RAIP Workbook

Second loan of Rs. 2 Cr. CMPD END N=9 X 12 I=13 PV=2 Cr. PMT=-315071.75 P/I=12 C/Y=12 Outstanding loan after 1 year PM1=1 PM2=12 Bal=18746175.54 After 2 years since the project started he sold it in Rs. 4 Cr. Rate of return he would get = 80.72% p.a. CASH 1–0 2 to 13 = - 161334.95 14 – 24 = - 315071.75-161334.95=-476406.7 25 = (40000000-315071.75-161334.95-8990321.159-18746175.54)=11787096.6 IRR = Solve = 5.055 Return = 5.055 X 12% = 60.666% p.a. comp monthly we will make it effective CNVR N=12 I=60.666 Eff = Solve = 80.72% 93

14) Mr. X has started a project by investing Rs.15 lacs. He gets from the project end of 1 year nothing, Rs.1.5 lacs after 2 years, 3 lacs after 3 years, 5 lacs after 4 years and end of 5th year 1.2 times of investment. If the opportunity cost is 12 % p.a. how much return is deviating of this project from opportunity cost? Sol. By using CASH function we can calculate the IRR of the project. 1 = -15,00,000 2-0 3-1,50,000 4-3,00,000 5-5,00,000 6-15,00,000 X 1.2 IRR = Solve = 14.84 Opportunity Cost = 12% p.a. But IRR of the project = 14.84 Deviation = 12% - 14.84 =- 2.84% 15) ABC ltd. started a project borrowing Rs.1 cr on January 2006 for 10 years at 10% p.a. reducing quarterly. It again had to take loan on july 2007 of Rs.50 lacs for 8.5 years at 11% p.a. reducing monthly basis. In September 2007 it again took loan of Rs.25 lacs for working capital for duration of 8 years at 12% p.a. reducing monthly basis. Finally in January 2008 it sold the project worth Rs.3 cr. Calculate the return on this project? Sol. Quarterly Repayment of loan taken on Jan 2006 END N=10 X 4 = 40 I=10 PV=1,00,00,000 PMT=398362.33 94

P/Y=4 C/Y=4 Balance on Jan 2008 AMRT PM1=1 PM2=8 Bal = 8703889 EMI of loan taken on July 2007 END N=8.5 X 12 I=11 PV=50,00,000 PMT=75665.2285 P/Y=12 C/Y=12 Balance on Jan 2008 AMRT PM1=1 PM2=6 Bal=4816856.263 EMI of loan taken on Sep 2007 END N= 8 X 12 I=12 PV=25,00,000 P/Y=12 C/Y=12 PMT=40632.1035 95

Bal on Jan 2008 AMRT PM1=1 PM2=4 Bal=2436527.391 Finally on Jan 2008 it sold the project worth Rs. 3 Cr. we use cash function to calculate the yield this project. CASH 1-0 2-0 3-0 4= - 398362.33 5-0 6-0 7= - 398362.33 8-0 9-0 10= - 398362.33 11-0 12-0 13 = -398362.33 14-0 15-0 16= -398362.33 17-0 18-0 19= - 398362.33 20= - 75665.2285 21 = -75665.2285 22=-514659.662=(-398362.33-75665.2285-40632.1035) 23= -116297.332=(-75665.2285-40632.1035) 96

24= = -116297.332=(-75665.2285-40632.1035) 25 = 13528067 = (3,00,00,000 - 398362.33 - 75665.2285 - 40632.1035 - 8703889 - 4816856.26 - 2436527.391) IRR= Solve = 16.216% Return = 16.216% p.m. = 16.216 X 12 = 194.595 % p.a. compounding Monthly CNVR N=12 I=194.595 Effective = solve = 507.019% p.a. 16) Mr. Sharma has purchased term insurance policies of risk cover Rs.2 crore, Rs.40 lacs of each. He is planning to discontinue one of his term insurance after 10 years. The current household expenses of family Rs.40000 per month including his self expenses of Rs.6000. He would require Rs.80 lacs for his child education after 5 years and Rs.50 lacs for his child marriage after 10 years. After 10 years the spouse would require 50% of then expenses for 35 years. He has current saving of Rs.50 lacs. He needs your advice on insurance cover. ( assuming investment return is 10% p.a. and inflation is 6% p.a. ) Sol. Current house hold expenses = 40000 p.m. His own expenses = 6000 p.m. This loans family would require = 40000 – 6000 = 34000 p.m. Project value of HHE for first 10 years CMPD Begin N=10 X 12 I=(10-6)/1.06 PV=-3414885.61 PMT=34000 P/Y=12 97

C/Y = 1 After 10 years from now spouse would require 50% of 34000 X (1.06)10 for next 35 years. We need to calculate present value of expenses required for 35 years CMPD Begin N=35 X 12 I=(10-6)/1.06 PV=-7176408.74 PMT=34000X(1.06)10 X 0.50 P/Y=12 C/Y= 1 Now we will discount the above value for 10 years 7176408.74/(1.1)10 = 2766816.232 Total present value of all future household expenses = 3414885.61+2766816.232= 6181701.842 Present value of cost of child education = 80,00,000/(1.1)5 =4967370.584 Present value of cost of Marriage = 50,00,000/(1.1)10= 1927748.005 Total = 6181701.842+4967370.584+1927748.005= 13076788.87 Current Saving = 50 lacs Insurance required = 13076788.87-5000000 = 8076788 But he has already taken policy of S.A. = 2Cr. Now we can suggest him to surrender 3 policies of s.a. 40 lacs each. 17) Mr. X took a housing loan of Rs.20 lacs for 20 years @ 12% p.a. reducing monthly. After 5 years he paid 30% outstanding balance with the same EMI. What would be his new tenure if he keeps paying the same EMI? Sol. 98

First we need to calculate the EMI Using CMPD SET=END N=20 X 12 I=12 PV=20 LACS PMT=SOLVE=-22021.72 P/Y=12 C/Y=12 Outstanding Balance after 5 years. PM1=1 PM2=60 BALANCE=SOLVE=1834886.577 Outstanding loan after paying 30% = 1834886.577-550465.97 = 1284420.607 New Tenure? CMPD END N=SOLVE=87.96 I=12 PV=1284420.607 PMT=-22021.72 P/Y=12 C/Y=12 Therefore balance tenure after paying 30% payment = 87.96 18) Ram had taken a housing loan of Rs.30 lacs for 25 years at 13% p.a. reducing monthly rate of interest. After 3 years he paid 25% of outstanding loan at that time along with the EMI. After that what would be his new EMI if there is no change in tenure of loan? 99

Sol. First we need to calculate the EMI SET: END N=25 x 12 I=13 PV=30 LACS PMT=SOLVE=-33835.05 P/Y=12 C/Y=12 OUTSTANDING LOAN AFTER 3 YEARS PM1=1 PM2=36 BALANCE=SOLVE=2941600.045 OUTSTANDING LOAN AFTER 3 YEARS = 2941600.045-735400.011 = 2206200.034 NEW EMI SET : END N=25 X 12 – 3 X 12=264 I=13 PV=2206200.034 PMT=25376.29 P/Y= 12 C/Y=12 NEW EMI=25376.29 19) Mr. X, aged 34, earns Rs.10 lakh p.a. out of which taxes and self-expenses account for Rs. 2 lakh p.a. His salary is expected to rise by 12% p.a. whereas taxes and personal expenses are 100

likely to rise by 6% p.a. If he expects to work till 60 years, what additional life cover can you enumerate on his life, if he already has life cover of Rs.25 lakhs and rate of return is 9% p.a.? Sol. First we need to calculate the present value of Income SET= Begin N=26 I=(9 – 12) / 1.12 PMT=10 LACS PV=SOLVE=-37267865.15 P/Y = 1 C/Y = 1 Now we need to calculate the present value of expenses Set=Begin N=26 I=(9-6)/1.06 PMT=2 LACS PV=-3749452 P/Y = 1 C/Y = 1 Net present value of Income after adjusting present value of expenses = 37267865.15- 3749452=33518412 He has taken life cover of Rs. 25 lacs Additional cover required = 33713437.8 – 25 lacs =31018412 20) In the above question, if Mr. X delays his retirement by 5 years, how much additional cover will be required on his life? Sol. If he delays retirement by 5 yrs. 101

First we need to calculate the present value of Income SET= Begin N=31 I=(9 – 12) / 1.12 PMT=10 LACS PV=SOLVE=-47969565.76 P/Y = 1 C/Y = 1 Now we need to calculate the present value of expenses Set=Begin N=31 I=(9-6)/1.06 PMT=2 LACS PV=-4207552.918 P/Y = 1 C/Y = 1 Net present value of Income after adjusting present value of expenses = 47969565.76- 4207552.918 = 43762012.84 If he retires at age 60 he require cover = 31018412 But if he retires at age 65 then additional cover required = 43762012.84-31018412 = 12743600 21) Sonali has a Money back insurance policy of sum assured Rs.1 lac of term 15 years with annual premium Rs.7500. She will get a 15% survival benefit at the end of 3rd/6th/9th& 12th year of the policy and 40% at the time of maturity. Accrued bonus of last 12 years is Rs.48000 and terminal bonus of 12% of the sum assured. She wants to know the underlying IRR in this policy. According to you it is ______________ per annum. Sol. Sum Assured= 1,00,000 102

Term=15 years Premium = 7500 p.a. first we need to calculate maturity of this policy Maturity = 40% of S.A. + Simple RevesionaryBonus + Final Additional Bonus = 40000 + 40/1000 x 1 lac x 15 ( 48000/12) + 12% of 1,00,000 = 1,12,000 He gets survival benefits after 3 yrs / 6 yrs / 9 yrs of Rs. 15000 For calculating IRR We need to use Cash Function 1 - -7500 2 - -7500 3 - -7500 4 – 15000 – 7500 5 - -7500 6 - - 7500 7 – 1500 – 7500 8 - -7500 9 - -7500 10 – 15000 – 7500 11 - - 7500 12 - -7500 13 - 15000 – 7500 14 - - 7500 15 - -7500 16 – 112000 IRR=Solve=8.23% 22) Sam has told you that they intend to purchase a new car which on road price Rs.350000. there is 7.5% expenses such as road tax registration charges etc on Ex showroom Price. A bank is ready to finance 75% of the ex-showroom value of the car for 3 years at an interest of 11.50% p.a. Sam wants to know if they take this loan and repay the same in 36 EMI's, how much interest will they have to pay in all. According to you the same is approximately ______________. 103

Sol. On Road Price= 350000 Addition due to expenses over Ex Showroom Price= 7.50% So Ex showroom Price 325581 350000/1.075 Loan 75% So Loan Amount= 244186 (325581*75%) Rate of Interest=11.50% per year Term= 3 years EMI= 8,052 ( set = end, n = 36, pv = 244186, p/y = 12, c/y =12 ) Total Repayment=(8052*36)= 289872 Original Loan= 244186 Total Interest Paid= 45686 (289872-244186 ) 23) Dr. Arun is a well to do surgeon aged 48 years. His son is in final year medical college, and daughter would be marriageable in 2 years. He has saving of Rs 50 lakh, a house, a clinic, Gold and other valuables. His wife died 2 years back. State his priority in regard to the following insurances. (A) Permanent total disability cover (B) Property insurance (C) Professional indemnity insurance (D) Life cover. A) (A), (C), (B), (D) B) (D), (C), (A), (B) C) (A), (C), (D), (B) D) (A), (B), (C), (D) Ans. C 24) Sunil insured the building of his house for a sum of Rs.500000 against fire insurance. One day the house is totally gutted in a devastating fire. The insurance surveyors certified that the building is a total loss with no salvage value and that the insurable value of the building just prior to the loss was Rs.400000. The insurer will pay to Sunil: (a) Rs.400000 (b) Rs.250000 (c) Rs.500000 (d) Nil 104

Ans. a 25) Mr. A purchases a flat at Rs 35 lakhs in Oct 2011. He has taken loan of Rs 20lakhs for 15yrs @ 8.5% pa, registration 2 lakhs, statutory expense and furniture Rs 3 lakhs. The value increases in Oct 2017 at Rs 80 lakhs. What value flat towards his unencumbered interest after setting aside 12% of the appreciation value towards tax and other cost to be discharged on selling unit sol. Appreciated amount = 80 lakh- 35 lakh – 2 lakh – 3 lakh = 40 lakh amount of taxes and other cost = 40 lakh *.12 = 480000 outstanding loan = 1483114 unencumbered interest = 8000000-480000-1483114 = 6036886 26) Mr. took a personal loan of Rs. 2lakh at 14.5%p.a. interest, tenure 2 yrs on the credit card. The card company has also charged possessing fees of 1.5% on the loan amt. the interest is charged on monthly reducing bal. what is the effective interest paid? a) 16.04%pa b) 17.28% pa c) 13.79% pa d) 15.25% pa Sol. End, n = 24, I = 14.5, pv = 200000, p/y=c/y=12 ,pmt= 9649.88.. end, n = 24, pv = 200000-3000(processing fees ), p/y=c/y=12 , pmt= 9649.88 I = solve = 16.044….. CONV N = 12 I = 16.044…. Eff = solve = 17.278… 27) A couple with no dependents and age 60 yrs (male) and 58 yrs (female) has a corpus of 1 crore. Their expectancy to live is 80yrs (male) and 83yrs (female). Following are the annuity options: (1) Guarantee period of annuity of Rs 9.43lakhs p.a. for 20yrs. (2) Rs 8.37lakhs p.a. as joint life annuity. (3) Rs 7.28 lakhs p.a. as joint life annuity with return of purchase price. a) Option 1, as it gives highest returns. b) Option 2, as it covers wife life expectancy. c) Option 1, as it gives higher annuity for husband. d) Option 3, as the corpus comes backs and return is high. Ans. b 28) Suresh, a Certified Financial Planner, is preparing a letter to circulate among prospective clients and the letter contains information on services provided by his firm. According to the Code of Ethics and Rules of Professional Conduct, all of the following information should appear in the letter except ________. 105

(a) details of firm’s portfolio size and composition (b) the fees and commission sources of the firm (c) any significant financial relationships or connections with product providers (d) identity of the firm providing the service and the nature of services offered Ans. a 29) While presenting and reviewing a Financial Plan to the client, you would do all of the foll owing except ______. (a) presenting the plan in writing to the client (b) expressing your opinion as a matter of fact (c taking the client through the plan (d) sharing the assumptions on which the plan is made Ans. b 30) (A) In India, only the lessor is allowed to charge depreciation on the assets and claim tax deductions. (B) In India, only the lessee is allowed to charge depreciation on the assets and claim tax deductions. (a) Statement (A) is correct. (b) Statement (B) is correct. (c) Both are correct. (d) None of the above is correct Ans. a 31) While making an investment in a Debt fund for your client you make the following remarks: (A) Rate of return by the instrument in the past is 7.5% and is expected to continue in future. (B) The investment would have low risk. In view of the CFP code of Ethics, which of the above statement is violates?- (a) (A), Only (b) (B), Only (c) Both (A) and (B) (d) None of the above Ans. a 32) ” Member should act with care and skill in providing Financial Planning Services”. This For ms part of ________ in the code of Ethics. (a) Fairness (b) Diligence (c) Integrity (d) Competence Ans. b 33) Which of the following statements is/are NOT true about a warranty in an insurance contract? (A) Declarations on the proposal form can be warranties by reference. (B) 106

Warranties help the insurer to ensure that the risk stays the same during currency of the policy. (C) Warranties have to be followed literally. (a) (A), (B) & (C) (b) (B) (c) (A) (d) None of the above Ans. b 34) In case of a life insurance policy, if the gross annual premium amount does not exceed the sum assured by 10%, then _______. (A) Death benefit is tax free. (B) Death benefit is taxable. (C) Maturity benefit is tax free. – Marks : 1 (a) (A), only is correct (b) (B), only is correct (c) (C), only is correct (d) Both (A) & (C) are correct Ans. d 35) Whole life insurance contracts contain cash surrender values. These cash surrender values: – (a) Represent estimates based on projected mortality savings. (b) Are based on the past experience of the insurance company and cannot be guaranteed. (c) Represent an excess of the premiums collected over pure insurance costs and earnings credited. (d) Are available only if the insurer chooses to terminate the coverage under the policy. Ans. c 36) Rationale behind principal of indemnity is that ____________. (a) Insured gets compensation to the extent he has insured, irrespective of amount of loss (b) Insured does not profit from insured’s loss (c) Insured profits from insured’s loss (d) None of the above Ans. b 37) Condition in an Insurance Contract is associated with_____________. (a) Exclusions in the Insurance Contract. (b) Limitations on the Insurer’s promise to perform. (c) Repudiation of claims in the Insurance Contract. (d) None of the above Ans. b 107

38) Any possible occurrence which may have a negative financial implication can be plotted on a graph with X axis measuring the frequency (low-high) and Y axis measuring the financial impact (low-high). It would not be practical to purchase insurance for events which would fall in the high frequency, high impact quadrant because _________. (a) the best way to cover such a risk would be to alter the functioning of the business (b) such a risk cover would be very expensive (c) usually this is a business risk, which is rewarded by profit motive (d) such occurrences are so few that no insurer would be offering a risk cover Ans. b 39) Reliable age proof must be given along with the proposal form of life insurance which could be a : (A) Certified copy of birth certificate of Municipal Corporation (B) Marriage certificate issued by Marriage Registrar (C) Registered document of property ownership – (a) (A) (b) (B) (c) Either (A) or (B) (d) Either (A) or (C) Ans. c 40) A Life insurer receives an application for Rs.20 crores. However the insurer is not ready to take this risk, but simultaneously does not want to leave the business. The insurer company shops around and contracts another insurer to assume a certain percentage of loss for a corresponding percentage of premiums. This is a case of (a) Facultative reinsurance (b) Treaty reinsurance (c) Both of the above (d) None of the above Ans. a 41) Vinita was recently divorced and has two children. The divorce decree requires thatshe pay 1/3 of the college tuition cost for her children. The tuition cost is currently Rs.15,000 per year and has been increasing at 7% per year. Her son and daughter are 12 and16 respectively and will attend college for four years beginning at age 18. How muchshould she save each month, beginning today for the next five years to finance educationfor both the children (in nearest rupee)? Assume that her after-tax rate of return will be9% and that general inflation has been 4% p.a. A) Rs.750 B) Rs.745 C) Rs.2,235 D) Rs. 2,500 108

Solution: Step 1) Tuition Cost for each child for Vinita = Rs 5000. Calculate the Inflation adjusted present value of tuition expenses for both children using Cash Mode: Inflation adjusted =(9-7)/1.07 D.Editor 1: 0, 2: 0, 3: 5000, 4: 5000, 5: 5000, 6: 5000, 7: 5000, 8: 5000, 9: 5000, 10: 5000 Npv = solve = 36158.96 Step2 Begin n = 60, I = 9, pv = 36158.96027, p/y = 12, c/y = 1, pmt = solve = PMT = solve = 739 42) Rajesh, aged 35 years, wishes to retire at 60. If his present monthly expenses are Rs. 50,000 and life expectancy is 75 years, calculate the additional corpus required in case he lives longer by 10 years than his life expectancy. Assume inflation to be 7.5% p.a. and rate of interest is 8% p.a SOL. FIRST FIND THE PV OF ALL FUTURE EXPENSES AT AGE OF 60 IF LIFE EXPECTANCY 75. Begin, N=15*12, I= (8-7.5)/1.075, PMT=50000*1.075^25, P/Y=12, C/Y=1, PV=solve = 53028710 NOW FIND THE PV OF ALL EXPENSES IF LIFE EXPECTANCY increase by 10 yrs after 75 age it means that he lives at age of 85 Begin, N=25*12, I= (8-7.5)/1.075, PMT=50000*1.075^25, P/Y=12, C/Y=1, PV=solve = 86385171 109