ITFP WORKBOOK

WORKBOOK 1

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RULE OF TIME VALUE OF MONEY 1. CMPD : a. We can set our calculator either begin mode or end mode when we don‘t use pmt. We can say that in case of using n, I, pv, fv, c/y we can set out calculator either begin or end mode. b. N means number of periods in normal case without considering PMT. For ex. Mr. invested Rs.100 for 10 years 6 months, then n would be 10+6/12 c. I means rate of interest. d. Pv means present value. For ex. I invest Rs.20000 for 10 years. Here pv is 20000. Pv means lump sum payment. Present value can be negative or positive as per situation. e. Pmt means regular payment. For ex. Saving Rs.2000 p.a. for 10 years, therefore 2000 is pmt. It can be positive or negative f. Fv means future value. For ex. If I receive Rs. 1 crore after 10 years. Here fv is 1 crore. Fv is always lump sum payment received or paid after some periods. g. P/y means number of payments in a year. For ex. I invest Rs.1000 p.m. for 12 years. Here p/y is 12 h. C/y means how many compounding in a year. For ex. rate of interest 12% p.a. compounding monthly therefore C/Y=12. 2. When money comes in (receiving or cash inflows) consider positive sign, when money goes out (investing or cash outflows) consider negative sign. 3. When there is role of regular payment means PMT in a step, following points should be kept in mind: a. We should always consider set begin or end as per the question. b. If nothing mentioned about regular saving whether in the beginning or end of every period, we always consider BEGIN, reason in all schemes we have to deposit money in advance. c. During post retirement life if nothing mentioned about the withdrawal of money (begin or end). We should consider always BEGIN as we need money immediately after retirement. d. In case of loan if nothing mentioned about repayment whether is made in the beginning or end of every period, we should consider END as logically first we get money then very next period we make repayment. e. n means total number of payments. Ex1. Mr. Sharma saves or withdraws Rs.2000 p.m. for 10 years. Here n is 10*12 = 120 Ex2. Mr. X saves or withdraws Rs.5000 per quarter for 10 years. Here n is 10*4 = 40 3

f. P/y means total number of payments made in a year. Ex1. Mr. X saves or withdraws 2000 pm for 10 years, here p/y=12 but n=10*12=120. (As n means total numbers of payments made) Ex2. Mr. X saves Rs.2000 per quarter for 15 years. Calculate future value if ROI 10% p.a. compounding half yearly. First we should check whether there is role of regular payment in this question. If yes we should consider first of all set begin or end Here we will consider set=begin (as if nothing mentioned saving in the beginning or end we always consider BEGIN) N=15*4=60 (as N is total number of payments are made in that period). I=10 Pv=0 (as there is no lump sum payment) Pmt= -2000 P/y=4 (total number of payment in a year) C/y=2 (total number of compounding in a year) Fv=solve=275680.6996 4. If we need to calculate the present value of regular payment which is increasing by inflation or growth like in salary, we should always use real rate of return, otherwise generally we never use RRR. For Ex. Mr. Sharma saves ( or salary ) Rs 5000 now and increasing by 10% p.a. in a scheme of 30 years. Calculate the present value if rate of interest is 12% p.a. SET=BEGIN N=30 I=(12-10)/1.10 Pmt=5000 PV=solve=116921.050 In case of salary we can calculate the net present value of all future income We can solve it by using growing annuity formula also. First we can calculate the future value using growing annuity formula and then discount it by 12% for 30 years. But better to use RRR. 5. We never use real rate of return in the step of investing money. 6. We never use real rate of return in a step of calculating future value of the regular payment. 7. We use inflation when cost of a goal ( Household Expenses, Car, Education, House, Marriage, World Tour Etc) is given in today‘s term ( present cost ) and we want to find cost of the same in future. Following examples will help you to comprehend this: 4

i. Current cost of house hold expenses Rs.1 lac p.a., inflation 6% p.a. if you calculate cost of HHE p.a. after 30 years, we have to inflate it for 30 years considering it as PV. As we need to know HHE annually we are not adding all expenses in this question therefore can‘t consider it as pmt. Step to solve: Set = end/begin n=30 I=6 pv = 100000 fv = solve or we can use formulae Fv = Pv(1+r)^n j. Current cost of house hold expenses Rs.50000 p.m. inflation 7% p.a. if you want to know your monthly house hold expenses after 25 years, you simply inflate it by 7% for 25 years. Step to solve : Set = end/begin n = 25 (don‘t consider 25*12 as you need to know only monthly expenses after 25 years) I=7 pv = 50000 fv=solve or fv = 50000(1.07)25 In CMPD function if n and i in same unit, p/y and c/y must be 1. For ex. Ram saves Rs.2000 per month for 10 years in a scheme that generates 2% p.m. interest, calculate future value? CMPD Set = begin ( as nothing mentioned begin or end, we always consider begin ) N = 10*12 = 120 ( as total number of payments ) I=2 Pmt = -2000 p/y=c/y=1 ( as n and i in same unit, same unit means both are in terms of months ) fv = ? 8. CASH FUNCTION: a. Cash function is always better to use in cases where payments are not constant. b. In cash editor 1 means beginning of first period ( month or year), 2 means beginning of second period or end of 1st year. 5

c. Whenever we calculate future value, we need to take care of last entry. For example Mr. X saves 2000 today and 3000 next year and calculating future value after 2 years. We put 2000 in first entry 3000 in second entry and third entry must be zero as 3rd entry is end of 2 years or beginning of 3rd year. d. When we calculate future value after 10 years or 15 years , 11th entry or 16th entry must be utilized as 11th entry means end of 10th and 16th entry means end of 15th. e. We can use RRR to calculate the net present value of payments which are increasing by some rate. Following examples will help you to comprehend the same: Ex. Current cost of higher education 5lacs p.a. for first 2 years and Rs3 lacs for next 3 years. Inflation 8% p.a. and rate of interest 12% p.a. what is the net present cost of education? i. Case 1 : Higher education starts now. Solution by using cash function: I = (12-8)/1.08 1 = 500000 2 = 500000 3 = 300000 4 = 300000 5 = 300000 NPV = solve ii. Case 2 if higher education starts after 15 years. Solution by using cash function: I = (12-8)/1.08 1 to 15 entries = 0 16 = 500000 17 = 500000 18 = 300000 19 = 300000 20 = 300000 NPV = solve f. Internal rate of return i.e. IRR is used to calculate the rate of interest of uneven cash inflows and outflows. Following examples will help you to comprehend the same: Ex. 1 If I invest Rs.2000 today and receive Rs.1200 after 1 year, Rs.600 after 2 years, Rs.500 after 4 years. Calculate rate of interest (IRR or CAGR)? Sol. We cannot use CMPD. We have to use CASH FUNCTION 6

1= -2000 2 = 1200 3 = 600 4=0 5 = 500 (as 5th entry means end of 4th or beginning of 5th) IRR = Solve Ex. 2 There is a scheme in which Rs.100000 p.a. to be invested for first 5 years and inflows 1 lac p.a. will start from the end of 10th year (beginning of 11th year) for 10 years. Now in this case you need to calculate the rate of interest (IRR OR CAGR). Sol. We can solve it by using CASH FUNCTION not CMPD 1 to 5 entries = -100000 6 to 10 entries = 0 11 to 20 = 100000 IRR = Solve 7

Chapter 1 Regulations Governing CFPCM, Code of Ethics& Steps of Financial Planning 1. While preparing a Financial Plan for Mr. X you have made a forecast of his present revenues and expenditures i.e. constructed a model of how his finances might perform in the near future. You have prepared a __________. A. Investment Plan B. Fund Flow statement C. Cash Flow statement D. Budget 2. Prior to providing any Financial Planning services, you a Financial Planning practitioner and Mr. X, as your client shall mutually define the scope of the engagement. The letter of engagement would define the scope of engagement by discussing i) Identification of the service(s) to be provided ii) Financial Planning practitioner‘s compensation arrangement(s) iii) Analysis and evaluation of client‘s current situation iv) Determining the clients and the Financial Planning practitioner‘s responsibilities; v) Establishing the duration of the engagement; vi) Determine the strategies to achieve financial goals (3) A) i), ii), iv) and v) B) ii), iii), iv) and vi) C) ii), iii), IV) and v) D) i), ii), v) and VI) 3. Before beginning work on Mr. X‘s Financial Plan, you have drafted a ―Letter of Engagement‖ and Sought Mr. X‘s consent on the same. Mr. X asked you about relevance of such a letter. In the context of Financial Planning Profession, you explain about the ―Letter of Engagement‖ as a _________. A. professional requirement under Code of Ethics of FPSB India B. professional requirement under Practice Guidelines of FPSB India C. legal contract as per Contract Act 1872 D. document for his personal record 4. Mr. X saw your name with CFP Marks; he wants to know different ways in which the CFP Marks in India can be written. i. CERTIFIED FINANCIAL PLANNERCM ii. CFPCM iii. CFPcm iv. C.F.P. v. CFPCM vi. Certified Financial Planner CM vii. 8

A. i) & ii) B. ii), iii), vi) C. iv), v) &vi) D. ii), v) &vi) 5. Mr. X wants to know how you will ensure that information and relevant documents given to or gathered by you are securely stored? This would be is accordance to FPSB India's Rules that relate to the Code of Ethics of _____________. A) Integrity B) Diligence C) Compliance D) Professionalism 6. Before finalizing the Financial Plan, Mr. X tells you that she wants to entrust the estate issues to a solicitor, who is a friend of Mr. X. Which of the following is your best stand? A. Estate issues being substantial in the case, you maintain that the Financial Plan cannot be an integrated one if the same is outside your purview, hence decline. B. This is permissible subject to such an arrangement finding an explicit mention in the Financial Plan for the said activity. C. This is permissible subject to the advice of the solicitor being integrated into the Financial Plan and monitored along with the Plan. D. You agree to the arrangement subject to the advice of solicitor made known to you so that you modify the Financial Plan accordingly. 7. Mr. X, after seeing the use of CFPCM mark with your name, wants to know which entity in India is licensed to award CFPCM Certification. You tell him the name of organization as ________. A. Financial Planning Standards Board India or FPSB India B. Financial Planning Standards Board of India C. Financial Planning Standards Board or FPSB D. Financial Planning Standards Board, India 8. While preparing Financial Plan for Mr. X you have ensured that all the significant recommendations are made in writing. If any significant recommendations are given orally, then confirmations have been given in writing. You have complied with Rule that relates to the Code of Ethics of ________. A. Fairness B. Diligence C. Professionalism D. Compliance 9. In the initial stage of Financial Plan preparation, you told Dr. Mrs. X and also mentioned in the Financial Plan prepared that you would charge fixed fee for the Financial Plan construction and you would also earn commission on sale of recommended financial products, if the same is accepted. Which code of ethics binds the CFPCM Practitioner to disclose conflict of interests? A. Objectivity B. Fairness C. Integrity D. Professionalism 9

10. You as a CFPCM Practitioner use the CFPCM mark as a proclamation to the public that you: 1. Can be trusted with the clients‘ financial affairs with confidence. 2. Will competently fulfill the responsibilities owed to the client. 3. Are governed by a professional Code of Ethics. 4. Possess exhaustive knowledge of all financial matters. A) (a), (b) B) (a), (b), (c) C) (a), (c), (d) D) All of the above 11. You as a CERTIFIED FINANCIAL PLANNERCM Professional are required to exercise objectivity in providing services to Mr. X, your client. This means you shall be _____________. A. Impartial B. Honest C. Competent D. Diligent 12. At the earliest point in the relationship, you have disclosed in writing to Mr. X that you are authorized to sell or advise on a restricted range of products, and any other limitation of their capacity to serve him. You have complied with the Code of Ethics of _________. A. Compliance B. Objectivity C. Diligence D. Competence 13. Mr. X before approaching you has also contacted another CFPCM Practitioner for the preparation of his Financial Plan. In his first meeting with the practitioner, Mr. X asked him the sources of compensation available to the practitioner by making a Financial Plan for him other than fee. But the practitioner refused to answer this question by saying that this is out of the scope of engagement. According to FPSB India‘s code of ethics, the practitioner has violated Code of Ethic of _________. A. Objectivity B. Professionalism C. Fairness D. Integrity 14. Which of the following shall you avoid while providing Financial Planning services to Mr. X and Mrs. X in line with the Ethical and Professional Conduct of CFPCM Certificant entailed by FPSB India? A. Keep the client informed of developments in the field of Financial Planning. B. Advice the client in those areas in which you have competence. C. Seek council of qualified individuals for areas in which you lack adequate competence. D. Alter existing financial strategy promptly, even without confirming to client, if the change in circumstances materially impacts the client‘s financial goals. 10

15. While entering into a relationship with you, Mr. X assumed that you being a CERTIFIED FINANCIAL PLANNERCM practitioner, you are fully able to take care of the execution of all aspects of his Financial Plan, i.e. Taxation, Insurance, Investments, etc. As per FPSB India Code of Ethics, what is the best proposition in this context? A. This is the right assumption which can be made about all CERTIFIED FINANCIAL PLANNERCM professionals. B. The scope and limitations of the services of the CERTIFIED FINANCIAL PLANNERCM practitioner needs to be disclosed in the beginning, specifically in writing, by the professional to the client. C. A CERTIFIED FINANCIAL PLANNERCM practitioner can never take care of all aspects of a Financial Plan. D. A CERTIFIED FINANCIAL PLANNERCM practitioner is concerned with only making a Financial Plan and not its execution. 16. Mrs. X had earlier received calls from certain institutions offering free services of Financial Planning through their Financial Planners by subscribing to their financial products and services. She asks you the features of CERTIFIED FINANCIAL PLANNERCM practitioner that distinguishes you from other financial planners. You tell her that__________ i. CFPCM practitioner has to go through an internationally accepted curriculum framework and meet the given competency profile ii. A CFPCM practitioner, once certified can follow any institution‘s guidelines of Financial Planning without any recourse to FPSB India iii. CFPCM practitioner has to meet stringent initial certification standards and continuing education to remain certified iv. CFPCM practitioner has to abide by FPSB India‘s Code of Ethics and professional guidelines v. A CFPCM Certificate has to necessarily do a fee-based Financial Planning Which of the above are correct? A) (II) and (V) only B) (I), (III) and (IV) only C) (I) and (II) only D) (I) and (IV) only 17. Mr. X saw the acronym CFPCM against your name in your business card. He wants to know about the same. You tell him that ________. A. CFP marks are owned outside the US by US based FPSB Ltd B. FPSB India is the owner of CFP marks within Indian territory C. The US based FPSB Ltd. is licensed globally to administer CFP marks D. The US based FPSB Ltd. and FPSB India are respectively licensed to issue CFP certification in US and India 18. As per the practice guidelines of FPSB India followed by you, being a CERTIFIED FINANCIAL PLANNERCM practitioner, which amongst the following is the next step after defining and discussing with Mrs. X the basic terms of the financial plan construction? A. To collect the general quantitative information of the prospective client B. To inform the prospective client about the terms of the engagement C. To define the financial goal of Mrs. X D. To share past financial records of your existing clients with your prospective client in order to make him comfortable with number and success of your clientele funds 11

19. Which of the following usages of the certification mark owned (outside the U.S.) by FPSB Ltd. Are correct? A. CFP Qualification B. CFP Certification C. CFP Education D. CFP Professional E. CFP Practitioner 20. Mr. X has asked you to give him a written assurance that if you prepare a Financial Plan for him, then in no case you would reveal any of his information to any other person, including his family members. As per FPSB Code of Ethics, is it possible for you? A. Yes B. No C. Yes, but with prior consent of all relevant family members. D. No, because client has no authority to demand such type of assurance. 21. Mr. X informed you that prior to consultations with you, he had contacted another CFPCM practitioner who demanded a flat remuneration of 35% of the ―Assets under Management‖ from Mr. X for providing his services. Is there any violation of ―Code of Ethics‖ as stipulated by FPSB India by the earlier Practitioner? A. This is a matter of mutual consent between the practitioner and the client only. B. This is a violation of Code of Ethics of Professionalism. C. This is a violation of Code of Ethics of Fairness. D. This is a violation of Code of Ethics of Compliance. 22. You have mentioned to Mr. X that you shall ensure all information and relevant documents given to or gathered by you are securely stored to establish at any time that it has complied with the FPSB India‘s Professional Standards and be available for inspection by the FPSB India when required. Such records shall be retained for seven years from the date the document was last acted upon. This is according to the Code of Ethics of __________. A. Compliance B. Professionalism C. Diligence D. Objectivity 23. You, as a CFPCM Certificant, need to disclose regarding compensation to be received from Mr. X According to you, which would be the most appropriate option? A. Need not disclose the source of compensation B. Need to disclose compensation structure at the time of establishing relationship C. Need to disclose only when asked by Mr. X D. Need to disclose the source once the financial plan is constructed 24. You as a CFPCM Certificate have made it clear to Mr. X that you shall enter into an engagement with him as a client only after securing sufficient information to be satisfied that: a. The relationship is warranted by Mr. X‘s needs and objectives; and b. You have the ability to either provide requisite competent services or to involve other professionals who can provide such services. 12

You have followed the Code of Ethic of __________. A) Diligence B) Professionalism C) Compliance D) Fairness 25. Mr. X has come to know about this CFPCM practitioner through a newspaper advertisement. The theme and wording of advertisement says that along with preparation of Financial Plan, they also help to generate assured return of 12% p.a. According to FPSB India‘s code of ethics, the practitioner has violated _________. a. Code of Ethic of Objectivity b. Code of Ethic of Professionalism c. Code of Ethic of Fairness d. Code of Ethic of Integrity 26. Mr. X‘s friend Dinesh used to take advice on his investments from a Financial Planner certified by FPSB India who co-mingled the money of Dinesh with his own money. However, the Financial Planner maintained good records to segregate both cash flows. Which of the following Principles has hisFinancial Planner violated? 1. Integrity 2. Objectivity 3. Fairness 4. Professionalism A) 1 only B) 1, 2 and 4 C) 1,2 and 3 D) 1,2, 3 and 4 27. Mr.X has asked you about FPSB India‘s nature of constitution. You have explained him that FPSB India is a _________________. a. Self-Regulatory Organisation b. Professional Standards Setting Body c. Professional Regulatory Organisation d. A Quasi Government Body 28. Mr.X has asked you a practicing CERTIFIED FINANCIAL PLANNERCM about the ownership of CFPCM mark in the world. You have explained to him that _________________. a. CFPCM mark is owned by FPSB India b. CFPCM mark is owned by FPSB across the world c. CFPCM mark is owned by CFP Board across the world d. CFPCM mark is owned by FPSB, Denver (US) outside the United States 29. As a CFPCM Certificant, which of the following will not be a correct interpretation of the Rules of Conduct pertaining to the Code of Ethics of Diligence for you while dealing with Mr. X? a. A significant recommendation may be given orally, however confirmation must be given in writing as soon as possible. b. As a CFP Certificant, you are considered to be more knowledgeable than Mr. X and hence may not need to explain the recommendation and basis in a manner that Mr. X may comprehend. c. As a CFP Certificant, you shall enter into an engagement with Mr. X only after securing sufficient information to be satisfied that Mr.X's needs and objectives warrant the relationship. 13

d. As a CFP Certificant, you shall confirm in writing to Mr. X where a subsequent instruction given by him alters the financial strategy of his portfolio under your supervision. 30. Ajay has told you that that one of his friend was consulting another CFP who moved a major chunk of his friend‘s investments into equities when markets were at their peaks resulting in loss of a major portion of that investment. His friend is very upset with this as he was not taken into confidence before taking this step. Ajay wants to know what Code of Ethics prevents a CFP from committing such actions. a. Code of Ethics of Objectivity b. Code of Ethics of Integrity c. Code of Ethics of Professionalism d. Code of Ethics of Diligence 31. In your initial meeting, to make an impression on your client, you discuss the Financial Plan made by you for a famous doctor and also his spending habits with Arvind. Which Code of Ethics prohibits you to have such a discussion with Arvind? a. Code of Ethics of Professionalism b. Code of Ethics of Confidentiality c. Code of Ethics of Fairness d. Code of Ethics of Integrity 32. Mr. X informed you that prior to consultations with you, he had contacted another CFP practitioner who demanded a flat remuneration of 35% of the ―Assets under Management‖ from Mr. X for providing his services. Is there any violation of ―Code of Ethics‖ as stipulated by FPSB India by the earlier Practitioner? a. This is a matter of mutual consent between the practitioner and the client only. b. This is a violation of Code of Ethics of Professionalism. c. This is a violation of Code of Ethics of Fairness. d. This is a violation of Code of Ethics of Compliance. 33. Jatin, a CFP licensee, has proof that Manish, another CFP licensee in his office, has utilized clients‘ funds under management to pay his gambling debts. Manish returned the funds to the clients‘ accounts, including the earnings that would have accrued during the time, for which the funds were withdrawn. Under the Code of Ethics and Professional Responsibility and Disciplinary Rules and Procedures, Jatin is obligated to A. Report Manish‘s action to the local CFP organization for proper processing B. Report Manish‘s action to the CFP Board of Examiners because Manish has violated the Professionalism Principle C. Report Manish‘s action to the CFP Board because Jatin is bound by the CFP Code of Ethics and Professional Responsibility to do so. D. Not report Manish‘s action to the CFP Board because Jatin would violate the Confidentiality Principle. 34. Which of the following is a correct interpretation of the Rules of Conduct pertaining to the Ethic of Confidentiality? A. A Member must when requisitioned by the client, provide to a person authorized by the client, all original documents prepared or received by the Member in undertaking the advisory task B. A Member owes to the Member‘s partners or co-owners a responsibility to act in good faith (Expectations of confidentiality) only while in business together, not thereafter 14

C. The Member shall maintain the same standards of confidentiality to employers as to clients D. Under no circumstance, will any Member divulge any information or knowledge regarding the FPSB India or its members that they may know or be exposed to 35. During a meeting with one client, Prashant a CFP designee, comes to conclusion that the CFP this client was dealing earlier has recommended a strategy which hasn‘t worked well because of Macro level factors in the economy. He immediately brings this fact to the knowledge of the client that the CFP with whom he was dealing earlier was not competent enough. Has Prashant violated any of the Code of Ethics, if yes then which Code of Ethic? A. No, he has just done his duty with Diligence. B. Yes, he has violated the Code of Ethics of Professionalism. C. Yes, he has violated the Code of Ethics of Fairness. D. Yes, he has violated the Code of Ethics of Diligence. 36. A wealthy client comes to Dhruv, a CFP designee asking for some advice. Dhruv after realizing that the client has deep pockets charged more fees for the advice than he normally charges, and client also paid that amount. Has Dhruv violated any of the Code of Ethics? A. Yes, Dhruv has violated the Code of Ethic of Fairness. B. Yes, Dhruv has violated the Code of Ethic of Diligence. C. Yes, Dhruv has violated the Code of Ethic of Professionalism. D. No, because the client has paid the amount and the deal is closed. 37. …………… says that a CFP designee shall not commingle his own or one client‘s funds with other client‘s funds, unless he has obtained permission from the concerned client‘s and has completed client‘s and completed legal formalities to do so? A. Code of Ethic of Diligence. B. Code of Ethic of Fairness C. Code of Ethic of Integrity. D. Code of Ethic of Professionalism. 38. Ajay, a CFP designee appointed an incompetent person in his office and also entrusted him with the job of advising and managing client‘s portfolios. Due to this in competent person‘s advice a client incurred some losses. In this case which Code of Ethics is violated by Ajay? A. Code of Ethic of Integrity B. Code of Ethic of Competence. C. Code of Ethic of Fairness. D. None of the above. 39. As per……………., a CFP designee should disclose all information related to his qualifications, competence, business affiliations, telephone numbers, credentials, compensation structure etc. to his clients. 15

A. Code of Ethic of Objectivity B. Code of Ethic of Professionalism C. Code of Ethic of Confidentiality D. Code of Ethic of Fairness. 40. The code of ethics of integrity covers which of the following area: A. Misleading advertising B. Promotional activities C. Representation of authority D. All of the above 41. Your client submits Rs. 50 lacs to manage and invest on his behalf. You combine this money with another client‘s money there by making a big portfolio. By doing so is there any violation of the FPSB‘s code of ethics. If yes which of the following code has been violated? A. Code of Ethic of Objectivity B. Code of Ethic of Integrity C. Code of Ethic of Confidentiality D. None of the above 42. ―A CFPCM Certificant shall exercise reasonable and prudent professional judgment in providing professional services.‖ Which of the following code of ethics relates to the above statement? A. Code of Ethic of Objectivity B. Code of Ethic of Integrity C. Code of Ethic of Confidentiality D. None of the above 43. ―A CFPCM Certificant recommends an unsuitable product to his client, because of higher commission benefit to CFP on the recommended product‖ Has any code of ethic is being violated? If yes which of the followingg code is violated? A. Code of Ethic of Objectivity B. Code of Ethic of Integrity C. Code of Ethic of Confidentiality D. None of the above 44. A CFPCM Certificant should always act in the A. Interest of the company he is working for B. Interest of the client C. In his own interest D. All of the above 45. Rahul, a CFP designee, during a visit to FPSB‘s office, comes to know about the FPSB‘s future plans related to SRO status through some papers lying on the table of one of the FPSB‘s officer. He discussed this information with one of his friend ina very general way. Has Rahul violated any Code of Ethic, if yes then which Code of Ethic has been violated? A. Yes, Code of Ethic of Confidentiality. B. Yes, Code of Ethic of Integrity. C. Yes, Code of Ethic of Professionalism. D. None, because his act didn‘t harmed any client and moreover it was discussed in a general way with no bad intention. 16

46. Ajay was a CFP designee and he hadn‘t paid his yearly membership renewal fee for last 3 years because of which his CFP status is revoked. But he still uses CFP mark and promotes himself as such. Is he violating any Code of Ethic, and if yes then which Code of Ethic? A. Yes, Code of Ethic of Competence. B. Yes, Code of Ethic of Professionalism. C. Yes, Code of Ethic of Diligence. D. No code of Ethic is violated in this case. 47. You have a two year old daughter named Neha. You want to have enough money so that you can pay for her college education when she starts her college in sixteen years, which of the following best describes your concern? A. A short term financial goal B. An intermediate term financial goal C. A long term financial goal D. A personal goal 48. You want to find enough time to exercise daily to improve your health this is a question of: A. A consumable products financial goal B. A durable goods financial goal C. An intangible goal D. A long term financial goal 49. You feel very strongly that going into debt is wrong. This is an question of the influence of __________ on your financial planning decisions. A. Your values B. Your stage in the adult life cycle C. Market forces D. General economic forces 50. ________________is a rise in the general price level, Your purchasing power decreases and it will cost more money to buy the same goods. A. Uncertainty B. Inflation C. Interest D. Risk 51. You receive a phone call from a person with whom you have never spoken. .The caller is excited, just having heard that a new mutual fund is positioned to deliver larger gains in the coming year. The caller wishes to purchase shares of the fund through you. Keeping in mind stages of the overall personal planning process, which of the following questions that address the first two stages of the financial planning process should you ask the caller? (1) What are your goals for this investment? (2) What other investments do you have? (3) What is your date of birth? (4) Do you want your dividends reinvested? 17

A. 1 and 2 only B. 2 and 4 only C. 1, 2, and 3 only D. 1, 2, and 4 only 52. Which one of the following statements regarding the second step of the financial planning process, Gathering client data and determining goals and expectations, is correct? A. General goals, such as ―adequate retirement income‖ provide appropriate guidance in developing the plan. B. Quantitative information and qualitative information are equally important. C. This step provides the greatest time-saving potential since most of the information required can be estimated and reasonable accuracy is not affected. D. Most clients will be able to completely implement their financial plans in a relatively short period of time, so prioritization is merely a formality and not particularly important 53. What is the third step in the financial planning process? A. Recommending a plan B. Establishing the client planner relationship C. Analyzing information D. Gathering data 54. Which of the following financial decisions results from one‘s personal planning? A. Personal financial plan B. Personal financial objective C. Personal budget D. None of the above 55. An appropriate Financial Plan is influenced by one‘s________ A. Income B. Age C. Liquidity D. All of the above 56. A comprehensive financial plan includes: A. Wealth Accumulation B. Wealth Distribution C. Risk Management D. All of the above 57. Which of the following are most commonly-cited reasons that people give for why they sought out a financial planner? 1) To assist with the time and effort of managing their finances, 2) To get timely advice on markets and investment opportunities, 3) To seek advice on tax-reduction, 4) Budget planning in order to optimize their investable income 18

A. (1), (3) and (2) B. (1), (2), (3) and (4) C. (1), (3) and (4) D. (1) and (2) 58. Which of the following is not qualitative information? A. Liquidity Preference. B. Assets and Liabilities. C. Personal Details. D. All of the above. 59. Which of the following is the basic characteristic of a client‘s goal? A. It must be defined in terms of money B. It must be quantified C. It must not be vague D. All of the above 60. Which of the following data cannot be collected through a single direct Question? A. Income of a person B. Family members C. Risk tolerance D. term for the goal to be achieved 19

ANSWERS ANS 1 D ANS 21 C ANS 41 B ANS 2 A ANS 22 A ANS 42 A ANS 3 B ANS 23 B ANS 43 A ANS 4 A ANS 24 A ANS 44 B ANS 5 C ANS 25 D ANS 45 A ANS 6 B ANS 26 B ANS 46 B ANS 7 A ANS 27 B ANS 47 C ANS 8 B ANS 28 D ANS 48 C ANS 9 A ANS 29 B ANS 49 A ANS 10 B ANS 30 D ANS 50 B ANS 11 A ANS 31 B ANS 51 C ANS 12 B ANS 32 C ANS 52 B ANS 13 A ANS 33 C ANS 53 C ANS 14 D ANS 34 C ANS 54 A ANS 15 B ANS 35 B ANS 55 D ANS 16 B ANS 36 A ANS 56 D ANS 17 A ANS 37 C ANS 57 B ANS 18 A ANS 38 B ANS 58 B ANS 19 B ANS 39 D ANS 59 D ANS 20 B ANS 40 D ANS 60 C 20

TIME VALUE OF MONEY Calculation of Future Value Future value measures the nominal future of money that a given sum of money is ―worth‖ at a specified time in the future assuming a certain interest rate. Future Value = Present value (1+r)n Q1. Calculate the maturity amount of Rs. 1,18,000 if invested at 8% per annum for 5 years. SOL. Set = Begin N=5 I=8% PV= - 118,000 FV=SOLVE =173380.71 Or Fv= 118000*1.08^5 Q2. You have just inherited Rs.250,000 and plans to deposit it immediately in a bank account that pays 10% interest per year compounded monthly. Calculate the maturity value after 10 years? SOL. Set = Begin N=10 I = 10% PV = - 250,000 P/Y = 1 C/Y = 12(as number of compounding in a year is 12) FV =solve = 676,760.37 Q3. Mr. Manish invested Rs. 10,000 in a mutual fund scheme. During the first year the investment earned 10% p.a. for the year. During the second year, he earned only 14%on his investment. Calculate the amount that will accumulate in his account at the end of two years? Sol. Step1: Begin, Step 2: Begin N = 1, N = 1, I = 10 I = 14 PV = - 10,000 PV = -11,000 FV = 11,000 Solve FV = 12,540 Solve 21

Q4. You have deposited Rs.2500 in an account that promises to pay 8% p.a. compounded quarterly for the next five years. How much money will you have in the account at the maturity? Sol. Begin, N = 5, I = 8%, PV = -2500, C/Y = 4. FV = 3714.86 solve Q5. Mr. A aged 35, has Rs.30,000 to be invested today for next 25 years. He plans to retire at the age of 60 years. What would be the retirement corpus he can arrange through his investment if return on investment is 10% p.a. compounded quarterly for first 8 years and then decreases to 8.75% per annum for 7 years and again increases to 9.25% per annum thereafter. Sol. Step 1:Begin Step 2 Begin Step 3 Begin N = 8, I = 10%, N=7 N = 10 PV = - 30,000 c/y = 4 I = 8.75% I = 9.25% FV = 66,112.70 PV = -66,112.70 PV = -118,929.55 c/y = 1, c/y = 1 FV = 118,929.55 FV = 2,88,074.13 Q6. Mr. Rajesh has deposited today Rs.2lacs in debt instruments at the rate of interest10% per annum for around 3 years and further invested this amount in equity stocks for 8 years giving 12% per annum compounding monthly. How much amount will be accumulated by the end of 11 years? Step 1: Begin, Step 2: Begin N=3 N=8 I = 10% PV = -200,000 I = 12% FV = 266,200 Solve PV = -266,200 C/Y = 12 FV = 691,926.45 Solve 22

CALCULATION OF PRESENT VALUE Present value is the value on a given date of future payment or series of future payments, discounted to reflect the time value of money and other factors such as investment risk. PV= Future Amount/(1+interest Rate)^term Q1. How much must be invested today, at 9% p.a., to accumulate Rs.100000 in seven years from today? Sol. Set: End/begin, N = 7, I=9 PV = Solve= -54703.42, FV = 100000 OR PV = 1,00,000/1.09^7 Q2. How much should be invested to receive Rs.200000 after five years from now assuming rate of interest is 8.5% p.a.? Sol. Set: End/Begin, N = 5, I = 8.5, PV = Solve = -133009.08, FV = 200000 Q3. Sheetal wishes to earn a 11% p.a. compounding quarterly return on an investment she is considering. She receives Rs.25000 four years from today. How much she should be willing to invest today? Sol. Set: Begin/end, N = 4, I = 11%, c/y = 4, fv = 25,000. Pv = -16,196.85 Solve Q4. Megha bought a house this morning for Rs.120000. If this house has increased in value by 11% per year for the last 50 years then what was the value of the house 12years ago? Sol. Set : begin/end, N = 12, I = 11%, fv = 120,000. PV = 34,300.89 Solve 23

Q5. Geeta has got approximately Rs. 1250000 after 10 years from the redemption of mutual fund on which she has got 9.25% compounded quarterly for first 3 years, 8.25% per annum for the next 4 years and 8%per annum compounded semi-annually for remaining years. Estimate the amount she would have deposited 10 years ago? Step 1 Step 2 Step 3 Set: Begin/End, N=3 Set: Begin/End Set: Begin/End I = 8% C/Y = 2 N=4 N = 3, FV = 12, 50,000. PV = solve =-987893.15 I = 8.25% I = 9.25% C/Y = 1 C/Y = 4 FV = 98783.15 FV = 719,446.25 PV = solve = -719,446.65 PV = solve = -542,832.42 Q6. An investor would require Rs.1000000 when she retires in 20 years. If she can earn a 10 percent annual return, how much she would need to invest today lump sum? Set: Begin/End N = 20 I = 10 FV = 10,00,000 PV = -148,643.62 Solve P/Y = 1 C/Y = 1 24

CALCULATION OF INTEREST & TERM Interest The interest is calculated upon the value of the assets in the same manner as upon money. Interest can be thought of as ―rent on money‖. For Q, if you want to borrow money from the bank, there is a certain rate you have to pay according to how much you want loaned to you. Term Term is defined as a limited period of time, a point in time at which something ends, or a deadline, as for making a payment. Rule of 72: To estimate the number of periods required to know double an original investment. No. of years = 72/Rate of Interest or CAGR Ex. If interest rate is 8% p.a., how many years to get the investment double as per Rule 72 Years = 72/ROI = 72/8 = 9 years. Rule of 69: this rule also tells you in how many periods (years ) will take to double your investment. 69/ interest rate + 0.35 = years For Q, if interest rate is 10%, the investment will double in how many years as per rule 69. 69/10 + 0.35 = 7.25 years Rule of Tripling of Investments Rule of 114: To estimate how long it takes to triple your money, divide 114 by interest rate (CAGR) 114 / interest rate = years For Q : how many years an investment will take to get tripled in interest rate is 10% p.a. 114/10 = 11.4 years Q1. I invested Rs.50000 in a fund offering ROI of 12% p.a. approximately how many years will it take to reach Rs.100000 as per Rule 72 ? Sol. 72/12 = 6 Years Q2. Mr. Sharma deposits Rs.100 in an investment. Ten years later it is worth Rs.17910.What rate of return did the investor earned on the investment? sol. Set : End/begin, N = 10, I = Solve = 6.0, PV = -10000, FV = 17910 25

Q3. What annual rate of interest is the bank charging, if you borrow Rs.1 lacs and repay Rs. 120000 at the end of 4 years and a quarter? Sol. Set: End/Begin, N = 4+1/4, I = Solve = 4.38, PV = -100000 FV =120000 Q4. If Rs.1200 grows to Rs.1500 in 5 years, what is the annual compound rate of interest? Sol. Set: End/Begin N=5 I = Solve = 4.56 PV = -1200 FV = 1500 Q5. If I invest Rs.100 today in a scheme that generates 10% p.a. interest rate and receive Rs.300 after 10 years, what annual rate of interest I receive in this plan? Sol. Set: End/Begin, N = 10 I = solve = 11.61% PV = -100 FV = 300 26

Annuities Annuity: The term annuity is used in reference to any terminating stream of fixed annuity payments over a specified period of time. Some Qs of annuity are: Rent, Loan EMI‘S, Pension, etc Types of annuities: 1. Ordinary Annuity/Annuity in Arrears An ordinary annuity is essentially a level stream of cash flows made at the end of each period for a fixed period of time. 2. Annuity Due An annuity due is essentially a level stream of cash flows made in the beginning of each period for a fixed period of time. 3. Deferred Annuity A type of annuity contract that delays payments of income, installments or a lumpsum until the investor elects to receive them. This type of annuity has two main phases, the Savings Phase in which you invest money into the account, and the income phase in which the plan is converted into an annuity and payments are received 4. Growing Annuity A growing annuity is a finite number of cash flows growing at a constant rate. Growing annuity is of two types: a. Growing Annuity by Fixed percentage b. Growing annuity by Fixed amount A. Growing Annuity by Fixed percentage: The Formula of calculating future value of a growing annuity when payments are made in the beginning of every period is: FV = PMT [{(1+r)n – (1+g)n}]* (1+r) (1+r) – (1+g) or FV = PMT [{(1+r)n – (1+g)n}]* (1+r) r-g Where, PMT= first payment g = Growth rate r = Interest Rate n = Number of payments 27

The Formula of calculating future value of a growing annuity when payments are made at the end of every period is: FV = Pmt,*(( )( ) +- )( ) or FV = 1stPmt,*( ) ( ) +- IMP: Growing annuity with fixed percentage when growth and rate of interest are same. Future Value of growing annuity with fixed percentage when rate of interest and growth rate are same and saving in the beginning of every period = [A*n (1+R)n-1 ] * (1+R) or A * n(1+R)n Future Value of growing annuity with fixed percentage when rate of interest and growth rate are same and saving at the end of every period = [A*n (1+R)n-1] A stands for first payment, R is rate of interest and n is total number of payments B. Growing annuity by Fixed amount The Formula of calculating future value of a growing annuity with fixed amount when payments are made in the beginning of every period is: [{A * Sn + D * (Sn – n)} / r] * (1+r) Where, A = First payments Sn = it is a future value of ordinary annuity (set = End) of Re. -1(pmt = -1) considering number of payments and rate of interest as per the Question N = number of payments R = rate of interest The Formula of calculating future value of a growing annuity with fixed amount when payments are made at the end of every period is: [A * Sn + D * (Sn – n) / r] 28

5. Annuity in Perpetuity Perpetuity forever is an annuity whose payment continues forever. Present Value of annuity in perpetuity if received at the end of every period = Annuity required/ rate of interest Ex. If I need Rs.100000 at the end of every year forever how much should be invested today if rate of interest is 10% p.a. Present value = 100000/0.10 = 1000000 Present Value of annuity in perpetuity if received in the beginning of every period = (Annuity required/ rate of interest) * (1 + rate of interest) Or = (Annuity Required/ Rate of Interest) + Annuity Required 29

Questions Based On Ordinary Annuity and Annuity Due 1. Mr. Sharma saves Rs.20000 in the beginning of every year for 20 years, return on investment 12% p.a. how much would be the maturity? Sol. Set: Begin N = 20, I = 12, PMT = - 20000. FV = solve = 16,13,974.71 2. If I need Rs.2 lacs after 10 years, how much I should deposit in the beginning of every year if rate of interest 15% p.a. compounding half yearly? Sol. Set: Begin N = 10 I = 15% FV = 2,00,000 PMT = -8292.70 solve C/Y = 2, P/Y = 1 3. How much you shall deposit in the beginning of every year from the age of 30 till age 65 in an account paying 9% p.a. compounded monthly to accumulate Rs.1million? Sol. Set: Begin, N = 35 I = 9% FV = 10,00,000 PMT = -3,887.06 Solve P/Y = 1, C/Y = 12 4. Mr. Sharma invests Rs.1000 pm for 20 years in mutual fund that generates 12% p.a. return, what will be the maturity amount? Sol. Set: Begin, PMT = - 1000 n = 240 I = 12 P/y = 12, C/Y = 1 FV = solve = 9,19,857.35 5. Calculate the maturity of deposits of Rs.10000 per quarter in a scheme that generates 12% per annum compounding monthly for 10 years. Set Begin, N = 10*4 I = 12 PMT = -10,000 FV = Solve ( 7,82,182.41) P/Y = 4 C/Y = 12 30

6. You have just invested 5 lacs in a mutual fund scheme that generates 7% p.a. return. How much you can withdraw at end of every month for 20 years? Set End, N = 20*12 I=7 PV = -5,00,000 PMT = Solve ( 3812.223) P/Y = 12, C/Y = 1 7. A 5 years ordinary annuity annually has a future value of Rs. 1,00,000/-. If ROI is 8 % per annum, then how much will be the amount of each payment? Set: End N=5 I = 8% FV = 1,00,000 PMT = Solve (-17,045.64) 8. Neha deposits Rs.2,000/- at the end of every month in an account and is getting interest @ 12% per annum compounded monthly. How much will be her nest egg after 10 years? Set: End N = 120 I = 12% PMT =-2,000 FV = Solve ( 4,60,077.37) P/Y = 12 C/Y = 12 9. Manav invests Rs. 500/- at the end of every 6 months towards a fund to pay for his children education. If the investment pays ROI @ 9 % per annum, compounded Semi Annually, then what will be the corpus after 10 years? Set: End, N = 20 I = 9% PMT = -500 FV = Solve= 15,685.71 P/y = 2 C/y = 2 31

10. A person saves Rs. 5,000/- at the end of every quarter for 9 years @ 15 % per annum compounded monthly. What amount would he be having after 9 years? Set: End N = 9*4 I = 15% PMT = -5,000 FV = Solve ( 3,72,034.44) P/Y = 4 C/Y = 12 11 Manav wishes to have a retirement corpus of Rs.2,50,000/- in 30 years time. Assuming that he can earn a ROI of 12 % per annum, what amount he should invest at the end of every year into a fund to reach his goal? Set: End, N = 30 I = 12 PV = 2,50,000 PMT = Solve (-1035.91) 12. Mansi has deposited Rs. 7,00,000/- in a bank today @ ROI of 10 % per annum. She wants to know that if she withdraws this money at the end of every month for 7 years, then how much will be the each installment amount? Set: End N = 84 I = 10 PV = -7,00,000 PMT = SOLVE ( 11,465.52) P/Y = 12 13. Manav saves Rs. 20,000/- at the end of every year for 5 years and Rs. 30,000/- a year for 10 years thereafter. What will be the total amount in his account after 15 years, if ROI is 10 % per annum? STEP 1 SET: END STEP 2 SET: END N=5 N = 10 I = 10% I = 10% PMT = -20,000 PMT = - 30,000 FV = Solve ( 1,22,102) PV = -122,102 C/Y = 1 FV = Solve (7,94,823.87) P/Y = 1 P/Y = 1 C/Y = 1 32

14. Rahul decides to deposit Rs. 5,000/- at the end of every month into an account yielding 12 % per annum compounded monthly for 20 years. What will be the accumulated value in this account after 20 years? SET: END N = 20*12 I = 12 PMT = -5,000 FV = Solve (49,46,278.82) P/Y = 12 C/Y =12 15. What is the Present Value of an annuity which pays Rs. 10,000/ at the end of every quarter for 3 years, assuming ROI @ 7% p.a. compounded semi-annually? set: End N = 12 I = 7% PMT = -10,000 PV = Solve ( 1,07,495.53) P/Y = 4 C/Y = 2 16. What is the PV of an Annuity Due which provides Rs. 2,000/- in the beginning of every month for first 3 years and then Rs. 3,000/- per month for next 2 years. And ROI is 9 % per annum compounded monthly? Set: Begin, Set: Begin N = 24 N = 36 I=9 I = 9% PMT = 3000 PMT = 2000 PV =SOLVE PV = SOLVE P/Y =12 FV = 66159.94 C/Y =12 C/Y = 12 P/Y = 12 17. Mani deposits Rs.50,000/- in a bank account which pays interest @ 10 % per annum. How much can be withdrawn in the beginning of each quarter for 5 years and 9 months? Set: Begin N = 23 I = 10% PV = -50,000 PMT = Solve P/Y = 4 33

18. What amount needs to be invested today at 10 % per annum compounded semi-annually, so that it pays Rs. 1 lac per annum for 5 years, Rs.25000 per half yearly for next 3 years and Rs.20000 per month for next 5 quarters? ( all payments are in the beginning of each period ) Step 1 Step 2 Step 3 Set: Begin N = 15 Set: Begin Set: Begin I = 10 PMT = -20,000 N=6 N=5 PV = Solve (2,83,575.30) P/Y = 12 I = 10 I = 10 C/Y =12 PMT =-25000 PMT = 1,00,000 FV = 2,83,575 FV = 3,44,845.17 PV = Solve (3,44,845.17) PV = Solve (626983.69) P/Y = 2 P/Y = 1 C/Y = 2 C/Y = 2 19. Mr. Vijay has to accumulate approximately Rs.25 lakhs for his daughter‘s wedding 11 years down the line for which he invests Rs. 25000 at the end of each quarter for the said period at 9%per annum compounded quarterly. Calculate the surplus or deficit he will face at the end of 11 years, also determine the additional amount he should save every quarter end to reach his target. Sol. STEP 2 STEP 1 SET : END SET : END N = 44 N = 44 I=9 I=9 PMT = -25000 PMT = -33847 (SOLVE) FV = 1846516 FV = 2500000 P/Y = 4 P/Y = 4 C/Y = 4 C/Y = 4 Deficit he is facing to reach his target = Rs.2500000 – Rs.1846516 = Rs.653484 Additional amount he can save = Rs.33847 - Rs.25000 = Rs. 8847 34

Questions Based On Deferred Annuity Q1. Mr. Sharma is aged 50 years at present. He has invested some amount in an annuity which will pay him after 10 years Rs. 25,000/- p.a. at the beginning of every year for 10 years. Rate of interest is 6% p.a. Calculate how much amount he has invested now? Step1. Step 2 Set = Begin Set Begin N = 10 N = 10 I = 6% I = 6% PMT = 25000 PMT = 0 FV = 0 FV = 195042.30 P/Y = 1 C/Y = 1 P/Y = 1 PV = Solve = 195042.30 C/Y = 1 PV Solve ( 108910.60) Q2. Mr. Mohit is 55 years old at present. He has invested some amount in an annuity which will pay him after 5 years Rs. 30,000/- p.m. in the beginning of every month for 10 years. Rate of interest is 7% p.a compounded quarterly Calculate how much amount he has invested now? STEP1. Step 2 Set = Begin set End N = 10*12 N=5 I = 7% I = 7% PMT = 30000 PMT = 0 FV = 0 FV = 2603446.726 P/Y = 12 PV = Solve = 1840180.131 C/Y = 4 P/Y = 1 PV = Solve = -2603446.726 C/Y = 4 Q3. Mr. Vipin is now 50 years old. He has invested Rs. 1, 50,000/- in an annuity which will pay him after 10 years a certain amount per half year at the beginning for 10 years. Rate of interest is 8% p.a. compounded monthly. Calculate how much he will receive at the beginning of every half year after 10 years? STEP1. STEP 2 Set = End/begin Set = Begin N = 10 N = 10*2 I = 8% I=8 PV = –150000 PV = -332946.035 PMT = 0 PMT solve (23681.6925) P/Y = 1 P/Y = 2 C/Y = 12 C/Y = 12 FV = Solve = 332946.0352 35

Q4. Mr. Raju is now 40 years old. He has invested some amount in an annuity which will pay him from the end of 10th year from today, Rs. 30,000/- p.a. for 10 years. Rate of interest is 6%p.a.compounded monthly Calculate how much he has invested today? STEP1. Step 2. Set = End Set = End N = 10 I = 6% N=9 PMT = 30,000 I = 6% FV =0 PMT = O C/Y= 12 FV = 219057.9982 PV = Solve = -219057.9982 P/Y = 1 C/Y = 12 PV = 1,27827.5441 Q5. Mr. Gopal is working in a reputed company and earning Rs. 3,00,000/- p.a. and is now 48 years old. He has invested Rs. 3, 00,000/- in an annuity plan lump sum today which will pay him after 5 years a certain amount p.m. at the end of every month for 10 years. Rate of interest is 8% p.a. Calculate monthly income out of this investment? STEP1. STEP 2 Set = END Set = End N=5 I=8 N = 120 (10*12) PV = -3,00,000 I=8 PMT = 0 PV = -440798 FV = 0 FV = 0 P/Y PMT = Solve = 5,283 C/Y = 1 P/Y = 12 FV = Solve = 4, 40,798 C/Y = 1 Q6. Mr. Viki is now 50 years old. He has invested some amount in an annuity which will pay him from the end of 5th year Rs. 30,000/- p.a. for 10 years. Rate of interest is 7% p.a. compounded quarterly. Calculate how much he has invested now? STEP1. STEP 2 Set = End Set = END/BEGIN N = 10 I = 7% N=4 PMT=30,000 I = 7% P/Y= 1 FV = 208908.6124 C/Y= 4 PV = Solve=- 158272.57 PV=Solve=-208908.6124 P/Y = 1 C/Y = 4 36

Q7. Mr. Naman is working in a reputed company and earning Rs. 5,00,000/- p.a. and is now 50 years old. He has invested Rs. 2, 50,000/- in an annuity which will pay him after 5 years a certain amount p.a. at the end of every year for 10 years. Rate of interest is 8% p.a. Calculate how much he will receive at the end of every year after 5 years? STEP1. STEP 2 Set = END / BEGIN Set = END/BEGIN N=5 N = 10 I =8% I = 8% PV= -2,50,000 PV = -3,67,332 PMT=0 FV = 0 FV=0 PMT = 54,743 Solve P/Y= 1 P/Y = 1 C/Y= 1 C/Y = 1 FV=Solve=3,67,332 Q8. Mr. Sharma is working in a reputed company and earning Rs.3,00,000/- p.a. and is now 48 years old. Now he has invested 50% of his half yearly salary in an annuity plan which will pay him after 5 years a certain amount p.m. at the end of every month for 12 years. Rate of interest is 8% p.a. compounded semi-annually. Calculate how much he will receive at the end of every month after 5 years? STEP1. STEP 2 Set =END / BEGIN Set = END/BEGIN N=5 I=8 N = 144 PV= -75000 I = 8% C/Y= 2 PV= -111018.3214 FV=Solve=111018.3214 PMT = 1193.81 P/Y = 12 C/Y = 2 Q9. Mr. X deposits Rs. 50000 in the beginning of every quarter for 25 years in an annuity plan. After 25 years how much he will receive at the end of every month for 20 years if ROI is 12% p.a? STEP 1 STEP 2 SET: BEGIN Set: End N=25*4, N= 20*12 I=12% I = 12% PV=0, PV=-ANS PMT=-50,000, P/Y =12 P/Y=4, C/Y=1 C/Y=1, PMT=303,173.39 SOLVE FV=2,86,38,456.22 Solve Q10. Mr. S has invested Rs.50lacs now in a deferred annuity plan which will provide monthly annuity in the beginning of every month after 35 years from now for 20 years. Calculate annuity amount if ROI is 12% p.a. compounding half yearly? 37

STEP 1 STEP 2 SET: BEGIN SET: BEGIN N=35 N=20*12 PV= 50,00,000 I=12%, I = 12% P/Y=1, PV=-ANS C/Y=2. P/Y =12 FV=29,53,79,650.90solve C/Y = 2 PMT = 31,62,119.01 solve Q11. Mr. X is aged 40 years at present. He has invested some amount in an annuity which will pay him after 20 years Rs. 85,000/- p.a. at the beginning of every year for 20 years. Rate of interest is 6.8% p.a. Calculate how much amount he has invested now? STEP 1 STEP 2 SET: BEGIN SET: BEGIN N=20, N=20 I=6.8%, PMT=85,000, I = 6.8% P/Y=1, FV= -ANS C/Y=1, PV =2,62,06,319 solve PV=-976,857.21 solve P/Y=1 C/Y =1 Q12. Mr. M is 35 years old at present. He has invested some amount in an annuity which will pay him after 20 years Rs. 30,000/- p.m. at the beginning for 20 years. Rate of interest is 9% p.a. compounded quarterly Calculate how much amount he has invested now? STEP 1 STEP 2 SET: BEGIN SET: BEGIN N=20 N= 20*12 I = 9% I= 9% PMT=30,000 FV=-ANS P/Y= 12 C/Y=4. P/Y =1 PV=33,75,239.15solve C/Y=4 PV= -5,69,166.34 solve Q13. Mr. S is now 40 years old. He has invested Rs. 41,50,000/- in an annuity which will pay him after 20 years a certain amount per half year at the beginning for 20 years. Rate of interest is 12% p.a. compounded monthly. Calculate how much he will receive at the beginning of every half year after 20 years? STEP 1 STEP 2 SET: BEGIN SET: BEGIN N = 20 N=20*2 I = 12% I = 12% PV = 41,50,000 PV=-ANS FV = Solve ( 4,52,04,097.66) P/Y=2 C/Y = 12 C/Y=12 PMT=Solve ( 28,84,617.57) 38

Q14. Mr. R is now 25 years old. He has invested some amount in an annuity which will pay him from the end of 20th year from today, Rs. 30,000/- p.a. for 30 years. Rate of interest is 12% p.a. compounded monthly Calculate how much he has invested today? STEP 1 STEP 2 SET: BEGIN SET: END N = 30 N=20 I = 12 I=12% PMT =-30,000 FV=-ANS PV = Solve2,59.131.92 P/Y = 1 PV= Solve-23789.82 C/Y = 12 Q15. Mr. Gopal is working in a reputed company and earning Rs. 3,00,000/- p.a. and is now 48 years old. He has invested Rs. 3,00,000/- in an annuity which will pay him after 5 years a certain amount p.m. at the end of every month for 10 years. Rate of interest is 8% p.a. Calculate monthly income out of this investment? Step 1 Step 2 SET: BEGIN SET END N=5 N=10*12 I = 8% I = 8% PV = -3,00,000 FV = Solve 4,40,798.42 PV = - 4,40,798.42 P/Y = 1 PMT = Solve 5,283.3 C/Y = 1 P/Y = 12 C/Y = 1 Q16. Mr. M is 55 years old at present. He has invested some amount in an annuity which will pay him Rs.3,40,000 in the beginning of every quarter for 12 years after 5 years from now. Rate of interest is 11% p.a. Calculate how much amount he has invested now? STEP 1 STEP 2 SET: BEGIN SET BEGIN N = 12*4 N= 5 I = 11% PMT = 3,40,000 I= 11% PV = - 94,28,722.41 FV= -94,28,722.41 P/Y = 4 PV= Solve -55, 95,487.83 C/Y = 1 P/Y=1 C/Y=1 Q17. Mr. X is now 20 years old. He is investing Rs.20000 in the beginning of every month in an annuity which will pay him some amount at the end of every month after 30 years for 20 years. Rate of interest is 12% p.a. compounded quarterly. Calculate how much he will receive? STEP 1 STEP 2 SET: BEGIN SET: END N = 360 I = 12% N=240 PMT = -20,000 I= 12% PV=-6,87,65,985.13 39

FV = Solve 6,87,65,985.13 PMT= Solve 7,51,521.42 P/Y = 1 P/Y=12 C/Y = 1 C/Y=4 Q18. Mr. N would require Rs.10lacs in the beginning of every year after 25 years from now for 20 years at rate of interest 12% p.a. How much he should deposit in the beginning of every month? STEP 1 STEP 2 SET: BEGIN SET BEGIN N = 20 N=25*12 I = 12 I=12% PMT = -10,00,000 FV=83,65,776.85 PV = Solve 83,65,776.85 P/Y = 1 PMT= Solve -4914.66 C/Y = 1 P/Y=12 C/Y=1 Q19. Mr. S is working in a company and earning Rs.3,00,000/- p.m. and saving 10% of his monthly salary at the end of every month in an annuity plan which will pay him after 25 years a certain amount p.m. at the end of every month for 22 years. Rate of interest is 8% p.a. compounded semi-annually. Calculate how much he will receive at the end of every month after 25 years? STEP 1 STEP 2 SET: END SET: END N = 25*12 N=22*12 I = 8% I=8% PMT =-30,000 PV=-2,79,34,583.57 FV = Solve 2,79,34,583.57 PMT= Solve 2,22,884.22 P/Y = 12 P/Y=12 C/Y = 2 C/Y=2 20. Mr. X deposits Rs. 5000 in the beginning of every month for 15 years in an annuity plan. After 15 years how much she will receive at the end of every month for 20 years if ROI is 9.5% p.a. SET: BEGIN SET: END N = 15*12 N = 20*12 I = 9.5% PMT = -5000 I = 9.5 FV = 1925399.59 SOLVE PV = 1925399.59 P/Y = 12 C/Y = 1 PMT = 17459.56 SOLVE P/Y = 12 C/Y = 1 40

Questions Based on Growing Annuity and Annuity in Perpetuity Q1. Mr. X is 30 years of age and decides to save Rs.1,50,000 at year end and increases his saving 10 % every year. If ROI is 18 % p.a. What will be his accumulated corpus at the age of 50? Sol. It is a case of growing annuity with fixed percentage saving at the end of every period. The Formula of calculating future value of a growing annuity when payments are made at the end of every period is: FV = PMT [{(1+r)n – (1+g)n}] r–g FV=1,50,000 * ((1.18) ^20 – (1.10)^20) /(0.18 – 0.10) FV = 3,87,47,877.48 Q2. Mrs. Sharma decides to save Rs.100000 today and thereafter he increases his saving 10% every year. Calculate the accumulated amount after 40 years if rate of interest is 14% p.a. compounded monthly? Sol. The Formula of calculating future value of a growing annuity when payments are made in the beginning of every period is: FV = PMT [{(1+r)n – (1+g)n}]* ( 1 + r) r–g FV = 100000[ (1.1493)^40 – (1.10)^40] (1.1493) 0.1493 – 0.10 FV = 503918428 (We need to convert 14% p.a. compounding monthly into annual effective as saving annually) (CNVR n = 12, I = 14, EFF = solve = 14.93) Q3. Mr. A is 25 years of age and he is getting a salary of Rs1,50,000/- per annum. He wishes to save 12 % of his annual salary every year at the end of the year. If his salary increases by 15 % every year and ROI is 10 % per annum then what will be his accumulated savings at the age of 50? Sol. The Formula of calculating future value of a growing annuity when payments are made at the end of every period is: FV = PMT [{(1+r)n – (1+g)n}] r–g FV=150,000*.12*(1.1^25 – 1.15^25)/ (0.10 - 0.15) = 79,50,328.80 41

Q4. Mrs. Sharma decides to save Rs.2000 today and thereafter she increases his saving 2% p.m. Calculate the accumulated amount after 40 years if rate of interest is a. 1% pm b. 12% p.a. compounding monthly Sol. The Formula of calculating future value of a growing annuity when payments are made in the beginning of every period is: FV = PMT [{(1+r)n – (1+g)n}]* ( 1 + r) r–g Sol. A 1% p.m. FV = 2000* [{(1.01) ^480 – (1.02)^480} / (.01 – .02) ]* (1.01) FV=2688933344 (If saving monthly n, g and r should be monthly) Sol. B. 12% p.a. compounding monthly = 1% pm Therefore answer will be same. Q5. Mrs. Y saves Rs.80000 now and wants to increases her saving 2000 every year. Calculate the accumulated corpus she will be having after 26 years if roi is 12% p.a.? Sol. It is a case Growing Annuity with Fixed Amount The Formula of calculating future value of a growing annuity with fixed amount when payments are made in the beginning of every period is: FV = [A * Sn + D * (Sn – n) / r] * (1+r) = [80,000*150.33… + 2000* ( 150.33…-26)/0.12] * (1.12) (Calculation of Sn: set = end, N=26, i=12, pmt = -1, Fv = solve = 150.3339345) FV= 1,57,90,820.64 Q6. Mrs. Sharma decides to save Rs.100000 today and thereafter he increases his saving Rs.5000 every year. Calculate the accumulated amount after 40 years if Roi is 14% p.a. compounded monthly? Sol. The Formula of calculating future value of a growing annuity with fixed amount when payments are made in the beginning of every period is: FV = [A * Sn + D * (Sn – n) / r] * (1+r) First we need to convert 14% p.a compounding monthly into annual effective 42

CNVR n =12, I = 14, EFf = solve = 14.93420292 = [100000 * 1746.33….+5000 * ( 1746.33…-40)/ 1.1493…] * (1.1493…) (Calculation of Sn: set = end, N=40, i=14, pmt = -1, c/y = 14, Fv = solve = 1746.334509) = 266373647 Q7. Mr. S saves Rs.2 lacs at the end of year and increases his saving 5000 every year. Calculate total corpus after 25 years if rate of interest is 12% p.a. Sol. The Formula of calculating future value of a growing annuity with fixed amount when payments are made at the end of every period is: FV = [A * Sn + D * ( Sn – n ) / r ] = [200000 * 133.33.. + 5000 * (133.33.. – 25) / 0.12] FV = 31180511 Q8. Mr. X is 35 years of age and wishes to save 80000 at the end of the year and wants to increase his saving by 15 % every year and ROI is 15 % per annum then what will be his accumulated savings at the age of 60? Sol. It is a case of growing annuity with fixed percentage when rate of interest and growth rate are same. We use formula FV =[ A* n(1+R)n-1 ] Here A means first payment FV = 80000*25*(1.15)^24 = 5,72,50,352.38 Q9. What is the present value of perpetuity of a series of annual cash-flows of Rs.5000 which starts 1 year from now interest rate 12% p.a.? Sol. Present value of annuity in perpetuity if it is in the end of every period = annuity required/roi = 5000/0.12 = 41667 Q10. If Mr. Sharma needs Rs.2 lacs in the beginning of every month forever, what is the amount he needs to invest today if rate of interest 12% p.a. compounding monthly? Sol. Present value of annuity in perpetuity if it is in the beginning of every period = (annuity required/roi) *(1+roi) = (200000/.01) * (1.01) = 20200000 43

Q11. What is the present value of perpetuity of a series of annual cash-flows of Rs.5000 which starts 2 years from now interest rate 12% p.a.? Sol. First we need to calculate the PV after 2 years = (5000/0.12) x 1.12 = 46667 Now we need to find the present value of Rs.41667 at 12% per annum 46667/1.12^2 = 37202.38 Q12. What is the present value of perpetuity to be invested at the end, of a series of monthly cash flows of Rs.1420 which starts 2 years from now at interest rate of 13%per annum compounded monthly? Sol. Present value after 24 months = (pmt/i) +pmt = (1420/.01083) +1420 = Rs.132537.2669 I = 13/12 = 1.0833 This Rs.132537.2669 is received after 24 months so we need to find the present value of Rs.132537.2669 @13% per annum compounded monthly. SET: END/BEGIN N=2 I = 13 PV = -102336.39 (SOLVE) FV = 132537.2669 C/Y = 12 44

QUESTIONS ON ANNUITIES Q1. Ram is considering investing in a residential triplex project for which the EMI will be Rs.1248.33 per month. If the triplex costs Rs.172000 to build, and you can get a mortgage with monthly payments for 25 years at 9% p.a. compounded monthly interest, how much would be required by Ram? Sol Set: End N = 25 x 12 I=9 PV = Solve = 148753.02 PMT = -1248.33 P/Y = 12 C/Y = 12 Q2. Assume you can afford to make mortgage payments of Rs. 1550 per month, and that the market rate of interest is 8% p.a. compounded monthly for monthly end payment loans with a term of 30 years. If you pay 20% of the purchase price of the house as adown payment, what is the most expensive property you can buy? Sol. Set: End N = 30 x 12 I=8 PMT = -1550 PV = Solve = 211239.41 P/Y = 12 C/Y = 12 Value of house that can be purchased = 211239/0.8 = 264049.26 Faculty Comment: The PV calculated in step 1 is 80% of the value of house. Q3. An investment of Rs.8000 per quarter end for 6 years at annual interest rate of 8.5%, compounded quarterly. How much amount will accumulate by the end of 6 years? Sol. Set : End N=6x4 I = 8.5 PMT = -8000 FV = Solve = 247121.67 P/Y = 4 C/Y = 4 Q4. You borrow Rs.100000 which is to be repaid in equal monthly installments for a period of 3 years. The interest rate is 9% p.a. compounded monthly. What will be the monthly end payment? Sol Set: End N = 3 x 12 45

I=9 PV = 100000 PMT = Solve = -3179.97 P/Y = 12 C/Y = 12 Q5. Mr. Y is planning a trip with a family for which he is considering to invest Rs.15000at the end of every year for first 5 years and Rs.25000 at the end of every year for next 7 years and Rs.40000 thereafter. He is considering accumulating Rs. 645000after 15years. If he requires a 15%annual return, what is the maximum amount she can accumulate for his trip and determine the surplus or deficit if any. Sol STEP2 STEP 3 STEP1 SET : END SET: END SET : END N=7 N=3 N=5 I = 15 I = 15 I = 15 PV = -101135 PV = -545692 PMT = -15000 PMT = -25000 PMT = -40000 FV = 101135(SOLVE) FV = 545692(SOLVE) FV= 968831(SOLVE) P/Y = 1 P/Y = 1 P/Y=1 C/Y = 1 C/Y=1 C/Y=1 Maximum amount that he can accumulate after 15 years = Rs.968829.32 Surplus amount = Rs.968831 - 645000 = Rs. 323831 Q6. Rohan is planning for his early retirement at the age of 50. His current age is 35. He estimated that he will need Rs. 28500 per month at the end upto the age of 75 after his retirement. Calculate the corpus that would be required to meet the post retirement expenses and what amount he should invest at the end of every month if the rate of interest on the savings is 8.50% per annum? Sol STEP 2 STEP 1 SET : END SET : END N = 180 N = 300 I = 8.50 I = 8.50 PMT = 10331.24 (SOLVE) PV = Solve -3634442.75 FV = 3634442.75 PMT = 28500 P/Y = 12 P/Y = 12 C/Y = 1 C/Y = 1 Q7. Mr. Ram aged 30 years plans to retire at the age of 55. He plans to keep some amount aside at the end of each year for first 15 years so that he can withdrawRs.150000 per year end for 10 years once he gets retired with the first withdrawal at the age of 56. How much he should keep aside each year end if he can earn return of8.25% per annum on the investments? 46

Sol STEP 2 STEP 3 STEP 1 SET : END SET : END SET : END N = 10 N = 15 N = 10 I = 8.25 I = 8.25 I = 8.25 PV = -450461 (SOLVE) PMT = 16270 (SOLVE) PV = -995260 (SOLVE) FV = 995260 FV = 450461 PMT = 150000 Q8. Ram aged 55 years has some amount in an annuity which will pay him after 5 years Rs.30000 per annum at the beginning of every year for 10 years. Given the rate of interest at 8% p.a., calculate how much amount he has invested now? Sol. Step 2 Step 1 Set: End Set: Begin N=5 N = 10 I=8 I=8 PV = Solve = -147963.3 PMT = 30000 FV = 217406.63 PV = Solve = -217406.63 Q9. Mitesh invested some amount in a scheme that starts paying after 10 years, Rs.20000per year for five years at the beginning of each year and there after Rs.10000 at the beginning of each year for the next five years. How much Mitesh has invested, if return on the investment is 10% throughout the term period? Sol. Step 2 Step 3 Step 1 Set : Begin Set : End Set : Begin N=5 N = 10 N=5 I = 10 I = 10 I = 10 PMT = 20000 FV = 109288.89 PMT = 10000 FV = 41698.65 PV = Solve = -41698.65 PV = Solve = -109288.89 PV= Solve = -42135.59 Q10. Mr. Sohan (aged 40 years) is working in a pharma company. He invested Rs.300000in a term deposit which enables him to earn a certain amount at the beginning of each year for 10 years starting five years from today. Assuming the rate of interest of6.75% p.a. Calculate the amount that Mr. Sohan will receive each year? Sol. Step 2 Step 1 Set: Begin Set: End N = 10 N=5 I = 6.75 I = 6.75 PV = -300000 PV = -415872 FV = Solve = 415872 PMT = Solve = 54827.68 47

AMORTIZATION Amortization: Amortization is the distribution of a single lump-sum cash flow into many smaller cash flow installments, which can be determined by the amortization schedule. Under amortization every installment consists of both principal and interest. Greater amount of the payment is applied to interest at the beginning of the amortization schedule, while more money is applied to principal at the end. Flat Interest Rate Flat interest rate, as the term implies, means an interest rate that is calculated on the full amount of the loan throughout its tenure without considering that monthly repayments (EMIs) gradually reduce the principal amount. As a result, the Effective Interest Rate is noticeably higher than the nominal Flat Rate quoted in the beginning. The formula of calculating fixed rate of interest is – Interest Payable per Installment = (Original Loan Amount * No. of Years * Interest Rate p.a.) / Number of Installments For Q, if you take a loan of Rs 1, 00,000 with a flat rate of interest of 10% p.a. for 5 years, then you would pay: = (100000 + 10% of 100000*5)/5 =Rs30000 per year. This method is particularly used to calculate the interest payable for personal loans and vehicle loans. In this method, you have to pay interest on the entire loan amount throughout the loan tenure. It is actually less popular among the borrowers because even if you gradually pay down the loan, the interest does not decrease. Reducing / Diminishing Interest Rate Reducing/ Diminishing balance rate, as the term suggests, means an interest rate that is calculated every month on the outstanding loan amount. In this method, the EMI includes interest payable for the outstanding loan amount for the month in addition to the principal repayment. After every EMI payment, the outstanding loan amount gets reduced. Therefore, the interest for the next month is calculated only on the outstanding loan amount. The formula for calculating reducing balance interest is – Interest Payable per Installment = Interest Rate per Installment * Remaining Loan Amount For Q, if you take a loan of Rs 1, 00,000 with a reducing rate of interest of 10% p.a. for 5 years. Your annual repayment would be Rs.26380 instead of Rs.30000 which is paid as per flat rate of interest. In the first year interest would be charged on 100000 and 2nd year interest would be charged on Rs.90000; in the second year interest would be charged on Rs.83620 (100000-16380) and so on. Unlike the flat rate method, you would end up paying Rs.131900 instead of Rs. 1.5 lakh. 48

This method is particularly used to calculate the interest payable for housing, mortgage, property loans, overdraft facilities, and credit cards. Difference between Flat Interest Rate and Reducing Balance Rate  In flat rate method, the interest rate is calculated on the principal amount of the loan. On the other hand, the interest rate is calculated only on the outstanding loan amount on monthly basis in the reducing balance rate method.  Flat interest rates are generally lower than the reducing balance rate.  Calculating flat interest rate is easier as compared to reducing balance rate in which the calculations are quite tricky.  In practical terms, the reducing rate method is better than the flat rate method. Q1. Mr. Sharma has taken a housing loan of Rs 20 lacs for 25 years @ 8% p.a. reducing monthly, calculate the following: a. EMI (equated monthly installment ) Sol. Go to CMPD Set = End, n=300, i=8%, pv=20,00,000, p/y=c/y=12, pmt = solve = -15,436.32 Total interest paid in first 5 years Sol. Go to AMRT Pm1 =1 Pm2=60, SINT=-7,71,656.29 Here PM1 means payment number starts with. And PM2 means payment number ends with. b. Principal paid in last year Sol. Go to AMRT Pm1=24*12+1=289 Pm2=300 SPRN=1,77,452.61 c. Interest paid in 14th installment Sol. Go to AMRT Pm1=14 Pm2=14 INT=13,143.60 d. Total principal paid in first 12 years Sol. Go to AMRT Pm1=1 Pm2=144 SPRN=5,05,786.98 49

e. Total interest paid in last 12 years Sol. Go to AMRT Pm1=13*12+1 Pm2=300 SINT=7,96,779.85 f. Outstanding loan after 12.5 years Sol. Go to AMRT Pm1=1 Pm2=12.5*12 BAL=14,60,811.20 g. Total principal paid from 12th year till 20th year Sol. Go to AMRT Pm1=11*12+1 Pm2=240 SPRN=7,95,855.98 Q2. Mr. X has taken a housing loan of Rs.5000000 of 20 years @ 11% p.a. reducing monthly on floating bases. The bank would increases rate of interest to 12% p.a. reducing monthly after 3 years, what would be the new EMI? Sol. Set=End N = 240 PV = 50,00,000 I=11 FV=0 P/Y=12 C/Y=12 PMT=solve = -51,609.42 Now we need to calculate the outstanding loan after 3 years Go to AMRT: PM1=1, PM2=36, BAL=47,54,960.38 Now we need to calculate the new EMI SET=END N=240-36 PV=ANS execute I=12% P/Y=C/Y=12 PMT= solve = -54,739.84 50