400whichgives0.02
Nisthenumberofquartersovertheduration,thatis40quartersover120months.
So,youneedtotypein=2000*((1+0.02)^401)/(1(1+0.02)^(1/3))
Whenyouhitenter,youwillgetRs3,67,233asthematurityvalue.
Compoundedannualisedgrowthrate
Q:IhadinvestedRs1lakhinmutualfundfiveyearsbackatanNAVofRs20.Now,theNAVisRs70.
HowshouldIcalculatemyreturnsonanannualbasis?
ThegainofRs50overfiveyearsontheinitialNAVofRs20isasimplereturnof250percent(50/20*100).
This,however,doesnotmean50percentaveragereturnoverfiveyears.Thecompoundedannualisedgrowth
rate(CAGR)needstobecalculatedheretofindoutwhatthegrowthhasbeenoveraperiodoftime.
Formula:Returns=(((M/I)^(1/N))1)*100
Here,Misthematurityvalue(Rs70),
Iistheinitialvalue(Rs20)and
Nisthetimedurationinyears(5years).
So,youneedtotypein=(((70/20)^(1/5))1)*100
Whenyouhitenter,theCAGRcomesto28.47percent.
Annualisedyield
Q:Myfixeddepositof10percentinterestperannumiscompoundedquarterly.Whatisitsactual
yield?Whatifithasbeencompoundedmonthly?Whatifthedepositisofmorethanayear?
Here,10percentisthenominalrateofinterest.Asinterestiscompoundedeveryquarter,theeffective
interestamount,andthustheyield,increases.Higherthefrequencycompounding,moreistheyield.
Formula:Yield=((1+R/N)^n1)*100
Here,Ristherateofinterest,
Nisthenumberofcompoundingperiodsperyearand
nisthenumberofquartersinthetotalperiod.
So,ifcompoundingisquarterly:Yield=((1+0.10/4)^41)*100=10.38%
Ifcompoundingismonthly:Yield=((1+0.10/12)^121)*100=10.47%
AdepositofRs1lakhat10percentsimpleinterestperannumwouldyieldRs1,10,000.However,because
ofcompoundingityieldsRs1,10,380.Alongerperiodofdepositwillenhancetheyield.
However,ifthedepositisformorethanayear,say,fortwoyears,thentherewillbeeightquarters.
Formula:=(((1+R/4)^n1)*100)/2
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=(((1+10%/4)^81)*100)/2=10.92%
Discountedrateofinterest
Q:Mybankisgiving5percentperannuminterestrate.But,ifImakeadepositaskingformonthly
income,thereturnislesser.Why?
Underthemonthly,quarterlyorhalfyearlyoptiontheamountreceivedwillbelesserthanundertheannual
optionbecausebanksusediscountedrateofinterestforshorterperiodsofdeposit.Hereshowtoworkitout.
R/400
Formula:

(1+R/1200)2+(1+R/1200)+1

Ristheinterestrateperannum.
Formulafordiscountedratepermonth:=(R/400)/((1+R/1200)^2+(1+R/1200)+1)
=(5/400)/((1+5/1200)^2+(1+5/1200)+1)=.00415
So,onadepositof,say,Rs1lakhat5percent,insteadofreceivingRs416.66eachmonth,thediscounted
incomewouldbeRs414.93.
HomeloanEMI
Q:IhaveahomeloanofRs30lakhforaperiodof20yearsatafloatinginterestrateof9percent.I
wanttoensurethatmybankischargingmetherightEMI.HowtocalculatemyEMI?
Theloanbeingonfloatinginterestrate,theEMIwouldkeepchangingasrateschange.Onagivendateand
onknownparameterslikerateofinterestandtheloanamount,youcancalculatetheEMI.
Formula:EMI=(A*R)*(1+R)^N/((1+R)^N1)
Here,Aistheloanamountand
Ristherateofinterest.
ConvertRintomonthlyrate(=9%/12or=9/1200).Thiswillbe0.0075
TheEMIusingtheformulawillbe:
=(3000000*0.0075)*(1+0.0075)^240/((1+0.0075)^2401)=26,992
So,yourEMIisRs26,992.
InternalRateofReturn
Q:IpaidRs27,300everyyearonamoneybackinsurancepolicythatIhadbought20yearsback.
AftereveryfiveyearsIreceivedRs50,000backandRs7lakhonmaturity.Whatismyoverallrateof
return?
Theinternalrateofreturn(IRR)hastobecalculatedhere.Itistheinterestrateaccruedonaninvestmentthat
hasoutflowsaswellasinflowsatthesameregularperiods.Followthestepsmentionedbelowcarefully.
Inanexcelsheettype27300asanegativefigure(27300),asitisanoutflow,inthefirstcellasshownonthe
right.Pastethesamefiguretillthetwentiethcell.So,all20cellswillhave27300inthem.
Now,aseveryfifthyearhasaninflowofRs50,000,typein22700(inflowoutflowor5000027300)inevery
fifthcell.However,inthetwentiethcell,typein27300.Inthetwentyfirstcell,typein700000,whichistheRs
7lakhmaturityvalueofthepolicy.
Thenclickontheemptycellbelow700000andtype=IRR(A1:A21)andhitenter.Youwillget5.17%,whichis
theIRRorsimplytheoverallrateofreturnonyourmoneybackinsurancepolicy.
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XIRR
Q:Ibought1,000shareson18May2006atapriceofRs250.On18July,Iboughtanother500shares
ofthesamecompanyatRs160.On3April2007,Iboughtanother300sharesatRs120.On12
December2008,Isoldoffallthe1,800sharesatRs444pershare.Whatwillbethereturnonmy
investment?
TheXIRRfunctionisusedtodeterminetheIRRwhentheoutflowsandinflowsaremadeatdifferentperiods.
ItiscalculatedalmostinthesamefashionasIRR.Thedatesofthetransactionarementionedontheleftside
oftheoutflowsandinflowsbeforethecalculationismade.
Inanexcelsheet,clickontoolsinthetoolbar.Gotoaddins,checkAnalysisToolPakandclickok.(Youmay
havetoreinstallMSOffice2000forthisfunctiontowork).Typeoutthedatafromthetopmostcellasshown
here.Outflowfiguresareinnegativeandinflowsinpositive.Inthecellbelowthefigure800,000,typethe
formula
=XIRR(B1:B4,A1:A4)*100andhitenter.
XIRR,ortheoverallreturn,willbe70.66%
A

18May2006
8July2006
03April2007
12Dec2007

250000
80000
36000
800000
70.66

Posttaxreturn
Q:Myfatherislookingtomakeafixeddepositinabankat10percentannualreturnforfiveyears.He
isanincometaxpayee.Howwillhisreturnsbeimpacted?
Theposttaxreturnhastobecalculatedhere.Thisformulaisusedfordeterminingthereturnonincomethat
isfullytaxable.Theinterestincomefromabankdepositisfullytaxableasperyourtaxslab.Hence,the
returncomesdownafterfactoringinthetax.Forexample,forsomeonewhopays30.9percenttax,thepost
taxreturnonabankFDof10percentis6.91percent.
Formula:ROI(ROI*TR)
Here,ROIistherateofinterestandTRisthetaxrate.
Hence,posttaxreturn=10(10*30.9%)=6.91
So,posttaxyieldwillbe6.91percent.
Pretaxyield
Q:MybrothersaysthatPublicProvidentFund(PPF),whichgives8percentreturn,isthebest
investmentoption.But,isnt8percentalowrateofreturn?
Weneedtoseethepretaxyieldtounderstandifaninvestmentsreturnishighorlow.PPFgives8percent
taxfreereturn.Thepretaxyieldshouldbecomparedwithataxedinstrumenttoestimateitsworth.
Formula:Pretaxyield=ROI/(100TR)*100
Usingthisformula,youneedtotypein=8/(10030.9)*100=11.57%
Forsomeonepayingtaxat30.9percent,pretaxyieldfromPPFwouldbe11.57percent.
Inthecurrentscenario,thereisnofixed,safeandassuredreturninstrumentthatcouldpay11.57percent
returnandyieldaposttaxreturncomparabletoPPFs8percent.
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Inflation
Q:MyfamilymonthlyexpenseisRs50,000.Ataninflationrateof5percent,howmuchwillIneed
after20yearswithsameexpenses?
Therequiredamountcanbecalculatedusingthestandardfuturevalueformula.Pricesofgoodsandservices
riseeveryyearandoveraperiodoftime,youneedmoremoneytofundthesameexpenses.
Formula:=Presentamount*(1+inflationrate)^Numberofyears
=50000*(1+5%)^20=Rs1,32,665
Purchasingpower
Q:MyfamilysmonthlyexpenseisRs50,000.Ataninflationrateof5percent,howmuchwillbethe
purchasingpowerofthisamountafter20years(orhowmuchwillthisbuyintodaysmoneyterms)?
Duetoinflation,overtheyears,acertainsumofmoneyisabletopurchasealesseramountthatitusedtoin
thepast.Here,Rs50,000after20yearsataninflationof5percentisabletobuygoodsthatRs18,844can
buytoday.Hereshow.
Formula:Reducedamount=presentamount/(1+inflationrate)^Numberofyears
=50000/(1+5%)^20=Rs18,844
RealRateofReturn
Q:MyfatherwantstomakeanFDinabankat9percentforaperiodofoneyear.Onmaturity,he
says,hiscapitalwillbepreservedandhewouldbegettingassuredreturn.Whatwillbetherealrateof
return(orinflationadjustedreturn)forhim?
Itistruethatafixeddepositissafeandgivesafixedandassuredreturn.However,afteradjustingfor
inflation,therealrateofreturncanbenegative.Verysimply,ifthenominalrateofinterestonabankFDis9
percentandinflationis11percent,therealrateofreturnisanegative2percent.Amorecorrectway,
however,istousetheformulabelow.
Formula:Realrateofreturn=((1+ROR%)/(1+i%)1)*100
RORisrateofreturnperannum(9%)andiisrateofinflation(assumingitas11%).
=((1+9%)/(1+11%)1)*100
Whenyouhitenter,youget1.8%,whichistherealrateofreturn.
DoublingofMoney
Q:Iwouldbeabletogenerate12percentreturnonmyinvestmentsinequity.Inhowmanyyearscan
Iseemyinvestmentdoubleorevenquadruple?
Thereisasimplethumbruletocalculatethenumberofyearsinwhichtheinvestmentwilldouble.Itisknown
astheruleof72.Tocalculateit,simplydivide72bytherateofreturnthatyoucangenerate.
No.ofyears=72/12=6.
So,at12percentreturn,youcandoubleyourmoneyinsixyears.Tofindoutthetimeneededtoquadruple
yourmoney,divide144byyourexpectedreturn.Hence,144/12willgive12years.
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