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Assignment 1 Fall 2009 Money and Banking (MGT411)

Last Date of Submission: November 10, 2009
Marks: 20
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will be accepted through e-mail after the due date.
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analytical assignment.
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with the solution.
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Question # 1 (Marks 4)
Determine the future value of an investment of Rs.100 for 12 months at the following
interest rates:
a- 5%
b- 1%
Question # 2 (Marks 6)
According to the data given below, calculate the GDP deflator and inflation rate.
Years Nominal GDP Real GDP GDP deflator Inflation rate
1997 Rs. 60,000 Rs. 60,000
1998 70,100 65,200
1999 81,200 74,600
Question # 3 (Marks 10)
Assume that the economy can experience high growth, normal growth, or recession. You
expect the following stock-market returns for the coming year under these conditions:
State of the Economy Probability Return
High Growth 0.3 +30%
Normal Growth 0.4 +12%
Recession 0.2 -15%
a. Compute the expected value of a Rs.1000 investment both in dollars and as a
percentage over the coming year.
b. Compute the standard deviation of the return as a percentage over the coming
year.
c. If the risk-free return is 7 percent, what is the risk premium for a stock market
investment?

Solution:
Q1:
Formula for FV:
FV=PV*(1+i) ^n
(a) PV=100, i=5%, n=12 months = 1 year
By putting the values:
FV=100*(1+.05) ^1
FV=Rs.105
(b)
PV=100, i=1%, n=12 months = 1 year
By putting the values:
FV=100*(1+.01) ^1
FV=Rs.101
Q2:

FORMULA FOR GDP DEFLATOR:
GDP Deflator = (Nominal GDP / Real GDP) ×100

FORMULA FOR INFLATION RATE:
Inflation rate=GDP deflator (current year)-GDP deflator (base
year)/GDP deflator (base year)*100

FORMULA FOR INFLATION RATE:
Inflation rate=GDP deflator (current year)-GDP deflator (base
year)/GDP deflator (base year)*10
Years Nominal GDP Real GDP GDP deflator Inflation rate
1997 Rs. 60,000 Rs. 60,000 100 n/a
1998 70,100 65,200 107.5 7.5
1999 81,200 74,600 108.8 1.2

Q3:
a)
Expected Value = 0.3(1000)(1+30%) + 0.4(1000)(1+12%) +0.2(1000)(1-15%) = 1008
Expected Return = 0.3(30%) + 0.4(12%) + 0.2(-15%) = 10.8%

b) Standard Deviation
= 0.3(30 -12.9%)2 + 0.4(12 -12.9%)2 + 0.2(-15 -12.9%)2
= 87.723 + 0.324 + 155.682
= 243.729
Take Under root of above Value..
=15.611

c) Risk Premium = 10.8% - 7% = 3.8%
regards
vuexpert
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