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2) In return for an initial investment of Rs. 10,000 an investor will receive Rs. 12500 in 5 years' time. In
addition there is a 50% chance that the investor will receive a further payment of Rs. 5000 in 10 years'
time. Calculate the expected yield on this investment. [3]
5) An investor is considering the purchase of 1000 shares in a company, Dividends on the share will be
paid annually. The next dividend is due in one year and is expected to be 90Ps. per share. The second
dividend is expected to be 9% greater than the first and the third dividend is expected to be 8% greater
than the second. Thereafter the dividend is expected to grow at 5% p.a. compound in perpetuity.
Calculate the present value of this dividend stream at a rate of interest of 7% p.a effective. [5]
n
6) Prove by general reasoning the relationship ( Ia )n = än - nv [4]
Time 4 . 4. 4.
0 1 1 2 2 3
12
12 12
Calculate the real yield if the price of the stock is Rs. 97. [6]
b) For the last 10 years a man has paid Rs. 5000 at the start of each month into a recurring deposit
account with a bank that has achieved a real rate of interest of 3% per annum over the period. If the
inflation rate has been at a constant rate of 5% per annum calculate the balance in his account
today. [2]
The only cash flow during the calendar years 1997, 1998 and 1999 that was not generated from the
assets of the fund was a payment of Rs. 140,00,000 received by the fund on 30 june, 1999. For the
period from 1 January 1997 to 31 December 1999 calculate:
a) The money-weighted rate of return.
b) The time-weighted rate of return, and
c) The linked annual rate of return.
Express your answers as annual rate rounded to the nearest 0.1%. [9]
11)
i) State the two situations when an arbitrage opportunity exists. [2]
ii) Explain what is meant by the "no arbitrage" assumption in financial mathematics. [3]
iii) A fixed interest security pays coupons of 8% p.a half-yearly in arrears and is redeemable at
110%. Two months before the next coupon is due, an investor negotiates forward contract in
which he agrees to buy Rs. 5 lakhs nominal of the security in ten months' time. The current
price of the stock is Rs. 8.40 per Rs. 100 nominal and the risk free force of interest is 5% p.a
ii) Each year the value of (1+ it ), where i, is the rate of interest in the tth year, is log normally
distributed. The rate of interest has a mean value of j = 0.08 and standard deviations = 0.1 in all
years.
a) Find the parameters µ and σ2 for the log-normal distribution of (1+ it ). [4]
b) Find the distribution of S20 where S20 denotes the accumulation of one unit of money of 20
years. [3]
14) A loan is repayable by an increasing annuity payable annually in arrears for 15 years. The repayment
at the end of first year is Rs. 200,000 and subsequent repayments increase by Rs. 20,000. every year.
The repayments were calculated using a rate of interest of 12% per annum effective.
i) Calculate the amount of loan originally granted. [4]
ii) Construct the schedule of repayment for years nine and ten [ie. immediately after the 8th
repayment installment], showing the outstanding loan at he beginning of the year, the
repayment installment, interest portion and capital repayment portion in each year. [5]
iii) Immediately after the tenth installment of repayment, the rate of interest on the outstanding loan
is reduced to 10% per annum effective. Calculate the amount of the eleventh repayment
installment if the subsequent installments continue to increase at Rs. 20,000 each year and the
loan is repaid by the original date i.e. 15 years from the commencement. [6]
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