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MGT411 Money & Banking Assignment 2 Solution Fall 2012

Question No. 1:
a) Today, most of the people in our country acknowledge the importance of education in our lives. Therefore, Mr. Akram is also planning to provide the best education to his son. In this regard, he is planning to set aside a handsome amount for his son education. Suppose the university fee of his son after 10 years will be Rs.200, 000. His bank is offering him 12% interest rate compounded annually. How much amount he has to deposit in his bank account today in order to get Rs.200, 000 from his bank after 10 years? (5 marks)

solution:

Q1 a) – PV = FV/(1 + i)^n

Present Value = Future Value/ (1+(interest))^years

PV = 64394.65

 

b) Suppose you have some extra funds with you and you want to make investment in bonds with those funds. Currently a 6% coupon bond with face value of Rs.1, 000 is selling at Rs.850. If you want to keep that bond till its maturity (which is one year), then what will be the yield to maturity of this bond? (5 marks)

Qno.1 b) –

Subtract the purchase price (850) from par value (1000) = 150

Divide the discount (150) by the remaining years to maturity (1) of the bond = 150

Add the annualized capital gain (150) to the yearly interest (60), to obtain total annualized return (210)

Subtract annualized capital gain (150) from par (1000), to obtain 850.

Divide the annualized return (210) by the result from the previous step (850), Yield to Maturity 24.70%

Question No. 2:
a) Define GDP deflator and explain how it differs from CPI (Consumer Price Index) although both are used to measure inflation rate in an economy? (4 marks)

Q2 a) – Although at first glance it may seem that CPI and GDP Deflator measure the same thing, there are a few key differences.  The first is that GDP Deflator includes only domestic goods and not anything that is imported.  This is different because the CPI includes anything bought by consumers including foreign goods.  The second difference is that the GDP Deflator is a measure of the prices of all goods and services while the CPI is a measure of only goods bought by consumers.

Solution:

Q2 a) – Although at first glance it may seem that CPI and GDP Deflator measure the same thing, there are a few key differences.  The first is that GDP Deflator includes only domestic goods and not anything that is imported.  This is different because the CPI includes anything bought by consumers including foreign goods.  The second difference is that the GDP Deflator is a measure of the prices of all goods and services while the CPI is a measure of only goods bought by consumers.
b) Suppose you are given the responsibility to calculate the inflation rate prevailing in an economy.

You, along with your team members, collect the following data related to that particular economy:
Years      Nominal GDP       Real GDP
2009       Rs. 48,300          Rs. 46,200
2010       54,400                51,000
2011       59,300                 53,000
How you will measure the inflation rate based on the above data? (6 marks)
Note: You are required to provide complete working and formulas while calculating GDP deflator and Inflation rate.

Solution:

b) – GDP Deflator = (Nominal GDP / Real GDP) ×100

Inflation rate = (Current Year’s GDP Deflator – Previous Year’s GDP Deflator) / Previous Year’s GDP Deflator X 100

Inflation Rate

n.a

2.1%

4.9%

 

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