Modul

e2-
Timev
alueofMoney

Uni
t2:
TimeVal
ueOfMoney
.

 I
ntr
oduct
ion–Meani
ng&Def
ini
ti
on–Need–Fut
ureVal
ue(
Singl
eFl
ow–
Unev
enFl
ow&Annui
ty)–Pr
esentVal
ue(
Singl
eFl
ow–Unev
enFl
ow&
Annui
ty)
–Doubl
i
ngPer
iod.(
B.com)

 I
ntr
oduct
ion–Meani
ng&Def
ini
ti
on–Need–Fut
ureVal
ue(
Singl
eFl
ow–
Unev
enFl
ow&Annui
ty)–Pr
esentVal
ue(
Singl
eFl
ow–Unev
enFl
ow&
Annui
ty)
–Doubl
i
ngPer
iod–ConceptofVal
uat
ion–Val
uat
ionofBonds&
Debent
ures–Pr
efer
enceShar
es–Equi
tyShar
es–Si
mpl
ePr
obl
ems.
(BBA)

Moneyhast
imev
alue.Ar
upeet
odayi
smor
eval
uabl
ethanay
earhence.I
tisont
his
concept“
thet
imev
alueofmoney
”isbased.Ther
ecogni
ti
onoft
het
imev
alueof
moneyandr
iski
sext
remel
yvi
tal
inf
inanci
almaki
ng.

Mostf
inanci
aldeci
si
onssuchast
hepur
chaseofasset
sorpr
ocur
ementoff
unds,
af
fectt
hef
ir
m’scashf
lowi
ndi
ff
erentt
imeper
iod.Forexampl
e,i
faf
ixedasseti
s
pur
chased,
itwi
l
lrequi
reani
mmedi
atecashout
layandwi
l
lgener
atecashf
lows
dur
ingmanyf
utur
eper
iods.Si
mil
arl
yift
hef
ir
m bor
rowsf
undsf
rom abankorf
rom
anyot
hersour
ce,
itr
ecei
vescashandcommi
tsanobl
i
gat
iont
opayi
nter
estand
r
epaypr
inci
pal
inf
utur
eper
iods.Thef
ir
m mayal
sor
aisef
undsbyi
ssui
ngequi
ty
shar
es.Thef
ir
m’scashbal
ancewi
l
lincr
easeatt
het
imeshar
esar
eissued,
butas
t
hef
ir
m pay
sdi
vi
dendsi
nfut
ure,
theout
fl
owofcashwi
l
loccur
.Sounddeci
sion
maki
ngr
equi
rest
hatt
hecashf
lowswhi
chaf
ir
misexpect
edt
ogi
veupov
erper
iod
shoul
dbel
ogi
cal
l
ycompar
abl
e.I
nfact
,theabsol
utecashf
lowswhi
chdi
ff
eri
n
t
imi
ngandr
iskar
enotdi
rect
lycompar
abl
e.Cashf
lowsbecomel
ogi
cal
l
y
compar
abl
ewhent
heyar
eappr
opr
iat
elyadj
ust
edf
ort
hei
rdi
ff
erencesi
nti
mingand
r
isk.Ther
ecogni
ti
onoft
het
imev
alueofmoneyandr
iski
sext
remel
yvi
tal
in
f
inanci
aldeci
sionmaki
ng.I
fthet
imi
ngandr
iskofcashf
lowsi
snotconsi
der
ed,
the
f
ir
m maymakedeci
si
onswhi
chmayal
l
owi
ttomi
ssi
tsobj
ect
iveofmaxi
mizi
ngt
he
owner
’swel
far
e.Thewel
far
eofowner
swoul
dbemaxi
mizedwhenNetPr
esent
Val
uei
scr
eat
edf
rom maki
ngaf
inanci
aldeci
sion.I
tist
hus,
timev
alueconcept
whi
chi
simpor
tantf
orf
inanci
aldeci
sions.

Thus,
weconcl
udet
hatt
imev
alueofmoneyi
scent
ral
tot
heconceptoff
inance.I
t
r
ecogni
zest
hatt
hev
alueofmoneyi
sdi
ff
erentatdi
ff
erentpoi
ntsoft
ime.Si
nce
moneycanbeputt
opr
oduct
iveuse,
itsv
aluei
sdi
ff
erentdependi
nguponwheni
tis

Fi
nanci
alManagement,
BBA&B.
com,
School
ofCommer
ce,
Presi
dencyUni
ver
sit
yPage1
 Modul
e2-
Timev
alueofMoney

r
ecei
vedorpai
d.I
nsi
mpl
ert
erms,
thev
alueofacer
tai
namountofmoneyt
odayi
s
mor
eval
uet
omor
row.I
tisnotbecauseoft
heuncer
tai
ntyi
nvol
vedwi
tht
imebut
pur
elyonaccountoft
imi
ng.Thedi
ff
erencei
nthev
alueofmoneyt
odayand
t
omor
rowi
sref
err
edast
imev
alueofmoney
.

Meani
ng:

 Thedi
ff
erencei
nthev
alueofmoneyt
odayandt
omor
rowi
sref
err
edasTi
me
v
alueofmoney
.

 The 
ti
mev
alue 
ofmoney(
TVM)i
stheconceptt
hatmoneyy
ouhav
enowi
s
wor
thmor
ethant
hei
dent
ical
sum i
nthef
utur
eduet
oit
spot
ent
ial
 
ear
ning
capaci
ty.

NeedorReasonf
ort
imev
alueofmoney

 Ri
skanduncer
tai
nty
:Fut
urei
sal
way
suncer
tai
nandr
isky
.Out
fl
owofcashi
s
i
nourcont
rol
aspay
ment
stopar
ti
esar
emadebyus.Ther
eusnocer
tai
nty
f
orf
utur
ecashi
nfl
ows.Cashi
nfl
owsar
edependentoutonourcr
edi
tor
s,Bank
et
c.Asani
ndi
vi
dual
orf
ir
misnotcer
tai
naboutf
utur
ecashr
ecei
pts,
itpr
efer
s
r
ecei
vi
ngcashnow.

 I
nfl
ati
on:
Inani
nfl
ati
onar
yeconomy
,themoneyr
ecei
vedt
odayhasmor
e
pur
chasi
ngpowert
hant
hemoneyt
ober
ecei
vedi
nfut
ure.I
not
herwor
ds,
a
r
upeet
odayr
epr
esent
sagr
eat
err
eal
pur
chasi
ngpowert
hanar
upeeay
ear
hence.

 Consumpt
ion:
Indi
vi
dual
sgener
all
ycur
rentconsumpt
iont
ofut
ure
consumpt
ion.

 I
nvest
mentoppor
tuni
ti
es:
Ani
nvest
orcanpr
ofi
tabl
yempl
oyar
upeer
ecei
ved
t
oday
,togi
vehi
m ahi
gherv
aluet
ober
ecei
vedt
omor
roworaf
teracer
tai
n
per
iodoft
ime.

Thus,
thef
undament
alpr
inci
plebehi
ndt
heconceptoft
imev
alueofmoneyi
sthat
,a
sum ofmoneyr
ecei
vedt
oday
,iswor
thmor
ethani
fthesamei
srecei
vedaf
tera
cer
tai
nper
iodoft
ime.Forexampl
e,i
fani
ndi
vi
dual
isgi
venanal
ter
nat
iveei
thert
o
r
ecei
ve10,
000noworaf
teroney
ear
,hewi
l
lpr
efer10,
000now.Thi
sisbecause
t
oday
,hemaybei
naposi
ti
ont
opur
chasemor
egoodswi
tht
hismoneyt
hanwhathe

Fi
nanci
alManagement,
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com,
School
ofCommer
ce,
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dencyUni
ver
sit
yPage2
 Modul
e2-
Timev
alueofMoney

i
sgoi
ngt
ogetf
ort
hesameamountaf
teroney
ear
.Thus,
timev
alueofmoneyi
sa
v
ital
consi
der
ati
oni
nmaki
ngf
inanci
aldeci
sion.Letust
akesomeexampl
es:

Val
uat
ionconcept
s

Thet
imev
alueofmoneyest
abl
i
shest
hatt
her
eisapr
efer
enceofhav
ingmoneyat
pr
esentt
hanaf
utur
epoi
ntoft
ime.I
tmeanst
hataper
sonwi
l
lhav
etopayi
nfut
ure
mor
eforar
upeer
ecei
vedt
oday
.Forexampl
e:supposey
ourf
athergav
eyou100on
y
ourt
ent
hbi
rt
hday
.Youdeposi
tedt
hisamounti
nabankat10%r
ateofi
nter
estf
or
oney
ear
.Howmuchf
utur
esum woul
dyour
ecei
veaf
teroney
ear
?Youwoul
drecei
ve
110.

Fut
uresum =Pr
inci
pal
+Int
erest

=100+0.
10×100=110

Whatwoul
dbet
hef
utur
esum i
fyoudeposi
ted100f
ort
woy
ear
s?Youwoul
dnow
r
ecei
vei
nter
estoni
nter
estear
nedaf
teroney
ear
.

Fut
uresum =100×1.
10=121

Weexpr
esst
hispr
ocedur
eofcal
cul
ati
ngasCompoundVal
ueorFut
ureVal
ueofa
sum.Aper
sonmayacceptl
esst
oday
,forar
upeet
ober
ecei
vedi
nthef
utur
e.Thus,
t
hei
nver
seofcompoundi
ngpr
ocessi
ster
medasdi
scount
ing.Her
ewecanf
indt
he
v
alueoff
utur
ecashf
lowasont
oday
.

Techni
quesoft
imev
alueofmoney

Ther
ear
etwot
echni
quesf
oradj
ust
ingt
imev
alueofmoney
.Theyar
e:

 Compoundi
ngTechni
ques/
Fut
ureVal
ueTechni
ques

 Di
scount
ing/
PresentVal
ueTechni
ques

Compoundi
ngTechni
ques/
Fut
ureVal
ueTechni
que

I
nthi
sconcept
,thei
nter
estear
nedont
hei
nit
ial
pri
nci
pal
amountbecomesapar
tof
t
hepr
inci
pal
att
heendoft
hecompoundi
ngper
iod.

For
mul
atoCal
cul
ateFut
urev
alue:
n
FV=PV(
1+r
)

FV=Fut
ureVal
ue

Fi
nanci
alManagement,
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com,
School
ofCommer
ce,
Presi
dencyUni
ver
sit
yPage3
 Modul
e2-
Timev
alueofMoney

PV=Pr
esentVal
ue

r=Rat
eofI
nter
est

n=NumberofYear
s

Thev
alueofmoneyataf
utur
edat
ewi
thagi
veni
nter
estr
atei
scal
l
edf
utur
eval
ue.
Si
mil
arl
y,t
hewor
thofmoneyt
odayt
hati
srecei
vabl
eorpay
abl
eataf
utur
edat
eis
cal
l
edPr
esentVal
ue.

Case1:
Annual
Compoundi
ng

1.
Findoutt
hev
alueofasum ofRs.
2000af
teray
earwi
that
imePr
efer
enceof
12%(
Ans:
2240)

Sol
n:For
mul
atoCal
cul
ateFut
urev
alue:
n
FV=PV(
1+r
)
1
FV=2000(
1+0.
12)
1
FV=2000(
1.12)

FV=2000(
1.12)

FV=2240

2.Mr
.XaFi
nanceManageri
nABCLi
mit
edi
nvest
ssur
plusf
undsofRs.
10,
000i
na
nat
ional
i
zedbankat10%compoundi
nter
estperannum .
HowmuchMr
.XWi
l
lhav
e
af
ter5y
ear
s.

Sol
n:For
mul
atoCal
cul
ateFut
urev
alue:
n
FV=PV(
1+r
)
5
FV=10,
000(
1+0.
1)
5
FV=10,
000(
1.1)

FV=10,
000(
1.6105)

FV=16,
105

Fi
nanci
alManagement,
BBA&B.
com,
School
ofCommer
ce,
Presi
dencyUni
ver
sit
yPage4
 Modul
e2-
Timev
alueofMoney

3.
Mr.
ABCaFundManageri
nxy
zLi
mit
edi
nvest
sfundsofRs.
50,
000i
naMF
Companyat12%compoundi
nter
estperannum .
HowmuchMr
.ABCWi
l
lhav
eaf
ter6
y
ear
s.

Sol
n:For
mul
atoCal
cul
ateFut
urev
alue:
n
FV=PV(
1+r
)
6
FV=50,
000(
1+0.
12)
6
FV=50,
000(
1.12)

FV=50,
000(
1.9738)

FV=98,
691+99or-
99

4.Fi
ndoutt
hef
utur
eval
ueofasum ofRs.
2000af
teray
earwi
that
imepr
efer
ence
of12%.
(2240)
(Repeat
ed)

5.
Xinv
est
sRs.
3000f
or3y
ear
sinasav
ingsaccountt
hatpay
s10%i
nter
estp.
a
.
Cal
cul
atet
hef
utur
eval
ue

Sol
n:For
mul
atoCal
cul
ateFut
urev
alue:
n
FV=PV(
1+r
)
3
FV=3,
000(
1+0.
1)
3
FV=3,
000(
1.1)

FV=3,
000(
1.331)

FV=3993

6.
Findoutt
hef
utur
eval
ueofRs.
1600,
recei
vedaf
ter2y
ear
sat10%pr
efer
encer
ate.

Sol
n:For
mul
atoCal
cul
ateFut
urev
alue:
n
FV=PV(
1+r
)
2
FV=1600(
1+0.
1)
2
FV=1600(
1.1)

FV=1600(
1.21)

Fi
nanci
alManagement,
BBA&B.
com,
School
ofCommer
ce,
Presi
dencyUni
ver
sit
yPage5
 Modul
e2-
Timev
alueofMoney

FV=1936

7.Cal
cul
atet
hef
utur
eval
uef
or20,
000deposi
tedi
nbankf
oraper
iodof5y
ear
s@
12%p.
a.

Sol
n:For
mul
atoCal
cul
ateFut
urev
alue:
n
FV=PV(
1+r
)
5
FV=20,
000(
1+0.
12)
5
FV=20,
000(
1.12)

FV=20,
000(
1.7623)

FV=35,
246

8.
Arunmakesadeposi
tofRs.
10,
000i
nabankwhi
chpay
s8%i
nter
estcompounded
annual
l
yfor8y
ear
s.Youar
erequi
redt
ofi
ndoutt
heamountwhi
chi
stor
ecei
vedby
hi
m af
ter8y
ear
s

Sol
n:For
mul
atoCal
cul
ateFut
urev
alue:
n
FV=PV(
1+r
)
8
FV=10,
000(
1+0.
08)
8
FV=10,
000(
1.08)

FV=10,
000(
1.8509)

FV=18,
510

Case2:
Mul
ti
plecompoundi
ngorI
ntr
aCompoundi
ng

Wheni
nter
esti
s compounded 
mor
ethanonceay
ear
,thi
saf
fect
sbot
hfut
ureand
pr
esent
-val
uecal
cul
ati
ons.Wi
th 
i
ntr
a-y
ear
 compoundi
ng,
theper
iodi
cint
erestr
ate,
i
nst
eadofbei
ngt
hest
atedannual
rat
e,becomest
hest
atedannual
rat
edi
vi
dedby
t
henumberof
 compoundi
ng 
per
iodspery
ear
.

I
nter
estcanbecompoundedmont
hly
,quar
ter
lyandhal
fyear
ly.I
fcompoundi
ngi
s
quar
ter
ly,
annual
int
erestr
atei
stobedi
vi
dedby4andt
henumberofy
ear
sist
obe
mul
ti
pli
esby4.Si
mil
arl
y,i
fmont
hlycompoundi
ngi
stobemade,
annual
int
erestr
ate

Fi
nanci
alManagement,
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com,
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ofCommer
ce,
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dencyUni
ver
sit
yPage6
 Modul
e2-
Timev
alueofMoney

i
stobedi
vi
dedby12andnumberofy
ear
sist
obemul
ti
pli
edby12.

For
mul
atobeusedunderMul
ti
pleCompoundi
ngorI
ntr
acompoundi
ngar
eas
f
oll
ows:

a)
WhenI
nter
esti
spay
abl
ehal
fyear
ly(
Semi
-annual
l
yi.
e2)
2n
FV=PV(
1+r
/2)

a)
WhenI
nter
esti
spay
abl
eQuar
ter
ly(
4)
4n
FV=PV(
1+r
/4)

a)
WhenI
nter
esti
spay
abl
emont
hly(
12)

FV=PV(
1+r
/12)12n

a)
WhenI
nter
esti
spay
abl
eDai
l
y(365)
365n
FV=PV(
1+r
/365)

Pr
obl
ems:

1.
Cal
cul
atet
heFut
urev
alueofRs.
4000whi
chi
sinv
est
edf
or4y
ear
sandt
hei
nter
est
oni
tiscompoundedat12%p.
aFi
ndoutt
hecompoundedv
aluef
orhal
fyear
lyand
quar
ter
ly.
8=
Gi
ven(
1.06) 1.
594

Sol
n:For
mul
a=a)
WhenI
nter
esti
spay
abl
ehal
fyear
ly
2n
FV=PV(
1+r
/2)
2x
4
FV=4000(
1+0.
12/
2)
8
FV=4000(
1+0.
06)
8
FV=4000(
1.06)

FV=4000(
1.594)

FV=6376

a)
WhenI
nter
esti
spay
abl
eQuar
ter
ly(
4)
4n
FV=PV(
1+r
/4)

Fi
nanci
alManagement,
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com,
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ofCommer
ce,
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dencyUni
ver
sit
yPage7
 Modul
e2-
Timev
alueofMoney
4x
4
FV=4000(
1+0.
12/
4)
16
FV=4000(
1+0.
03)
16
FV=4000(
1.03)

FV=4000(
1.6047)

FV=6419

2.
Cal
cul
atet
hef
utur
eval
ueofRs.
7000i
nvest
edf
or5y
ear
satar
ateofi
nter
estof
15%compoundedhal
fyear
ly.
Accor
dingt
oCompoundt
abl
ecompoundv
aluef
act
or
f
orRe.
1in5y
ear
satr
ate15%.

Sol
n:For
mul
a=a)
WhenI
nter
esti
spay
abl
ehal
fyear
ly
2n
FV=PV(
1+r
/2)
2x
5
FV=7000(
1+0.
15/
2)
10
FV=7000(
1+0.
075)
10
FV=7000(
1.075)

FV=7000(
2.061)

FV=14,
427

3.
Mrs,
Par
udeposi
tedRs.
6000i
nbankf
or5y
ear
sandt
hei
nter
estoni
tis
20
compoundedat10%p.
a.i
fint
eresti
scal
cul
atedquar
ter
ly(
Giv
en(
1.025) =1.
637

Cal
cul
atet
hef
utur
eval
uequar
ter
ly.

a)
WhenI
nter
esti
spay
abl
eQuar
ter
ly(
4)
4n
FV=PV(
1+r
/4)
4x5
FV=6000(
1+0.
1/4)
20
FV=6000(
1+0.
025)
20
FV=6000(
1.025)

Fi
nanci
alManagement,
BBA&B.
com,
School
ofCommer
ce,
Presi
dencyUni
ver
sit
yPage8
 Modul
e2-
Timev
alueofMoney

FV=6000(
1.637)

FV=9822

4.
Cal
cul
atet
hef
utur
eval
ueofRs.
9000i
sinv
est
edf
oraper
iodof5y
ear
sat12%p.
a
20
I
nter
estCompoundedquar
ter
ly.
FindoutFV.Gi
ven(
1.03) =1.
806

a)
WhenI
nter
esti
spay
abl
eQuar
ter
ly(
4)
4n
FV=PV(
1+r
/4)
4x
5
FV=9000(
1+0.
12/
4)
20
FV=9000(
1+0.
03)
20
FV=9000(
1.03)

FV=9000(
1.806)

FV=16,
254

5.
Indi
anbankpay
s12%i
nter
estcompoundedQuar
ter
lyi
fRs.
1,000i
smadeasan
i
nit
ial
Deposi
t,Howmuchi
twi
l
lbei
nter
msofgr
owt heendof5thy
hatt ear
.

a)
WhenI
nter
esti
spay
abl
eQuar
ter
ly(
4)
4n
FV=PV(
1+r
/4)
4x
5
FV=1000(
1+0.
12/
4)
20
FV=1000(
1+0.
03)
20
FV=1000(
1.03)

FV=1000(
1.806)

FV=1806

Case3:
Thef
utur
eval
ueofannui
tyofcashf
lowsorser
iesofequal
cashf
lows

Fi
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alManagement,
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com,
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ce,
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dencyUni
ver
sit
yPage9
 Modul
e2-
Timev
alueofMoney

Ev
enCashf
lowsofacer
tai
nper
iodoft
imei
sknownas“
Annui
ty”
.

I
not
herwor
dsAnnui
tyi
saf
ixedpay
mentorr
ecei
pteachy
earf
oraspeci
fi
ednumber
ofy
ear
s.

Thef
utur
eval
ueofAnnui
tycanbecal
cul
atedbyusi
ngAnnui
tyt
abl
easwel
lasby
adopt
ingaf
ormul
a:

FVA=AxCFA(
r,
n)

OR
n-
1 n-
2 n-
3 n-
4 n-
5
FVA=R(
1+i
) +R(
1+i
) +R(
1+i
) +R(
1+i
) +R(
1+i
) …………

FVA=Fut
urev
alueofAnnui
ty

R=Pr
inci
pal
Amount

i
=rat
eofI
nter
est

n=Numberofy
ear
s

FVA=Fut
urev
alueofAnnui
ty

1.
Cal
cul
atet
heFVAofRs.
5000deposi
tedatt
heendofeachy
earat6%f
oraper
iod
of5y
ear
s.

Sol
n:
n-
1 n-
2 n-
3 n-
4 n-
5
For
mul
a:FVA=R(
1+i
) +R(
1+i
) +R(
1+i
) +R(
1+i
) +R(
1+i
)
5-
1 5-
2 5-
3 5-
4
FVA=5000(
1+0.
06) +5000(
1+0.
06) +5000(
1+0.
06) +5000(
1+0.
06) +
5-
5
5000(
1+0.
06)
4 3 2 1 0
FVA=5000(
1.06)+5000(
1.06)+5000(
1.06)+5000(
1.06)+5000(
1.06)

FVA=5000(
1.26)+5000(
1.19)
+5000(
1.12)
+5000(
1.06)
+5000(
1)

FVA=6300+5950+5600+5300+5000

FVA=28,
150

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 Modul
e2-
Timev
alueofMoney

2.
Mr.
Kumardeposi
tsRs.
6000att
heendofev
eryy
earf
or5y
ear
sandt
hedeposi
t
ear
nscompoundi
nter
estat12%p.
a.Det
ermi
nehowmuchmoneywi
l
lhehav
eatt
he
endoff
ivey
ear
s.

Sol
n:
n-
1 n-
2 n-
3 n-
4 n-
5
For
mul
a:FVA=R(
1+i
) +R(
1+i
) +R(
1+i
) +R(
1+i
) +R(
1+i
)
5-
1 5-
2 5-
3 5-
4
FVA=6000(
1+0.
12) +6000(
1+0.
12) +6000(
1+0.
12) +6000(
1+0.
12) +
5-
5
6000(
1+0.
12)
4 3 2 1 0
FVA=6000(
1.12)+6000(
1.12)+6000(
1.12)+6000(
1.12)+6000(
1.12)

FVA=6000(
1.57)+6000(
1.40)
+6000(
1.25)
+6000(
1.12)
+6000(
1)

FVA=9420+8400+7500+6720+6000

FVA=38,
040

3.
Cal
cul
atet
hef
utur
eval
ueofannui
tyofRs.
4000deposi
tedatt
heendofeachy
ear
at6%f
oraper
iodoff
ivey
ear
s.

Sol
n:
n-
1 n-
2 n-
3 n-
4 n-
5
For
mul
a:FVA=R(
1+i
) +R(
1+i
) +R(
1+i
) +R(
1+i
) +R(
1+i
)
5-
1 5-
2 5-
3 5-
4
FVA=4000(
1+0.
06) +4000(
1+0.
06) +4000(
1+0.
06) +4000(
1+0.
06) +
5-
5
4000(
1+0.
06)
4 3 2 1 0
FVA=4000(
1.06)+4000(
1.06)+4000(
1.06)+4000(
1.06)+4000(
1.06)

FVA=4000(
1.26)+4000(
1.19)
+4000(
1.12)
+4000(
1.06)
+4000(
1)

FVA=5040+4760+4480+4240+4000

FVA=22,
520

4.
Mr.
Manj
udeposi
tsRs.
3000att
heendofev
eryy
earf
orf
ivey
ear
sinhi
ssav
ings
accountpay
ing6%i
nter
estcompoundedannual
l
y.Hewant
stodet
ermi
nehowmuch
moneyhewi
l
lhav
eatt
heendof5y
ear
s.

Sol
n:

Fi
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alManagement,
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com,
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dencyUni
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sit
yPage11
 Modul
e2-
Timev
alueofMoney
n-
1 n-
2 n-
3 n-
4 n-
5
For
mul
a:FVA=R(
1+i
) +R(
1+i
) +R(
1+i
) +R(
1+i
) +R(
1+i
)
5-
1 5-
2 5-
3 5-
4
FVA=3000(
1+0.
06) +3000(
1+0.
06) +3000(
1+0.
06) +3000(
1+0.
06) +
5-
5
3000(
1+0.
06)
4 3 2 1 0
FVA=3000(
1.06)+3000(
1.06)+3000(
1.06)+3000(
1.06)+3000(
1.06)

FVA=3000(
1.26)+3000(
1.19)
+3000(
1.12)
+3000(
1.06)
+3000(
1)

FVA=3780+3570+3360+3180+3000

FVA=16,
890

UNEVENCASHFLOWS

5.
Cal
cul
atet
hef
utur
eval
ueatt
heendof4y
ear
soft
hef
oll
owi
ngser
iesofpay
ment
s
at9%r
ateofi
nter
est

Rs.
1000att
heendoff
ir
sty
ear

Rs.
2000att
heendofsecondy
ear

Rs.
3000att
heendoft
hir
dyear

Rs.
4000att
heendoff
our
thy
ear
.

Sol
n:
n-
1 n-
2 n-
3 n-
4
For
mul
a:FVA=R1(
1+i
) +R2(
1+i
) +R3(
1+i
) +R4(
1+i
)
4-
1 4-
2 4-
3 4-
4
FVA=1000(
1+0.
09) +2000(
1+0.
09) +3000(
1+0.
09) +4000(
1+0.
09)
3 2 1
FVA=1000(
1.09)+2000(
1.09)+3000(
1.09)+4000(
1.09)

FVA=1000(
1.29)+2000(
1.18)
+3000(
1.09)
+4000(
1)

FVA=1290+2360+3270+4000

FVA=10,
920

6.
Cal
cul
atet
hef
utur
eval
ueatt
heendof4y
ear
soft
hef
oll
owi
ngser
iesofdeposi
ts
at8%r
ateofi
nter
est

Fi
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alManagement,
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com,
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ofCommer
ce,
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dencyUni
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sit
yPage12
 Modul
e2-
Timev
alueofMoney

Rs.
2000att
heendoff
ir
sty
ear

Rs.
4000att
heendofsecondy
ear

Rs.
6000att
heendoft
hir
dyear

Rs.
8000att
heendoff
our
thy
ear
.(
21,
620)

7.
Cal
cul
atet
hef
utur
eval
ueatt
heendof5y
ear
soft
hef
oll
owi
ngser
iesofdeposi
ts
at9%r
ateofi
nter
est

Rs.
1000att
heendoff
ir
sty
ear

Rs.
2000att
heendofsecondy
ear

Rs.
3000att
heendoft
hir
dyear

Rs.
4000att
heendoff
our
thy
ear
.

Rs.
5000att
heendoff
if
thy
ear
.(
16,
920)

Di
scount
ingorpr
esentv
alueconcept

pr
esentv
aluei
stheexactopposi
teoff
utur
eval
ue.Thepr
esentv
alueofaf
utur
e
cashi
nfl
oworout
fl
owi
stheamountofcur
rentcasht
hati
sofequi
val
entv
aluet
othe
deci
si
onmaker
.

Det
ermi
ningt
hepr
esentv
alue:

Thepr
ocessofdet
ermi
ningpr
esentv
alueofaf
utur
epay
mentorr
ecei
ptsoraser
ies
off
utur
epay
ment
sorr
ecei
ptsi
scal
l
eddi
scount
ing.

Thecompoundi
nter
estr
ateusedf
ordi
scount
ingcashf
lowi
sal
socal
l
edt
he
di
scountr
ate.

Thef
ormul
ausedt
odet
ermi
net
hePr
esentv
alueasf
oll
ows:
n
Pr
esentVal
ue:
1/(
1+r
)

Case1:
Presentv
alueofSi
ngl
eCashf
lows
n
PV=FV/
(1+r
)

1.
Findoutt
hepr
esentv
alueofRs.
3000r
ecei
vedatt
heendoft
hey
ear,
i
fthe
di
scountr
atei
s9%p.
a.

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nanci
alManagement,
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com,
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ofCommer
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dencyUni
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sit
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 Modul
e2-
Timev
alueofMoney
n
Sol
n:PV=FV/
(1+r
)

FV=3000

R=9%or0.
09

N=1
1
PV=3000/
(1+0.
09)

PV=3000/
1.09

PV=2752/
-

2.
Cal
cul
atet
hepr
esentv
alueofasum ofRs.
50,
000.
recei
vedaf
tert
woy
ear
s,i
fthe
di
scountr
atei
s8%p.
a.

n
Sol
n:PV=FV/
(1+r
)

FV=50,
000

R=8%or0.
08

N=2
2
PV=50,
000/
(1+0.
08)

PV=50,
000/
1.16

PV=43,
103/
-

3.
Cal
cul
atet
hepr
esentv
alueofasum ofRs.
25,
000t
ober
ecei
vedaf
ter4y
ear
sata
di
scountof10%.

Ans:
17,
123/
-

Case2:
Mul
ti
pleCompoundi
ngorI
ntr
aCompoundi
ng
mn
PV=FV/
(1+r
/m)

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alManagement,
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 Modul
e2-
Timev
alueofMoney

PV=Pr
esentVal
ue

R=Rat
eofDi
scount

M=Mat
uri
ty

N=Numberofy
ear
s

1.
Findoutt
hepr
esentv
alueofRs.
10,
000r
ecei
vabl
eaf
ter3y
ear
satt
her
ateof12%
i
nter
est.Cal
cul
atesemi
-annual
l
y.
mn
Sol
n:PV=FV/
(1+r
/m)
2x
3
PV=10,
000/
(1+0.
12/
2)
6
PV=10,
000/
(1+0.
06)

PV=10,
000/
(1.
42)

PV=7042/
-

2.
Findoutt
hepr
esentv
alueofRs.
10,
000r
ecei
vabl
eaf
ter3y
ear
satt
her
ateof10%
i
nter
estquar
ter
lyandsemi
annual
l
y

Quar
ter
ly=7462/
-

Semi
annual
l
y=7462/
-

3.
Findoutt
hepr
esentv
alueofRs.
12,
000/
-recei
vabl
eaf
ter3y
ear
satt
hedi
scount
r
ateof12%.Cal
cul
atequar
ter
lyandsemi
annual
l
y.

Quar
ter
ly:
8,451/
-

Semi
Annual
l
y:8,
510/
-

Case3:
Presentv
alueofAnnui
tyorASer
iesofequal
orev
enf
utur
ecashf
lows

I
faI
nvest
orexpectuni
for
m cashf
lowsov
eraper
iodoft
imeatadef
ini
tedi
scount
r
ate,
suchcashf
lowspr
esentv
aluewhi
chwi
l
lal
way
sbel
ess,
whencompar
edt
o
t
hef
utur
ecashf
lows.
Itcanbedet
ermi
nedbyusi
ngt
hef
oll
owi
ngf
ormul
a:

P1 P1 P1 P1
PVA: + + + …….
tot
hennumber
s
( )
1+r1( )
1+r2( )
1+r3( )
1+r4

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 Modul
e2-
Timev
alueofMoney

PVA=Pr
esentv
alueofAnnui
ty

P1=Uni
for
m ser
iesofPay
ment
s

r=Di
scountr
ateorI
nter
estr
ate

1.
Findoutt
hepr
esentv
alueofAnnui
tyr
ecei
ptofRs.
4000r
ecei
vedf
or4y
ear
satt
he
r
ateof8%di
scountr
ate.

P1 P1 P1 P1
PVA: + + +
( )
1+r1( )
1+r2( )
1+r3( )
1+r4

4000 4000 4000 4000

PVA= + + +
(
1+0.08)1(
1+0.08)2(
1+0.08)3(
1+0.08)4

4000 4000 4000 4000

PVA= + + +
(
1.08)
1( 08)
1. 2( 08)
1. 3( 08)
1. 4

4000 4000 4000 4000

PVA= + + +
1.08 1.17 1.26 1.36

PVA=3,
704+3,
419+3,
175+2,
941

PVA=13,
239/
-

2.
Findoutt
hepr
esentv
alueofa5y
ear
sannui
tyofRs.
10,
000di
scount
edat9%.

Sol
n:38,
927/
-

3.
Findoutt
hepr
esentv
alueofanannui
tyr
ecei
ptofRs.
7000r
ecei
vedf
or5y
ear
sat
t
her
ateof12%di
scountr
ate.

I
ncaseofmul
ti
plecompoundi
ngper
iodori
ntr
acompoundi
ng

P1 P1 P1 P1
PVA: + + +
(
1+r
/m)
mn (
1+r
/m)
mn (
1+r
/m)
mn (
1+r
/m)
mn

Mn=mni
ntheout
ercol
umni
spower

1.AnI
nvest
ordeposi
tsRs.
10,
000att
heendofeachy
earf
or5y
ear
satt
her
ate8%
p.
a,i
nter
estcompoundedhal
fyear
ly.Fi
ndoutt
hepr
esentv
alueofanannui
ty.

PVA=?

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alManagement,
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 Modul
e2-
Timev
alueofMoney

P1=10,
000

R=8%

N=5y
ear
s

M=2t
imes

P1 P1 P1 P1 P1
PVA: + + + +
(
1+r
/m)
mn (
1+r
/m)
mn (
1+r
/m)
mn (
1+r
/m)
mn (
1+r
/m)
mn

10,
000 10,
000 10,
000 10,
000 10,
000
PVA: + + + +
(
1+0.
08/2)
1x2(1+0.
08/2)
2x2(1+0.
08/2)
3x2(1+0.
08/2)
4x2(1+0.
08/2)
5x2

10,
000 10,
000 10,
000 10,
000 10,
000
PVA: + + + +
(
1+0.04)
2(1+0.04)
4(1+0.04)
6(1+0.04)
8( 04)
1+0. 10

10,
000 10,
000 10,
000 10,
000 10,
000
PVA: + + + +
(
1.04)
2(1.04)
4(1.04)
6(1.04)
8( 04)
1. 10

10,
000 10,
000 10,
000 10,
000 10,
000
PVA: + + + +
1.
08 1. 17 1. 26 1. 37 1. 48

PVA=9,
259+8,
547+7,
936+7,
299+6,
756

PVA=39,
797/
-

2.Mr
.Rangar
ajandeposi
tsRs.
30,
000att
heendofeachy
earf
or6y
ear
satt
her
ate
10%p.
a,i
nter
estcompoundedhal
fyear
ly.Fi
ndoutt
hepr
esentv
alueofanannui
ty.

3.Mr
.Anandwi
l
ldeposi
tRs.
25,
000att
heendofeachy
earf
or4y
ear
satt
her
ate
12%p.
a,i
nter
estquar
ter
ly.Fi
ndoutt
hepr
esentv
alueofanannui
ty.

Pr
esentv
alueofUnev
enf
utur
ecashf
lows

I
tcanbedet
ermi
nedt
hepr
esentv
alueofunev
encashf
lowsbyusi
ngt
hef
oll
owi
ng
f
ormul
a:

P1 P2 P3 P4 P5
PVUECF= + + + +
( )
1+r1( )
1+r2( )
1+r3( )
1+r4( )
1+r5

PVUECF=Pr
esentv
alueofunev
encashf
lows

P1,
P2,
P3=Unev
encashf
lows

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 Modul
e2-
Timev
alueofMoney

R=Di
scountr
ate

1.
Cal
cul
atet
hepr
esentv
alueoft
hef
oll
owi
ngser
iesofpay
ment
smadeatt
heendof
eachy
earf
oraper
iodof5y
ear
sat8%di
scountr
ate.

Cashf
lowatt
heendof1sty
ear–Rs.
2,000

Cashf
lowatt
heendof2ndy
ear–Rs.
4,000

Cashf
lowatt
heendof3r
dyear–Rs.
6,000

Cashf
lowatt
heendof4t
hyear–Rs.
8,000

Cashf
lowatt
heendof5t
hyear–Rs.
10,
000

Sol
n:

P1 P2 P3 P4 P5
PVUECF= + + + +
( )
1+r1( )
1+r2( )
1+r3( )
1+r4( )
1+r5

2000 4000 6000 8000 10,

000
PVUECF= + + + +
(
1+0.08)1(
1+0.08)2(
1+0.08)3(
1+0.08)4(
1+0.08)
5

2000 4000 6000 8000 10,

000
PVUECF= + + + +
(
1.08)
1( 08)
1. 2( 08)
1. 3( 08)
1. 4(1.08)
5

2000 4000 6000 8000 10,

000
PVUECF= + + + +
1.08 1.17 1.26 1.36 1.47

PVUECF=1,
852+3,
419+4,
761+5,
882+6,
803

PVUECF=22,
717/
-

2.Cal
cul
atet
hepr
esentv
alueoft
hef
oll
owi
ngser
iesofpay
ment
smadeatt
heendof
eachy
earf
oraper
iodof5y
ear
sat8%di
scountr
ate.

Cashf
lowatt
heendof1sty
ear–Rs.
4,000

Cashf
lowatt
heendof2ndy
ear–Rs.
5,000

Cashf
lowatt
heendof3r
dyear–Rs.
6,000

Cashf
lowatt
heendof4t
hyear–Rs.
7,000

Cashf
lowatt
heendof5t
hyear–Rs.
8,000

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nanci
alManagement,
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com,
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ofCommer
ce,
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dencyUni
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sit
yPage18
 Modul
e2-
Timev
alueofMoney

Sol
n:23,
429/
-

3.Cal
cul
atet
hepr
esentv
alueoft
hef
oll
owi
ngser
iesofpay
ment
smadeatt
heendof
eachy
earf
oraper
iodof5y
ear
sat9%di
scountr
ate.

Cashf
lowatt
heendof1sty
ear–Rs.
1,000

Cashf
lowatt
heendof2ndy
ear–Rs.
2,000

Cashf
lowatt
heendof3r
dyear–Rs.
3,000

Cashf
lowatt
heendof4t
hyear–Rs.
4,000

Cashf
lowatt
heendof5t
hyear–Rs.
5,000

4.Cal
cul
atet
hepr
esentv
alueoft
hef
oll
owi
ngser
iesofpay
ment
smadeatt
heendof
eachy
earf
oraper
iodof5y
ear
sat12%di
scountr
ate.

Cashf
lowatt
heendof1sty
ear–Rs.
11,
000

Cashf
lowatt
heendof2ndy
ear–Rs.
12,
000

Cashf
lowatt
heendof3r
dyear–Rs.
13,
000

Cashf
lowatt
heendof4t
hyear–Rs.
14,
000

Cashf
lowatt
heendof5t
hyear–Rs.
15,
000

DOUBLI
NGPERI
OD:
-Thedoubl
i
ngt
imei
stheper
iodoft
imer
equi
redf
oraquant
it
y
t
odoubl
einsi
zeorv
alue.I
tisappl
i
edt
opopul
ati
ongr
owt
h,i
nfl
ati
onandr
esour
ce
ext
ract
ion,
consumpt
ionofgoods,
compoundi
nter
est
,thev
olumeofmal
i
gnant
t
umour
s,andmanyot
hert
hingswhi
cht
endt
ogr
owov
ert
ime.Whent
her
elat
ive
gr
owt
hrat
eisconst
ant
,thequant
it
yunder
goesexponent
ial
growt
handhasa
const
antdoubl
i
ngt
imeorper
iodwhi
chcanbecal
cul
ateddi
rect
lyf
rom t
hegr
owt
h
r
ate.

Thedoubl
i
ngt
imef
ormul
aisusedi
nFi
nancet
ocal
cul
atet
hel
engt
hoft
ime
r
equi
redt
odoubl
eani
nvest
mentormoneyi
nani
nter
estbear
ingaccount
.

log (2)
Doubl
i
ngTi
me=
log(
1+r)

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 Modul
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Timev
alueofMoney

r=r
ateofr
etur
n

i
tisi
mpor
tantt
onot
ethatri
nthedoubl
i
ngt
imef
ormul
aist
her
ateperper
iod.I
f
onewi
shest
ocal
cul
atet
heamountoft
imet
odoubl
ethei
rmoneyi
namoneymar
ket
accountt
hati
scompoundedmont
hly
,thenrneedst
oexpr
esst
hemont
hlyr
ateand
nott
heannual
rat
e.Themont
hlyr
atecanbef
oundbydi
vi
ngt
heannual
rat
eby12.
Wi
tht
hissi
tuat
ion,
thedoubl
i
ngt
imegi
vet
henumberofmont
hst
hati
ttakest
o
doubl
emoneyandnoty
ear
s.

CONCEPTOFVALUATI
ON

v
aluat
ioni
sthepr
ocessofdet
ermi
ningt
hecur
rentwor
thofanassetorcompany
.
Ther
ear
emanyt
echni
quest
hatcanbeusedt
odet
ermi
nev
alue,
somear
esubj
ect
ive
andot
her
sar
eobj
ect
ive.Judgi
ngt
hecont
ri
but
ionofacompany
’smanagement
woul
dbemor
eofasubj
ect
ivev
aluat
iont
echni
que,
whi
l
ecal
cul
ati
ngi
ntr
insi
cval
ue
basedonf
utur
eear
ningswoul
dbeanobj
ect
ivet
echni
que.

Assetv
aluat
ioni
scommonl
yper
for
medpr
iort
othesal
eofanassetorpr
iort
o
pur
chasi
ngi
nsur
ancef
oranasset
.Assetv
aluat
ionmayconsi
stofbot
hsubj
ect
ive
andobj
ect
ivemeasur
ement
s.Forexampl
e,i
nval
uingacompanyt
her
eisnonumber
ont
hecompany
’sf
inanci
alst
atement
sthatt
ell
showmuchi
tsbr
andnamei
swor
th;
t
hisaspectofassetv
aluat
ionmustbesubj
ect
ive.Ont
heot
herhand,
netpr
ofi
tisan
obj
ect
ivemeasur
ementbasedont
hecompany
’si
ncomeandexpensef
igur
es.
Commonmet
hodsf
ordet
ermi
ninganasset
’sv
aluei
ncl
udecompar
ingi
ttosi
mil
ar
asset
sandev
aluat
ingi
tscashf
lowpot
ent
ial
.Acqui
sit
ioncost
,repl
acementcostand
depr
ival
val
uear
eal
somet
hodsofassetv
aluat
ion.

BOND:
-Abondi
sal
ong-
ter
m secur
it
yissuedbyanor
gani
zat
ionwhi
chdoesnot
car
ryar
iskf
ort
hei
nvest
ors.Ther
ateofi
nter
esti
sgener
all
yfi
xedandknownt
o
i
nvest
ors.Usual
l
y,bondsar
eissuedbygov
ernmentwher
einwi
l
lber
iskf
ree
i
nvest
ment
sandal
way
shonorobl
i
gat
ionsoni
tsbonds.

I
nIndi
a,t
her
eisnodi
sti
nct
ionbet
weenbondordebent
urewher
easi
nU.
S.A.
,
bondsar
esecur
edbyt
angi
bleasset
soft
hecompanyanddebent
uresar
esecur
ed
onl
ybyt
hegener
alcr
edi
twor
thi
nessoft
hecompany
.Acompanyi
nIndi
acani
ssue
secur
edorunsecur
eddebent
ures.Thepr
ivat
esect
orcompani
esal
soi
ssuebonds
whi
char
eal
socal
l
eddebent
uresi
nIndi
a.Bondsi
ssuedbypubl
i
csect
orcompani
es

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 Modul
e2-
Timev
alueofMoney

i
nIndi
aar
egener
all
ysecur
edbutt
heyar
efr
eef
rom r
isk.

FEATURESOFBOND;
-

Thebondi
ndent
urei
sthecont
ractbet
weent
hei
ssuer(
thebor
rower
)andt
he
bondhol
der(
thel
ender
),whi
chset
sfor
thal
ltheobl
i
gat
ionsoft
hei
ssuer
.Itusual
l
y
speci
fi
est
hei
nter
estr
ate,
mat
uri
tydat
e,conv
ert
ibi
l
ityandot
hert
erms.

I
mpor
tantf
eat
uresofbondsar
e:

1.
Parv
alue:
Thev
alueofbondi
ster
medasf
acev
alue,
parv
alueormat
uri
tyv
alue.A
bondi
sgener
all
yissuedataparv
alueofRs.100,
Rs.500orRs.1000andi
nter
esti
s
pai
donf
acev
alue.

2.
Mat
uri
ty:
Abondi
susual
l
yissuedf
oraspeci
fi
edper
iodoft
ime.Thet
imespeci
fi
ed
i
nthebondi
scal
l
edt
heMat
uri
tydat
eordat
eofr
e-pay
mentofpr
inci
pal
amount
.The
bondscanbei
ssuedatv
ary
ingmat
uri
typer
iod.I
tcoul
dbef
orl
ongt
erm,
medi
um
t
erm orshor
tter
m dependi
ngont
her
equi
rementofeachor
gani
zat
ion.

3.
Cal
l
:Bondshav
eanaddi
ti
onal
feat
ureofcal
lfunct
ion.Thi
sisapr
ivi
l
eget
othe
i
ssui
ngcompanyofr
e-pur
chasebondsatasl
i
ght
lyhi
gherpr
iceabov
etheoarv
alue.

4.couponr
ate:
Thei
nter
estr
atei
sal
socal
l
edasCouponr
ate.I
nter
estr
atesar
e
f
ixedandknownt
obondhol
der
s.I
nter
estpai
donbondi
staxdeduct
ibl
e.I
nter
eston
bondmaybepai
dbychequeorcouponsar
edet
achabl
e.cer
ti
fi
cat
esofi
nter
est
.

5.
Redempt
ion:
Thev
aluet
hatabondhol
derr
ecei
vesatt
het
imeofmat
uri
tyi
scal
l
ed
r
edempt
ionv
alueormat
uri
tyv
alue.Abondcanber
edeemedatparoratapr
emi
um
(
mor
ethanparv
alue)
.

6.
Mar
ketv
alue:
Abondmaybet
radedi
nst
ockex
change.Thepr
iceatwhi
chi
tis
cur
rent
lysol
dorboughti
scal
l
edt
hemar
ketv
alueoft
hebond.Mar
ketv
aluemaybe
di
ff
erentf
rom parv
alueorr
edempt
ionv
alue.

TYPESOFBONDS

Thef
oll
owi
ngl
i
stgi
vesi
nfor
mat
ionaboutt
hev
ari
oust
ypesofbondgi
vi
ngi
ts
i
mpor
tance:

Ser
ial
bonds:
iti
sissuedbyanor
gani
zat
ionwi
thdi
ff
erentmat
uri
tydat
essot
hati
t
enabl
est
hecompanyt
oret
ir
ethebondsi
ninst
almentr
athert
hanal
toget
her
.The

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 Modul
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Timev
alueofMoney

adv
ant
agesoft
hisbondwi
l
lmakebondhol
dert
osel
ectabondofmat
uri
tydat
e
whi
chwi
l
lmat
chhi
sfi
nanci
alpor
tfol
i
o.Hehasanopt
ionofsel
ect
ingshor
tter
m
bondsorl
ong-
ter
m bonds.I
tisusual
l
ydoesnothav
eanycal
lfeat
ure.I
tresembl
es
si
nki
ngf
undandhav
eanef
fectont
hey
iel
dofbond.

Si
nki
ngf
undbond:
Acompanywhi
chi
ssuesbondwher
eini
tdoesnott
akebur
denat
t
het
imeofr
eti
ri
ngbond.Thi
sbondhasanadv
ant
ageofusi
ngt
hef
undsar
ewel
las
r
eti
ri
ngt
hem wi
thoutanyexcessi
vel
i
qui
dit
ypr
obl
ems.Thecompanyset
sapar
tan
amountannual
l
yforr
eti
rementofbonds.Theannual
inst
almenti
susual
l
yfi
xedand
puti
ntosi
nki
ngf
undbyt
rust
ees.Thef
undsi
nvest
edar
eatt
rust
ee’
sdi
scr
eti
on.He
mayuset
hef
undst
ocal
lbondsy
earorbuybondsf
rom t
he

Regi
ster
edBond:
Itpr
otect
stheownerf
rom l
ossofpr
inci
pal
.Thebondhol
der
’sbond
number
s,name,
addr
essandt
ypeofbondar
eent
eredi
nther
egi
steroft
hei
ssui
ng
company
.Thebondhol
derhast
oful
fi
lthef
ir
m’sf
ormal
i
tiesatt
het
imeoft
ransf
erof
bonds.Whi
l
erecei
vi
ngi
nter
est
,regi
ster
edbondhol
der
susual
l
ygett
hei
rpay
mentby
cheque.Themai
nadv
ant
agesofr
egi
ster
ingabondi
sthati
fthebondi
slostt
he
bondhol
derdoesnotsuf
ferl
ossunl
i
ket
heunr
egi
ster
edbonds.Howev
er,
regi
ster
ed
bondsdonotof
fersecur
it
yofpr
inci
pal
atmat
uri
ty.

Debent
ureBond:
debent
urebondsar
eissuedbyt
hosecompani
eswhohav
ean
excel
l
entcr
edi
trat
ingbutdonothav
esecur
it
yint
hef
orm ofasset
stopl
edget
othe
bondhol
der
s.Thedebent
urehol
derar
ecr
edi
tor
soft
hef
ir
m andr
ecei
vet
her
ateof
i
nter
estwhet
hert
hecompanymakesapr
ofi
tornot
.

I
nIndi
ancont
extt
hedebent
urescanbei
ssuedwi
tht
hespeci
fi
cper
missi
onof
cont
rol
l
erofcapi
tal
issues.Bear
erdebent
uresar
enotconsi
der
edl
egal
and
per
missi
bledocument
sinI
ndi
a.Conv
ert
ibl
edebent
ureshav
elowerr
ateofi
nter
est
andhencei
thasbecomeanat
tract
ivei
nvest
menti
nrecenty
ear
s.Per
missi
onhast
o
besoughtf
ort
heconv
ert
ibi
l
ityf
ort
hei
ndi
vi
dual
wher
easi
tisnotnecessar
yfor
f
inanci
ali
nst
it
uti
ons.

Mor
tgageBond:
amor
tgagebondi
sapr
omi
sebyt
hebondi
ssui
ngaut
hor
it
yto
pl
edget
her
eal
proper
tyasaddi
ti
onal
secur
it
y.I
ncasei
fthecompanyf
ail
stopayi
ts
bondhol
der
sthei
nter
estoft
hepr
inci
pal
,wheni
tfal
l
sdue,
thebondhol
derhast
he
r
ightt
osel
lthesecur
it
yandgetbackt
hei
rdues.Thev
alueoft
hemor
tgagebond
dependsupont
hequal
i
tyofpr
oper
tymor
tgageandt
heki
nofchar
geonpr
oper
ty.A

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 Modul
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alueofMoney

f
ir
stchar
gei
sthemostsui
tabl
eandhi
ghl
ysecur
efor
m ofpar
ti
cul
ari
nvest
ment
si
ncei
tscl
aimswi
l
lbepr
ior
it
yoft
heasset
.Asecondandt
hir
dchar
geonsecur
it
yof
pr
oper
tyi
sconsi
der
edt
obeaweakf
rom ofsecur
it
yandi
slesssoundandi
sless
soundt
hanf
ir
stchar
ge.

Mor
tgagebondsmaybeopenend,
closeendandl
i
mit
edopenend.Anopenend
mor
tgagebondper
mit
sthebondi
ssui
ngcompanyt
oissueaddi
ti
onal
bondsi
f
ear
ningsandassetcov
eragemakei
tper
missi
blet
odoso.I
ncl
oseendmor
tgage
bondst
hecompanycanmakeonl
yonei
ssueofbondsandwhent
hosebondsexi
st,
newbondscannotbei
ssued.I
ftheaddi
ti
onal
bondsar
eissuedt
heygett
her
anki
ng
ofj
uni
orbondsandt
hepr
iori
ssueget
sthef
ir
stpr
ior
it
yinr
ecei
vi
ngpay
ment
s.The
l
i
mit
edopenendbondsper
mitt
heor
gani
zat
iont
oissuespeci
fi
ednumberoff
resh
bondsser
iesdi
str
ibut
edov
eranumberofy
ear
s.

Col
l
ater
alTr
ustBond:
iti
sgener
all
yissuedwhent
het
wocompani
esexi
standar
ein
r
elat
ionshi
pofpar
entandsubsi
diar
y.Thecol
l
ater
ali
spr
ovi
dedi
nthef
orm of
per
sonal
proper
tyoft
hecompanywhi
chi
ssuest
hebond.At
ypi
cal
exampl
eof
bondsi
swhenapar
entcompanyr
equi
resf
unds.I
tissuescol
l
ater
albondsby
pl
edgi
ngsecur
it
iesofi
tsownsubsi
diar
ycompany
.Thecol
l
ater
alsar
egener
all
yin
t
hef
orm ofi
ntangi
blesecur
it
iesl
i
kebonds.Thesebondshav
eapr
ior
it
ychar
geon
t
hebondswhi
char
eusedascol
l
ater
als.

Equi
pmentTr
ustBond:
theusual
met
hodofusi
ngt
hesebondswast
oissue20%
equi
tyand80%bonds.Theequi
tyi
ssuei
sli
kear
ever
set
opr
otectt
hel
enderi
n
caseswher
ethev
alueoft
heassetf
all
sint
hemar
ket
.Thet
rust
eeal
sohast
her
ight
t
osel
ltheequi
pmentandpayt
hebondhol
der
sincaserofdef
aul
t.

Suppl
ement
alcr
edi
tbonds:
whi
l
eissui
ngbondsanaddi
ti
onal
pledgesi
sguar
ant
eed
t
obondhol
der
sandt
hei
rbondsar
ecat
egor
izedassuppl
ement
albyanaddi
ti
onal
nonspeci
fi
cguar
ant
ee.Theyar
e:

a.Guar
ant
eedbond:
theset
ypeofbondsar
ebondswhi
char
esecur
edbyt
he
i
ssui
ngcompanyandt
heyar
eguar
ant
eedbyanot
hercompany
.Att
imesa
companyt
akesassest
hroughal
ease.Thel
easi
ngcompanyguar
ant
eest
he
bondsr
egar
dingi
nter
estandpr
inci
pal
amountdueonbonds.

b.Joi
ntbond:
thesebondsar
eguar
ant
eedbondssecur
edj
oint
lybyt
woormor
e

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 Modul
e2-
Timev
alueofMoney

compani
es.Bondsar
eissuedwhent
woormor
ecompani
esar
einneedof
i
nvest
mentanddeci
det
orai
set
hef
undst
oget
hert
hroughbonds.The
companyr
aisedf
undsatr
educedcost
.Thei
nvest
ori
sinaf
avour
abl
e
posi
ti
onashehassecur
it
ybypl
edgeoft
wocompani
es.

c.Assumedbond:
thebondsi
ssueddur
ingmer
gingoft
wocompani
eswher
ein
companyAdeci
dest
omer
gei
ntocompanyB.A’
sissuesofbondspr
iort
o
mer
get
henbecomest
heobl
i
gat
ionofcompanyBwhenmer
geri
saf
fect
ed.
Thesear
ecal
l
edassumedbondsascompanyAdi
dnotor
igi
nal
l
yissuet
hem
butasar
esul
tofmer
gert
hedebtwaspassedont
hem.Thebondhol
der
r
ecei
vesanaddi
ti
onal
pledgef
rom companyB.Hei
smor
esecur
edashi
s
bondsduet
omer
gergett
hesecur
it
yofbot
hcompani
esAandB.

Conv
ert
ibl
ebond:
iti
sri
ghtgi
vent
oabondhol
dert
obuyabondatt
het
imeofi
ssue
andl
aterexchangei
twi
thequi
tyshar
esoft
hesamecompany
.Thi
sgi
vest
he
bondhol
deraf
utur
epr
omi
sebyt
hei
ssui
ngcompanyt
oshar
ethegr
owt
hincapi
tal
oft
hecompany
.Thepr
iceoft
heconv
ert
ibl
ebondst
oshar
ethegr
owt
hincapi
tal
of
t
hecompany
.Thepr
iceoft
heconv
ert
ibl
ebondst
oagr
eatext
entdependsont
he
pr
iceofequi
tyshar
es.Thebondpr
icei
ncr
easesi
fthepr
iceofequi
tyshar
esr
ises
andv
icev
ersa.Theconv
ert
ibl
ebondhast
hescopeofexchangei
ntocommonst
ock
ataf
utur
edat
ethespeci
fi
cat
ionr
egar
dingdat
eofconv
ersi
oni
ntoequi
tyandt
he
i
nter
estatwhi
chi
twi
l
lbeconv
ert
edi
susual
l
yint
hef
orm ofwr
it
tencl
ause.
Gener
all
y,conv
ert
ibl
ebondi
sconsi
der
edasat
rade-
offbet
ween“
thepr
ovi
sionof
secur
it
yandexpect
edf
utur
eappr
eci
ati
on.

Debent
ures:t
hewor
d‘debent
ure’
isusedt
osi
gni
fyt
heacknowl
edgmentofadebt
gi
venundert
heseal
oft
hecompanyandcont
aini
ngacont
ractf
ort
her
epay
mentof
t
hepr
inci
pal
sum ataspeci
fi
eddat
eandf
ort
hepay
mentofi
nter
est(
usual
l
yhal
f
y
ear
ly)ataf
ixedr
ateunt
ilt
hepr
inci
pal
sum i
srepai
dandi
tmayormaynotgi
vea
char
gei
ntheasset
soft
hecompanyassecur
it
yfort
hel
oan.

Adebent
urei
sal
ong-
ter
m debti
nst
rumenti
ssuedbygov
ernment
sandbi
g
i
nst
it
uti
onsf
ort
hepur
poseofr
aisi
ngf
unds.Thedebent
urehassomesi
mil
ari
ti
es
wi
thbondsbutt
het
ermsandcondi
ti
onsofsecur
it
izat
ionofdebent
uresar
edi
ff
erent
f
rom t
hatofabond.Adebent
urei
sregar
dedasanunsecur
edbecauset
her
ear
eno
pl
edges(
guar
ant
ee)av
ail
abl
eonpar
ti
cul
arasset
s.

Fi
nanci
alManagement,
BBA&B.
com,
School
ofCommer
ce,
Presi
dencyUni
ver
sit
yPage24
 Modul
e2-
Timev
alueofMoney

Meani
ngofdebent
ures:
debent
urer
efer
stoacer
ti
fi
cat
eofagr
eementofl
oans
whi
chi
sgi
venundert
hecompany
’sst
ampandcar
ri
esanunder
taki
ngt
hatt
he
debent
urehol
derwi
l
lgetaf
ixedr
etur
n(f
ixesont
hebasi
sofi
nter
estr
ates)andt
he
pr
inci
pal
amountwhenev
ert
hedebent
uremat
ures.

Def
ini
ti
on:
sect
ion2(
12)oft
hecompani
esActst
atest
hat“
adebent
urei
ncl
udes
debent
urest
ock,
bondsandanyot
hersecur
it
iesofacompany
,whet
herconst
it
uti
ng
achar
geont
heasset
soft
hecompanyornot
”.

Feat
uresofDebent
ures

Fol
l
owi
ngar
ethef
eat
uresofdebent
ures:

1.Debent
ureshol
der
soft
hecompanyar
ethecr
edi
tor
soft
hecompanyandnot
t
heowner
soft
hecompany
.

2.Capi
tal
rai
sedbywayofdebent
uresi
srequi
redt
ober
epai
ddur
ingt
hel
i
fe
t
imeodt
hecompanyatt
het
imest
ipul
atedbyt
hecompany
.Thus,
iti
snota
sour
ceofper
manentcapi
tal
.

3.Debent
uresar
egener
all
ysecur
ed.

4.Ret
urnpai
dbyt
hecompanyi
sint
hef
orm ofi
nter
estwhi
chi
spr
edet
ermi
ned.

5.Debent
uresar
ever
yri
skyf
rom company
’spoi
ntofv
iewf
orr
aisi
ngl
ongt
erm
f
unds.

6.Ri
skont
hepar
tofdebent
urehol
der
sisv
eryl
ess.

7.Debent
urehol
der
sdonotcar
ryanyv
oti
ngr
ight
s.

8.Debent
uresar
eacheapsour
ceoff
undsf
rom t
hecompany
’spoi
ntofv
iew.

9.Debent
uresar
einst
rument
sinwr
it
ingacknowl
edgementoft
hedebtoft
he
companyt
othehol
deroft
hei
nst
rument
.

10.Debent
uresar
eal
way
smadeundert
heseal
oft
hecompany
.Howev
era
cer
ti
fi
cat
ethathasbeensi
gnedbyt
woormor
edi
rect
orsoft
hecompanybut
car
ri
esnoseal
isconsi
der
edav
ali
ddebent
uredocument
.

11.Theowneroft
hei
nst
rumenti
snotanowneroft
hecompanybutmer
elyi
ts
cr
edi
torf
ort
heamountment
ionedi
ntheacknowl
edgment
.

Fi
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ofCommer
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 Modul
e2-
Timev
alueofMoney

12.Thei
nter
estneedst
obepai
dtot
hedebent
urehol
deronaspeci
fi
edr
atebya
speci
fi
edt
ime.

13.Thehol
derofdebent
uredocument
sisent
it
ledt
ogetr
egul
ari
nter
estf
rom t
he
company
.Thi
scont
inuesev
eni
ncasewher
ethecompanyhasi
ncur
red
l
osses.

14.Al
lthedebent
uresaer
edeemedonduedat
e.I
ncaseofwi
ndi
ngupoft
he
company
,debent
urehol
der
sar
erepai
daf
terpay
mentt
oshar
ehol
der
sar
e
made.

15.Debent
urecanbeconv
ert
edi
ntoequi
tyshar
ebyt
hei
ssui
ngcompany
.

Ty
pesofDebent
ures

Debent
urescanbecl
assi
fi
edi
ntot
hef
oll
owi
ngway
s:

1.Nonconv
ert
ibl
edebent
ures(
NCD)
:thesei
nst
rument
sret
aint
hedebt
char
act
erandcannotbeconv
ert
edi
ntoequi
tyshar
es.

2.Par
tyconv
ert
ibl
edebent
ures(
PCD)
:apar
toft
hesei
nst
rument
sar
econv
ert
ed
i
ntoequi
tyshar
esi
nthef
utur
eatnot
iceoft
hei
ssuer
.Thei
ssuerdeci
dest
he
r
ati
oforconv
ersi
on.Thi
sisnor
mal
l
ydeci
dedatt
het
imeofsubscr
ipt
ion.

3.Ful
l
yconv
ert
ibl
edebent
ures(
FCD)
:thesear
eful
l
yconv
ert
ibl
eint
oequi
ty
shar
esatt
hei
ssuer
’snot
ice.Ther
ati
oofconv
ersi
oni
sdeci
dedbyt
hei
ssuer
uponconv
ersi
ont
hei
nvest
orsenj
oyt
hedamest
atusasor
dinar
y
shar
ehol
der
soft
hecompany
.

4.Opt
ional
l
yconv
ert
ibl
edebent
ures(
OCD)
:thei
nvest
orhast
heopt
iont
oei
ther
conv
ertt
hesedebent
uresi
ntoshar
esatpr
icedeci
dedbyt
hei
ssuer
/agr
eed
uponatt
het
imeofi
ssue.

Onbasi
spfsecur
it
y,debent
uresar
ecl
assi
fi
edi
ntot
hef
oll
owi
ngway
s:

5.Secur
eddebent
ures:
thesei
nst
rument
sar
esecur
edbyachar
geont
hef
ixed
asset
soft
hei
ssuercompany
.Soi
fthei
ssuerf
ail
sonpay
mentoft
he
pr
inci
pal
ori
nter
estamount
,hi
sasset
scanbesol
dtor
epayt
hel
i
abi
l
ityt
othe
i
nvest
ors.

6.Unsecur
eddebent
ures:
thesei
nst
rumentar
eunsecur
edi
nthesenset
hati
f

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alManagement,
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ofCommer
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yPage26
 Modul
e2-
Timev
alueofMoney

t
hei
ssuerdef
aul
tsonpay
mentoft
hei
nter
estorpr
inci
pal
amount
,the
i
nvest
orhast
obeal
ongwi
thot
herunsecur
edcr
edi
tor
soft
hecompany
.

7.Regi
ster
eddebent
ures:
thesear
ethosedebent
ureswhi
char
eregi
ster
edi
nthe
r
egi
steroft
hecompany
.Thenames,
addr
essesandpar
ti
cul
arsofhol
dingsof
debent
urehol
der
sar
eent
eredi
nar
egi
sterkeptbyt
hecompany
.Such
debent
uresar
etr
eat
edasnon-
negot
iabl
einst
rument
sandi
nter
estonsuch
debent
uresar
epay
abl
eonl
ytor
egi
ster
edhol
der
sofdebent
ures.Regi
ster
ed
debent
uresar
eal
socal
l
edasdebent
urespay
abl
etor
egi
ster
edhol
der
s.

8.Bear
erdebent
ures:
thesear
ethosedebent
ureswhi
char
enotr
egi
ster
edi
nthe
r
egi
steroft
hecompany
.Bear
erdebent
uresar
eli
keabear
ercheck.Theyar
e
pay
abl
etot
hebear
erandar
edeemedt
obenegot
iabl
einst
rument
s.Theyar
e
t
ransf
err
abl
ebymer
edel
i
ver
y.Nof
ormal
i
tyofexecut
ingat
ransf
erdeedi
s
necessar
y.Whenbear
erdocument
sar
etr
ansf
err
ed,
stampdut
yneednotbe
pai
d.Aper
sont
ransf
err
ingabear
erdebent
ureneednotgi
veanynot
icet
othe
companyt
ohi
sef
fect
.Thet
ransf
ereewhoacqui
ressuchadebent
urei
ndue
cour
sebonaf
ideandf
orav
ail
abl
econsi
der
ati
onget
sgoodt
it
lenot
wi
thst
andi
nganydef
ecti
nthet
it
leoft
het
ransf
eror
.Int
erestcouponsar
e
at
tachedt
oeachdebent
ureandar
epay
abl
etobear
er.

9.Redeemabl
edebent
ures:
thesedebent
uresar
eissuedbyt
hecompanyf
ora
speci
fi
cper
iodonl
y.Ont
heexpi
ryofper
iod,
debent
urecapi
tal
isr
edeemedor
pai
dback.Gener
all
ythecompanycr
eat
esaspeci
alr
eser
veaccountknowas
“
Debent
ureRedempt
ionReser
veFund”f
ort
her
edempt
ionofsuchdebent
ures.
Thecompanymakest
hepay
mentofi
nter
estr
egul
arl
y.Undersect
ion121of
t
heI
ndi
anCompani
esAct
,1956,
redeemeddebent
urescanber
e-i
ssued.

10.I
rr
edeemabl
edebent
ures:
thesedebent
uresar
eissuedf
orani
ndef
ini
te
per
iodwhi
chi
sal
soknowasper
pet
ual
debent
ures.Thedebent
urecapi
tal
is
r
epai
dei
theratt
heopt
ionoft
hecompanybygi
vi
ngpr
iornot
icet
othatef
fect
oratt
hewi
ndi
ngupoft
hecompany
.Thei
nter
esti
sregul
arl
ypai
dont
hese
debent
ures.Thepr
inci
pal
amounti
srepay
abl
eonl
yatt
het
imeofwi
ndi
ngup
oft
hecompany
.Howev
er,
thecompanymaydeci
det
orepayt
hepr
inci
pal
amountdur
ingi
tsl
i
fet
ime.

11.Mor
tgagedebent
ure:amor
tgagedebent
urei
sonewhi
chi
ssecur
edbya

Fi
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ofCommer
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 Modul
e2-
Timev
alueofMoney

mor
tgageont
her
eal
proper
tyoft
hecompany
.Ift
hecompanyf
ail
stor
epay
t
hebor
rowedamountataspeci
fi
edper
iod,
thedebent
urehol
derhasal
egal
r
ightt
osel
lthepr
oper
tyandr
ecov
eredt
hel
oan.

12.Nakeddebent
ure:
ingener
alt
het
erm debent
urei
nBr
it
ishusagedesi
gnat
es
anysecur
it
yissuedbycompani
esot
hert
hant
hei
rshar
es,
incl
udi
ng,
ther
efor
e,
whatar
eint
heuni
tedst
atescommonl
ycal
l
edbonds.Whenusedi
ntheuni
ted
st
atesdebent
uregener
all
ydesi
gnat
esani
nst
rument
ssecur
edbyaf
loat
ing
char
gej
uni
ort
oot
herchar
gessecur
edbyf
ixedmor
tgagesorspeci
fy,
oneofa
ser
iesofsecur
it
iessecur
edbyagr
oupofsecur
it
ieshel
dint
rustf
ort
he
benef
itoft
hedebent
urehol
der
s.

13.Agencydebent
ures:
themar
ketpl
aceappear
stobel
i
evet
hatGSEAgency
debent
urescar
ryani
mpl
i
citguar
ant
eef
rom t
heuni
tedst
atesgov
ernment
.
Thi
sisduet
otheGSE’
sdi
rectbor
rowi
ngabi
l
ityf
rom t
heU.
S.Tr
easur
yandt
he
i
mpor
tanceoft
heGSE’
scongr
essi
onal
char
ter
sandmi
ssi
ons.

Adv
ant
agesofDebent
ures

1.Cont
rol
ofco.i
snotsur
render
edt
odebent
urehol
der
sbecauset
heydon’
t
hav
eanyv
oti
ngr
ight
s.

2.Tr
adi
ngonequi
tyi
spossi
bleasdebent
urehol
der
sgetal
owerr
ateofr
etur
n
t
hant
heear
ningsoft
hecompany
.

3.I
nter
estondebent
urei
sanal
l
owabl
eexpendi
tur
eunderi
ncomet
axact
,hence
i
nci
denceoft
axont
hecompanyi
sdecr
eased.

4.Debent
urecanber
edeemedwhencompanyhassur
plusf
unds.

Di
sadv
ant
agesofDebent
ures

1.Costofr
aisi
ngcapi
tal
thr
oughdebent
uresi
shi
ghofhi
ghst
ampsdut
y.

2.Commonpeopl
ecannotbuydebent
ureast
heyar
eonhi
ghdenomi
nat
ions.

3.Theyar
enotmeantf
orcompani
esear
ninggr
eat
ert
hant
her
ateofi
nter
est
whi
cht
heyar
epay
ingont
hedebent
ures.

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alManagement,
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ofCommer
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 Modul
e2-
Timev
alueofMoney

DI
FFERENCEBETWEENSHARESANDDEBENTURES

Basi
s Shar
es Debent
ures

Capi
tal Ashar
eisapar
tofequi
tyor Adebent
urei
sapar
tofl
oan
pr
efer
enceshar
ecapi
tal
ofa capi
tal
oft
hecompany
.The
company
.Thehol
der
soft
he hol
derofadebent
urei
sthe
shar
esmaybedescr
ibedaspar
t cr
edi
toroft
hecompany
.
owneroft
hecompany
.

Ret
urn Ret
urnonshar
eisknownas Ret
urnonadebent
urei
sknown
di
vi
dend.Acompanydecl
ares asi
nter
estandt
hecompany
di
vi
dedonl
ywhent
her
ear
epr
ofi
ts compul
sor
il
ypay
sitataf
ixed
andi
tsr
atemayv
aryf
rom y
ear
. r
atewhet
hert
her
ear
epr
ofi
tsor
l
osses.

Appr
opr
iat
ion di
vi
dendi
sanappr
opr
iat
ionof I
nter
estondebent
urei
sa
pr
ofi
tandi
sther
efor
edebi
tedi
n char
geagai
nstpr
ofi
tsandi
s
pr
ofi
t&l
ossappr
opr
iat
ion t
her
efor
edebi
tedi
npr
ofi
t&
account
. l
osses.

Char
ge Shar
esdonotcr
eat
eanychar
ge Debent
urecr
eat
eachar
geon
ont
heasset
soft
hecompany
. t
heassetoft
hecompany
.
Pr
oper
ty

Redempt
ion nor
mal
l
ytheshar
ecapi
tal
isnot Theamountofdebent
urehast
o
r
etur
neddur
ingt
hel
i
fet
imeoft
he ber
etur
nedaf
terast
ipul
ated
company
. per
iodoft
imeaspert
he
condi
ti
onsofi
ssue.

Di
scount Shar
escanbei
ssuedatdi
scount Ther
ear
enor
est
ri
cti
ononi
ssue
onl
ywhent
hecondi
ti
onsl
aydown ofdebent
uresatadi
scount
.
Oni
ssue
i
nsect
ion79oft
hecompani
es
act1956ar
eful
fi
ll
ed.

Pr
emi
um on Pr
emi
um r
ecei
vedoni
ssueof Pr
emi
um r
ecei
vedoni
ssueof
shar
escanbeut
il
isedbyt
he debent
urescanbeut
il
izedby
I
ssue
companysubj
ectt
othe companyi
nanymanneri
tli
kes.
condi
ti
onsgi
veni
nsect
ion78of

Fi
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ofCommer
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sit
yPage29
 Modul
e2-
Timev
alueofMoney

t
hecompani
esAct1956.

Pur
chase Acompanycannotpur
chasei
ts Acompanycanpur
chaseown
ownshar
es. debent
uresf
rom t
heopen
mar
ket
.

conv
ert
ibi
l
ity Shar
escannotbeconv
ert
edi
nto Debent
urescanbeconv
ert
ed
debent
ures. i
ntoshar
esaccor
dingt
othe
condi
ti
onsofi
ssueof
debent
ures.

VALUATI
ONOFBONDSORDEBENTURES

Abondoradebent
urei
sal
ong-
ter
m debti
nst
rumentorsecur
it
y.I
tisi
ssuedby
busi
nessent
erpr
isesorgov
ernmentagenci
est
orai
sel
ong-
ter
m capi
tal
.Abond
usual
l
ycar
ri
esaf
ixedr
ateofi
nter
est
.Iti
scal
l
edascouponpay
mentcanbeei
ther
s=annual
l
yorsemi
-annual
l
y.

Val
uat
ionofbondr
efer
stoat
echni
quesf
ordet
ermi
ningt
hef
airv
alueofa
par
ti
cul
arbond.Bondv
aluat
ioni
ncl
udescal
cul
ati
ngt
hepr
esentv
alueoft
hebond’
s
f
utur
eint
erestpay
ment
s,al
soknownasi
tscashf
lowandt
hebond’
sval
ueupon
mat
uri
tyal
soknownasi
tsf
acev
alueorparv
alue.

Bondsar
eoft
wot
ypes,
viz.
,

a)Redeemabl
ebonds

b)I
rr
edeemabl
ebonds

Abondcanbei
rr
edeemabl
eorr
edeemabl
e.Redeemabl
ebondshav
eaf
ixed
mat
uri
tydat
eandi
rr
edeemabl
ebondshav
eper
pet
ual
li
fewi
thonl
yint
erest
pay
ment
sper
iodi
cal
l
y.

VALUATI
ONOFREDEEMABLEBONDSORDEBENTURE

I I I3
I I5
M5
PVB= 1 1 + 2 2 + 3+
4
4+ 5+ 5
(
1+d) (1+d) ( 1+d) ( 1+d) ( 1+d) ( 1+d)

Wher
e,

Fi
nanci
alManagement,
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com,
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ofCommer
ce,
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dencyUni
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sit
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 Modul
e2-
Timev
alueofMoney

PVB=pr
esentv
alueoft
hebond

i=i
nter
estamountr
ecei
ved

d=di
scountr
ate

n=numberofy
ear
s

I
ll
ust
rat
ion:
1

Fi
ndoutt
hepr
esentv
alueofbondi
fitmat
uresaf
ter4y
ear
sandy
iel
dRs.
80ev
ery
y
earwi
thamat
uri
tyv
alueofRs.
120andi
fthecapi
tal
i
zat
ionr
atei
s8%

Sol
uti
on:

I
1
I2
I3
I4
I5
M5
PVB= 1+ 2+ 3+ 4+ 5+ 5
(
1+d) ( 1+d) ( 1+d) ( 1+d) ( 1+d) ( 1+d)

80 80 80 80 80 120
= 1+ 2+ 3+ 4+ 5+ 5
(1.
08) ( 1.
08) ( 08) (
1. 1.
08) ( 1.
08) ( 1.08)

80 80 80 80 120
= + + + +
1.08 1.16 1.26 1.36 1,
47

=74+69+64+59+82

=348

I
ll
ust
rat
ion:
2

Adebent
urei
sav
ail
abl
eint
hemar
ketf
orRs.
1,000wi
thRs.
80ast
hei
nter
estf
ora
y
earf
oraper
iodof4y
ear
swi
tht
hemat
uri
tyv
alueofRs.
1,120.Thedebent
ure
capi
tal
i
zat
ionr
atei
s10%.Adv
iseMr
s.Mi
tai
nherbuy
ingdeci
sionoft
hisdebent
ure.

Sol
uti
on:

I I I3
I M4
= 1 1+ 2 2+ 3+
4
4+ 5
(
1+d) (
1+d) (1+d) ( 1+d) ( 1+d)

80 80 80 80 1120
= 1+ 2+ 3+ 4+ 4
(1.
10) ( 1.
10) ( 10) (
1. 1.
10) ( 1.
10)

80 80 80 80 80
= + + + +
1.10 1.21 1.33 1.46 1.46

Fi
nanci
alManagement,
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com,
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ofCommer
ce,
Presi
dencyUni
ver
sit
yPage31
 Modul
e2-
Timev
alueofMoney

=73+66+60+55+767

=1,
021

VALUATI
ONOFI
RREDEEMABLEBONDSORDEBENTURE

Thev
alueofdebent
urewhi
chcar
ri
esapar
ti
cul
arr
ateofi
nter
estf
orani
ndef
ini
te
per
iodoft
imei
scal
cul
atedbyusi
ngt
hisf
ormul
a:

I
PVD=
Capi
tal
i
zati
onRat
e

I
ll
ust
rat
ion:
1

Whati
sthev
alueofi
rr
edeemabl
edebent
urewhi
chhasRs.
50ast
hei
nter
estf
or
ani
nfi
nit
eper
iodwi
tht
hedi
scountr
ateat10%.

I 50
Sol
uti
on:PVD= = =5
Capi
tal
i
zati
onRat
e 10

I
ll
ust
rat
ion:
2

Whati
sthev
alueofdebent
urewhi
chhasani
ndef
ini
teper
iodwi
tht
hei
nter
est
amountofRs.
80pery
earwi
tht
hecapi
tal
i
zat
ionr
atei
s6%.

I 80
Sol
uti
on:
PVD= = =13.
33
Capi
tal
i
zat
ion 6

SHARES

Aspert
hecompani
esActof1956,
“AShar
eisashar
eint
heshar
ecapi
tal
oft
he
company
”.

Thet
otal
capi
tal
ofaj
ointst
ockcompanyi
sdi
vi
dedi
ntoanumberofuni
tsofa
f
ixedv
alue.Eachsuchuni
tiscal
l
edashar
e.

FEATURESOFSHARE

Themai
nfeat
uresofshar
esar
easf
oll
ows:

1.
Limi
tedl
i
abi
l
ityf
orshar
ehol
der
s:f
oreachi
ndi
vi
dual
shar
ehol
der
s,t
hemaxi
mum
v
alueatr
iski
sthet
otal
val
ueoft
hei
rinv
est
menti
ntheshar
esoft
hecompany
.Thi
s
meanst
hat
,unl
i
kei
napar
tner
shi
p,or
dinar
yshar
ehol
der
sar
enotper
sonal
l
yli
abl
e

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ofCommer
ce,
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sit
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 Modul
e2-
Timev
alueofMoney

f
ort
hedebtofacompanyi
ntheev
entofbankr
upt
cy.

2.
Lossabsor
pti
onf
orot
her(
debt
)inv
est
orsandot
hercr
edi
tor
s:i
tisi
mpor
tantt
o
under
standt
hatshar
escomel
asti
nther
anki
ngofacompany
’scapi
tal
str
uct
ureand
shar
ehol
der
sonl
yhol
dar
esi
dual
clai
m.Thi
smeanst
hati
nli
qui
dat
ion,
shar
ehol
der
s
onl
ygetbackt
hei
rmoneyi
fther
eisany
thi
ngl
eftov
eraf
tercr
edi
tor
shav
ebeen
set
tl
ed.I
nmostcases,
theshar
esar
eusual
l
ywor
thl
essi
ntheev
entofbankr
upt
cyor
l
i
qui
dat
ion.

3.
Uncer
tai
nret
urns:
whi
l
emanycompani
espayoutdi
vi
dendst
oshar
ehol
der
s,t
her
e
i
snoobl
i
gat
iononcompani
est
odoso.I
ndeed,
ther
eisnoguar
ant
eeofr
etur
nsi
n
anyf
ormt
oshar
ehol
der
s.Howev
er,
inr
etur
nfort
hisdegr
eeofuncer
tai
ntyandr
isk,
shar
escar
ryhi
gherexpect
edr
etur
nsov
ert
hel
ongt
ermt
hanmosti
nvest
ment
s.Thi
s
f
ormst
hebasi
soft
her
elat
ionshi
pbet
weenr
iskandr
etur
nfori
nvest
orsi
nst
ocks
andshar
es.

Someot
heri
mpor
tantf
eat
uresofshar
ear
egi
venbel
ow:

I
. Ashar
eisnotasum ofmoney
.Iti
sonl
yani
nter
estorr
ight
,measur
edi
na
sum ofmoney
,topar
ti
cipat
eint
hepr
ofi
tsoft
hecompanydur
ingi
tsl
i
feand
i
ntheasset
soft
hecompanywheni
tiswoundup.

I
I. Ashar
eisgi
venaf
aceornomi
nal
val
ue,
andi
spai
dfori
nmoneyormoney
’s
wor
th.

I
II
. Theper
sonwhohol
dst
heshar
eorshar
esofacompanyi
scal
l
eda
shar
ehol
derormemberoft
hecompany
.

I
V. Thet
it
leofamembert
oashar
pisev
idencedbyt
heshar
ecer
ti
fi
cat
eissued
byt
hecompanyunderi
tscommonseal
.

V. Eachshar
einacompanyhav
ingshar
ecapi
tal
isdi
sti
ngui
shedbyi
tsspeci
fi
c
orappr
opr
iat
enumber
.

TYPESOFSHARES

Acompanyi
ssuedi
ff
erentt
ypesofshar
esi
nor
dert
osat
isf
yther
equi
rement
sof
di
ff
erentcl
assesofi
nvest
orsandt
ocol
l
ectmor
ecapi
tal
.Apubl
i
ccompanycan
i
ssueonl
ytwot
ypesofshar
essuchas:

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ofCommer
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sit
yPage33
 Modul
e2-
Timev
alueofMoney

1.Pr
efer
enceshar
es 2.Equi
tyshar
es

PREFERENCESHARES

Pr
efer
enceshar
eisast
ockwi
thdi
vi
dendt
hatar
epai
dtoshar
ehol
der
sbef
ore
commonst
ockdi
vi
dendar
epai
dout
.Int
heev
entofacompanybankr
upt
cy,
pr
efer
redst
ockshar
ehol
der
shav
ear
ightt
obepai
dcompanyasset
sfi
rst
.
Pr
efer
enceshar
est
ypi
cal
l
ypayaf
ixeddi
vi
dend,
wher
eascommonst
ocksdonot
.
Andunl
i
kecommonshar
ehol
der
s,pr
efer
enceshar
ehol
der
susual
l
ydonothav
e
v
oti
ngr
ight
s.

Meani
ngofpr
efer
enceshar
es

Pr
efer
enceshar
esar
eshar
es,
whi
chhav
epr
efer
ent
ial
right
s(i
.e.
,fi
rstpr
ior
it
yor
pr
efer
enceov
erot
herki
ndsofshar
es)i
nrespectofpay
mentofdi
vi
denddur
ingt
he
exi
stenceoft
hecompany
,andal
soi
nrespectofr
epay
mentorr
efundi
fshar
ecapi
tal
i
ntheev
ent
soft
hewi
ndi
ngupoft
hecompany
.

FEATUREOFPREFERENCESHARES

Themai
nfeat
uresofpr
efer
enceshar
ear
easf
oll
ows:

1.Pr
efer
enceshar
ehav
ebeenpr
ior
it
yov
erpay
mentofdi
vi
dendandr
epay
ment
ofcapi
tal
.

2.Pr
efer
encesshar
esdonothol
dvot
ingr
ight
s.

3.Cumul
ati
vepr
efer
enceshar
eshav
ebeenar
ightt
ocl
aim di
vi
dendf
ort
hose
y
ear
sal
sof
orwhi
cht
her
ewer
enopr
ofi
ts.

4.Thehol
der
sofnoncumul
ati
ngpr
efer
enceshar
eshav
enocl
aimf
ort
he
ar
rear
sofdi
vi
dend.Theyar
epai
dadi
vi
dendi
fther
ear
esuf
fi
cientpr
ofi
ts.

5.Redeemabl
epr
efer
enceshar
esnei
thert
hecompanycanr
etur
ntheshar
e
capi
tal
norcant
heshar
ehol
derdemandi
tsr
epay
ment
.

6.I
rr
edeemabl
epr
efer
enceshar
esar
etheshar
eswhi
chcannotber
edeemed
unl
esst
hecompanyi
sli
qui
dat
esar
eknownasi
rr
edeemabl
epr
efer
ence
shar
es.

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nanci
alManagement,
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com,
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ofCommer
ce,
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dencyUni
ver
sit
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 Modul
e2-
Timev
alueofMoney

Ty
pesofpr
efer
enceshar
es

Thepr
efer
enceshar
escanbecl
assi
fi
edi
ntot
hef
oll
owi
ngway
s:

1.
cummul
ati
vepr
efer
enceshar
es

Thehol
der
sofcumul
ati
vepr
efer
enceshar
ear
eent
it
ledt
orecei
veaf
ixed
per
cent
ageofdi
vi
dendsbef
oreany
thi
ngi
sgi
ven,
toot
hercl
assesofshar
ehol
der
s.
Apar
tfr
om t
hisr
ighti
nthecaseoft
heseshar
es,
ift
hecompanyhasnopr
ofi
tsor
i
nadequat
epr
ofi
tsi
nanyy
eart
odecl
aredi
vi
dend,
thear
rear
sofdi
vi
dendwoul
d
accumul
ateandbecomepay
abl
eoutoft
hef
utur
epr
ofi
tsbef
oreany
thi
ngi
sgi
vent
o
ot
hercl
assesofshar
ehol
der
s.

2.
Non-
cumul
ati
vePr
efer
enceShar
es

Non-
cumul
ati
vepr
efer
enceshar
esar
eent
it
ledt
oaf
ixedr
ateofdi
vi
dendi
nthe
f
ir
sti
nst
ance(
i.
e.,
bef
oreany
thi
ngi
sgi
vent
oot
hert
ypesofshar
ehol
der
s).Butt
hey
ar
eent
it
ledt
orecei
vet
hef
ixedper
cent
ageofdi
vi
dendi
nthef
ir
sti
nst
anceonl
yfor
t
hey
earory
ear
swhent
hecompanyear
nssuf
fi
cientpr
ofi
tsanddi
vi
dendi
sdecl
are
di
vi
dend,
then,
thear
rear
sofdi
vi
denddonotaccumul
ateandbecomepay
abl
eout
off
utur
epr
ofi
tsi
nthecaseoft
heseshar
es.

3.
Par
ti
cipat
ingPr
efer
enceShar
es

Thehol
der
soft
heseshar
es,
inaddi
ti
ont
oaf
ixedper
cent
ageofdi
vi
dendsar
e
al
soent
it
ledt
opar
ti
ci
pat
eint
hesur
pluspr
ofi
tsoft
hecompanyal
ongwi
tht
heequi
ty
shar
ehol
der
s.Onl
yift
her
eisaspeci
fi
cpr
ovi
sioni
nthear
ti
clesofassoci
ati
onoft
he
companygi
vi
ngt
hehol
der
soft
heseshar
esspeci
alr
ight
stopar
ti
cipat
eint
he
sur
pluspr
ofi
ts.Theyar
eal
soent
it
ledt
opar
ti
cipat
einsur
plusasset
soft
hecompany
oni
tswi
ndi
ngup.

4.
Non-
Par
ti
cipat
ingPr
efer
enceShar
es

Thehol
der
sofnon-
par
ti
cipat
ingpr
efer
enceshar
eswi
l
lgetonl
yaf
ixedr
ateof
di
vi
dend,
ofcour
se,
int
hef
ir
sti
nst
ance(
i.
e.,
bef
oreanydi
vi
dendi
spai
dtoequi
ty
shar
ehol
der
s).Butt
heyar
enotent
it
ledt
opar
ti
cipat
eint
hesur
pluspr
ofi
tsoft
he
company
.

5.
Conv
ert
ibl
ePr
efer
enceShar
es

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sit
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 Modul
e2-
Timev
alueofMoney

Thehol
der
sofconv
ert
ibl
epr
efer
enceshar
esar
egi
vent
her
ight
stoconv
ertt
hei
r
shar
esi
ntoequi
tyshar
esl
ateron(
i.
e.,
aft
eracer
tai
nper
iod)
.

6.
Non-
Conv
ert
ibl
ePr
efer
enceShar
es

Thehol
der
sofnon-
conv
ert
ibl
epr
efer
enceshar
ear
enotgi
vent
her
ightt
oconv
ert
t
heshar
esi
ntoequi
tyshar
esl
ateron.

7.
Redeemabl
ePr
efer
enceShar
es

Redeemabl
epr
efer
enceshar
esar
ethosepr
efer
enceshar
es,
whi
chcanbe
r
edeemed(
i.
e.,
ret
urnedorpai
dback)ev
endur
ingt
heexi
stenceoft
hecompany
.
Theseshar
escanber
edeemedaspert
het
ermsofi
ssueei
theratadef
ini
tedat
e
af
tert
heexpi
ryofast
ipul
ated(
fi
xed)per
iodoratt
heopt
ionoft
hecompany
,i.
e.,
whenev
ert
hecompanywant
s,af
tergi
vi
ngpr
opernot
ice.Redeemabl
epr
efer
ence
shar
escan.Ber
edeemedbyacompany
.Butt
hei
rredempt
ioni
ssubj
ectt
othe
condi
ti
ons:

i
. Thear
ti
cl
esofassoci
ati
onoft
hecompanyshoul
dpr
ovi
def
ort
hei
ssueand
r
edempt
ionoft
heseshar
es.

i
i
. Onl
yful
l
ypai
dshar
escanber
edeemed.Par
typai
dshar
escannotbe
r
edeemed.

i
i
i. Theycanber
edeemedonl
youtoft
hepr
ofi
tsoft
hecompanywhi
chwoul
dbe
ot
her
wiseav
ail
abl
efordi
vi
dend(
i.
e.,
outoft
hedi
vi
sibl
epr
ofi
tsoft
he
company
)oroutoft
hepr
oceedsoff
reshi
ssueofshar
esmadef
ort
he
pur
poseofr
edempt
ion.

i
v. Anypr
emi
um pai
dont
hei
rredempt
ionmustbepai
doutoft
hepr
ofi
tsoft
he
companyoroutoft
hecompany
’sshar
epr
emi
um account
.

8.
Ir
redemabl
ePr
efer
enceShar
es

I
rr
edeemabl
epr
efer
enceshar
esar
ethoseshar
e,whi
char
enotr
edeemabl
e(i
.e.
,
r
efundabl
e)unt
ilt
hecompanyi
swoundup.

Adv
ant
agesofpr
efer
enceshar
es
Fi
nanci
alManagement,
BBA&B.
com,
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ofCommer
ce,
Presi
dencyUni
ver
sit
yPage36
 Modul
e2-
Timev
alueofMoney

1.Hel
pful
inr
aisi
ngl
ongt
erm capi
tal
foracompany
.

2.Ther
eisnoneedt
omor
tgagepr
oper
tyont
heseshar
es.

3.Redeemabl
epr
efer
enceshar
eshav
etheaddedadv
ant
agesofr
epay
mentof
capi
tal
whenev
ert
her
eissur
plusi
nthecompany
.

4.Rat
eofr
etur
nisguar
ant
eed.

Di
sadv
ant
agesofPr
efer
enceshar
es

1.Per
manentbur
denont
hecompanyt
opayaf
ixedr
ateofdi
vi
dendbef
ore
pay
ingany
thi
ngont
heot
hershar
es.

2.Notadv
ant
ageoust
oinv
est
orsf
rom t
hepoi
ntofv
iewofcont
rol
and
managementaspr
efer
encesshar
esdonotcar
ryv
oti
ngr
ight
s.

3.Compar
edt
oot
herf
ixedi
nter
estbear
ingsecur
it
iessuchasdebent
ures,
usual
l
ythecostofr
aisi
ngt
hepr
efer
enceshar
ecapi
tal
ishi
gher
.

EQUI
TYSHARES

Equi
tyshar
esar
ethose,
whi
char
enotpr
efer
enceshar
es.I
not
herwor
ds,
these
ar
eshar
es,
whi
chdonotenj
oyanypr
efer
ent
ial
rightei
theri
nrespectofpay
mentof
di
vi
dendori
nrespectoft
her
epay
mentofcapi
tal
att
het
imeoft
hewi
ndi
ngupoft
he
company
.Theseshar
esar
eknowasequi
tyshar
es,
ast
heyar
ethe‘
owner
shi
p
shar
es’
conf
err
ingt
heowner
shi
poft
hecompanyont
hehol
der
soft
heseshar
es,
i.
e.,
t
hehol
der
soft
heseshar
esar
ether
eal
owner
soft
hecompany
.

Meani
ngofEqui
tyShar
es

Equi
tyshar
eref
erst
othest
ockofabusi
nessent
it
ywhi
chr
epr
esent
stheor
igi
nal
pai
dint
oori
nvest
edi
nthebusi
nessbyi
tsf
ounder
s.I
tser
vesasasecur
it
yfort
he
cr
edi
tor
sofabusi
nesssi
ncei
tcannotbewi
thdr
awnt
othedet
ri
mentoft
hecr
edi
tor
s.

Di
ff
erencesbet
weenPr
efer
enceShar
esandEqui
tyShar
es

Ther
ear
emanydi
ff
erencesbet
weenpr
efer
enceshar
esandequi
tyshar
esar
eas
f
oll
ows:

Pr
efer
enceShar
es Equi
tyShar
es

Meani
ng Pr
efer
enceshar
esar
ethose Shar
eswhi
chbeart
her
iskand

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alManagement,
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sit
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 Modul
e2-
Timev
alueofMoney

shar
eswhi
chenj
oyspr
efer
ence pr
ovi
deper
manentf
inancear
e
r
egar
dingdi
vi
dendand cal
l
edequi
tyshar
es.
r
epay
mentofcapi
tal
.

Repay
ment Pr
efer
enceshar
ehol
der
sgetback Equi
tycapi
tal
isnotr
epai
d
t
hei
rfi
nancedur
ingl
i
fet
imeof dur
ingt
hel
i
feofcompany
.
t
hecompanyandbef
oret
he
equi
tyshar
ehol
der
s.

Nat
ureof Pr
efer
enceshar
esenj
oys Equi
tyshar
esdonotcar
rysuch
pr
efer
ence pr
efer
ent
ial
right
sasr
egar
dst
he pr
efer
ent
ial
right
sov
er
pay
mentofdi
vi
dendandr
etur
nof pr
efer
enceshar
es.
capi
tal
.

Rat
eof Rat
eofdi
vi
dendi
sfi
xedatt
he Rat
eofdi
vi
dendi
snotf
ixedbut
di
vi
dend t
imeofi
ssueandchangesar
enot f
lex
ibl
e.I
nchangesev
eryasper
madei
nthi
srat
einduecour
se. t
henetpr
ofi
toft
hecompany
.

Vot
ing Pr
efer
enceshar
esdonotcar
ry Equi
tyshar
escar
rynor
mal
r
ight
s nor
mal
right
s,butonl
yunder v
oti
ngr
ight
s.
except
ional
cir
cumst
ances.

Ty
pes Ther
ear
edi
ff
erentt
ypesof Al
lequi
tyshar
esar
eofonet
ype
pr
efer
enceshar
esl
i
ke orcat
egor
y.Theyar
eal
way
s
cumul
ati
ve,
redeemabl
e, i
rr
edeemabl
e.
i
rr
edeemabl
e,par
ti
ci
pat
ingand
non-
par
ti
cipat
ing.

Appeal
to Pr
efer
enceshar
esappeal
to Equi
tyshar
esappeal
to
i
nvest
ors r
elat
ivel
ylessadv
ent
urous adv
ent
urousi
nvest
orswi
l
li
ngt
o
i
nvest
ors,
int
erest
edi
nfi
xed,
but t
aker
isksi
nthei
rinv
est
ment
.
r
egul
arr
etur
noni
nvest
ment
.

Facev
alue Rel
ati
vel
yhi
gher
.Usual
l
yRs.
100 Rel
ati
vel
yless.Usual
l
yRs.
10

capi
tal Nocapi
tal
appr
eci
ati
oni
s Capi
tal
appr
eci
ati
oni
spossi
ble
possi
ble duet
opr
ospect
sofr
isi
ng
di
vi
dends.

Fi
nanci
alManagement,
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com,
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ofCommer
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dencyUni
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sit
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 Modul
e2-
Timev
alueofMoney

Redeemabl
e Pr
efer
enceshar
es,
i.
e., Butequi
tyshar
esar
enot
r
edeemabl
epr
efer
enceshar
es r
edeemabl
edur
ingt
hel
i
feof
ar
eredeemabl
edur
ingt
he t
hecompany
.
exi
stenceoft
hecompany
.

BONUSSHARES

Bonusshar
esar
eshar
esi
ssuedbyacompanyoutofi
tsaccumul
atedr
eser
ves
orpr
ofi
tst
otheexi
sti
ngequi
tyshar
ehol
der
sei
therasf
ull
ypai
dshar
esorpar
tl
ypai
d
shar
esf
reeofcost
.

Abonusshar
eisaf
reeshar
eofst
ockgi
vent
ocur
rentshar
ehol
der
sina
company
,basedupont
henumberofshar
est
hatt
heshar
ehol
deral
readyowns.
Whi
l
ethei
ssueofbonusshar
esi
ncr
easest
het
otal
numberofshar
esi
ssuedand
owned,
itdoesnoti
ncr
easet
hev
alueoft
hecompany
.Al
thought
het
otal
numberof
i
ssuedshar
esi
ncr
eases,
ther
ati
oofnumberofshar
eshel
dbyeachshar
ehol
der
r
emai
nsconst
ant
.Ani
ssueofbonusshar
esi
sref
err
edt
oasabonusi
ssue.
Dependi
ngupont
heconst
it
uti
onal
document
soft
hecompany
,onl
ycer
tai
ncl
asses
ofshar
esmaybeent
it
ledt
obonusi
ssues,
ormaybeent
it
ledt
obonusi
ssuesi
n
pr
efer
encet
oot
hercl
asses.

Abonusi
ssuei
sast
ockspi
l
tinwhi
chacompanyi
ssuesnewshar
eswi
thout
char
gei
nor
dert
obr
ingi
tsi
ssuedcapi
tal
inl
i
newi
thi
tsempl
oyedcapi
tal
(the
i
ncr
easedcapi
tal
avai
l
abl
etot
hecompanyaf
terpr
ofi
ts)
.Thi
susual
l
yhappensaf
ter
acompanyhasmadepr
ofi
ts,
thusi
ncr
easi
ngi
tsempl
oyedcapi
tal
.Ther
efor
e,a
bonusi
ssuecanbeseenasanal
ter
nat
ivet
odi
vi
dends.Nonewf
undsar
erai
sedwi
th
abonusi
ssue.

Unl
i
kear
ight
sissue,
abonusi
ssuedoesnotr
iskdi
l
uti
ngy
ouri
nvest
ment
.
Al
thought
heear
ningspershar
eoft
hest
ockwi
l
ldr
opi
npr
opor
ti
ont
othenewi
ssue,
t
hisi
scompensat
edbyt
hef
actt
haty
ouwi
l
lownmor
eshar
es.Ther
efor
ethev
alue
ofy
ouri
nvest
mentshoul
dremai
nthesameal
thought
hepr
icewi
l
ladj
ustaccor
dingl
y.
Thewhol
eideabehi
ndt
hei
ssueofBonusshar
esi
stobr
ingt
heNomi
nal
Shar
e
Capi
tal
int
oli
newi
tht
het
rueexcessofasset
sov
erl
i
abi
l
iti
es.

VALUATI
ONOFSHARES

Fi
nanci
alManagement,
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com,
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ofCommer
ce,
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dencyUni
ver
sit
yPage39
 Modul
e2-
Timev
alueofMoney

Themet
hodofv
aluat
iondependsont
hepur
posef
orwhi
chv
aluat
ioni
srequi
red.
Gener
all
y,t
her
ear
ethr
eemet
hodsofv
aluat
ionofshar
es.

1.
NetAsset
sMet
hodsofVal
uat
ionofShar
es

I
nthi
smet
hod,
thenetv
alueofasset
soft
hecompanyar
edi
vi
dedbyt
henumber
ofshar
est
oar
ri
veatt
hev
alueofeachshar
e.Fordet
ermi
nat
ionofnetv
alueof
asset
s;i
tisnecessar
ytoest
imat
ethewor
thoft
heasset
sandl
i
abi
l
iti
es.The
goodwi
l
laswel
lasnon-
tr
adi
ngasset
sshoul
dal
sobei
ncl
udedi
ntot
alasset
s.The
f
oll
owi
ngpoi
ntsshoul
dbeconsi
der
edwhi
l
eval
uingofshar
esi
nthi
smet
hod.

a)Goodwi
l
lmustbepr
oper
lyv
alued.

b)Thef
ict
it
iousasset
sli
kepr
eli
minar
yexpenses,
discountoni
ssueofshar
es
anddebent
uresaccumul
atedl
osseset
c.shoul
dbeel
i
minat
ed.

c)Goodwi
l
lmustbepr
oper
lyv
alued.

d)Thef
ixedasset
sshoul
dbet
akenatt
hei
rreal
i
zabl
eval
ue.

e)Pr
ovi
sionf
orbaddebt
s,depr
eci
ati
onet
c.,
mustbeconsi
der
ed.

f
) Al
lunr
ecor
dedasset
sandl
i
abi
l
iti
esi
fanyshoul
dbeconsi
der
ed.

g)Fl
oat
ingasset
sshoul
dbet
akenatmar
ketv
alue.

h)Theext
ernal
li
abi
l
iti
esl
i
kesundr
ycr
edi
tor
s,bi
l
lspay
abl
e,l
oan,
debent
ureset
c.,
shoul
dbededuct
edf
rom t
hev
alueofasset
sfort
hedet
ermi
nat
ionofnet
v
alue.

Thenetv
alueofasset
s,det
ermi
nedsoast
obedi
vi
dedbynumberofequi
ty
shar
esf
orf
indi
ngoutt
hev
alueofshar
e.Thust
hev
aluepershar
ecanbe
det
ermi
nedbyusi
ngt
hef
oll
owi
ngf
ormul
a:

Val
uepershar
e=(
NetAsset
s–Pr
efer
enceShar
eCapi
tal
)/Noofequi
tyshar
es.

2.
Yiel
dormar
ketv
aluemet
hodofv
aluat
ionofshar
es

Theexpect
edr
ateofr
etur
nini
nvest
menti
sdenot
edbyy
iel
d.Thet
ermr
ateof
r
etur
nref
erst
other
etur
ninwhi
chashar
ehol
derear
nsonhi
sinv
est
ment
.Fur
theri
t
canbecl
assi
fi
edas

(
a)Rat
eofear
ning

Fi
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 Modul
e2-
Timev
alueofMoney

(
b)Rat
eofdi
vi
dend

I
not
herwor
ds,
yiel
dmaybeear
ningy
iel
danddi
vi
dendy
iel
d.

(
a)Ear
ningy
iel
d

I
nthi
smet
hod,
shar
esar
eval
uedont
hebasi
sofexpect
edear
ningandnor
mal
r
ateofr
etur
n.Thev
aluepershar
eiscomput
edbyusi
ngt
hef
oll
owi
ngf
ormul
a.

Val
uepershar
e=(
Expect
edr
ateofear
ning\
nor
mal
rat
eofr
etur
n)*
pai
dupv
alue
ofequi
tyshar
e.

Expect
edr
ateofear
ning=(
prof
itaf
tert
ax\
pai
dupv
alueofequi
tyshar
e)*
10

(
b)Di
vi
dendy
iel
d

I
nthi
smet
hodshar
esar
eval
uedont
hebasi
sofexpect
eddi
vi
dendandnor
mal
r
ateofr
etur
n.Thev
aluepershar
eiscomput
edbyusi
ngt
hef
oll
owi
ngf
ormul
a.

Expect
edr
ateofdi
vi
ded=(
prof
itav
ail
abl
efordi
vi
dend\
pai
dupequi
tyshar
e
capi
tal
)*100

4.
Ear
ningcapaci
tymet
hodofv
aluat
ionofshar
es

I
nthi
smet
hod,
thev
aluepershar
eiscomput
edont
hebasi
sofdi
sposabl
epr
ofi
t
oft
hecompany
.

Thedi
sposabl
epr
ofi
tcanbedet
ermi
nedbydeduct
ingr
eser
vesandt
axesf
rom
netpr
ofi
t.Thef
oll
owi
ngst
epsar
eappl
i
edf
ort
hedet
ermi
nat
ionofv
aluepershar
e
underear
ningcapaci
ty.

St
ep1:
findoutt
hepr
ofi
tav
ail
abl
efordi
vi
dend

St
ep2:
comput
ethecapi
tal
i
zedv
alueusi
ngt
hef
ormul
a

Capi
tal
i
zedv
alue=(
prof
itav
ail
abl
eforequi
tydi
vi
dend\nor
mal
rat
eofr
etur
n)*
100

St
ep3:
comput
eval
uepershar
e

Val
uepershar
e=capi
tal
i
zedv
alue\no.ofshar
es

I
ll
ust
rat
ion–1

Acompanyi
spl
anni
ngt
orai
sef
indsbymaki
ngr
ight
sissueofequi
tyshar
est
o

Fi
nanci
alManagement,
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com,
School
ofCommer
ce,
Presi
dencyUni
ver
sit
yPage41
 Modul
e2-
Timev
alueofMoney

f
inancei
tsexpansi
on.Theexi
sti
ngequi
tyshar
ecapi
tal
oft
hecompanyi
s
Rs.
50,
00,
000.Themar
ketv
alueofi
tsshar
eisRs.
42.t
hecompanyof
fer
stoi
tsshar
e
t
her
ightt
obuy2shar
esat/
rs.
11eachf
orev
ery5shar
ehel
d.Youar
erequi
redt
o
cal
cul
ate:

1.Theor
eti
cal
mar
ketpr
iceaf
terr
ighti
ssue

2.Thev
alueofr
ight

3.%i
ncr
easei
nshar
ecapi
tal

Sol
uti
on:

Mar
ketv
alueof5shar
eal
readyhel
dbyashar
ehol
der@ Rs.
42=210

Addt
hepr
icet
obepai
dbyhi
mforacqui
ri
ng2mor
eshar
es

@ Rs.
11pershar
e = 22

Tot
alRs. 232

1.Theor
eti
cal
mar
ketpr
iceofoneshar
e=232\
7=Rs.
33.
14

2.Val
ueofr
ight=mar
ketpr
ice–t
heor
eti
cal
mar
ketpr
ice=42–33.
14=33.
86

3.%i
ncr
easei
nshar
ecapi
tal

Pr
esentcapi
tal
=50,
00,
000

Ri
ghti
ssueRs.
50,
00,
000×2\
5=20,
00,
000

%i
ncr
easei
nshar
ecapi
tal
=20,
00,
000\50,
00,
000×100=40%

Rev
iewquest
ions

Concept
ual
type

1.Whati
sti
mev
alueofmoney
?

2.Whatt
oyoumeanbyf
utur
eval
ue?

3.Def
ineannui
ty?

Fi
nanci
alManagement,
BBA&B.
com,
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ofCommer
ce,
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dencyUni
ver
sit
yPage42
 Modul
e2-
Timev
alueofMoney

4.Whati
spr
esentv
alue?

5.Whati
sdoubl
i
ngper
iod?

6.St
atet
wot
echni
quesf
oradj
ust
ingt
het
imev
alueofmoney
.

Anal
yti
cal
type

1.Expl
aint
heconceptoft
imev
alueofmoney
.

2.Expl
aint
heneedsf
ort
imev
alueofmoney
.

3.Expl
aint
het
ypesofannui
ti
es.

PRATI
CALPROBLEMS

1.Fi
ndoutt
hef
utur
eval
ueofRs.
4,800r
ecei
vedaf
tert
woy
ear
sat10%t
ime
pr
efer
encer
ate.

2.Cal
cul
atet
hef
utur
eval
uef
or10,
000deposi
tedi
nbankf
oraper
iodof5y
ear
s
at12%p.
a.gi
ven(
1.12)
5
=1.
762

3.Cal
cul
atet
hef
utur
eval
ueofRs.
38,
000i
nvest
edf
or5y
ear
satar
ateof
i
nter
estof15%compoundedhal
fyear
ly.Accor
dingt
ocompoundt
abl
e
compoundv
aluef
act
orf
orRs1i
n5y
ear
satr
ate12%.

4.Cal
cul
atet
hef
utur
eval
ueofRs.
18,
000i
sinv
est
edf
oraper
iodof5y
ear
sat
20
12%p.
a.i
nter
estcompoundquar
ter
ly.Fi
ndoutFVgi
ven(
1.03) =1.
806

5.Cal
cul
atet
hef
utur
eval
ueofannui
tyofRs.
66,
000deposi
tedatt
heendof
eachy
earat8%f
oraper
iod5y
ear
s.

6.Mr
.Sat
ishRoydeposi
tedRs.
23,
000att
heendofev
eryy
earf
orf
ivey
ear
sand
t
hedeposi
tear
nscompoundi
nter
est@10%p.
a.Det
ermi
nehowmuchmoney
hewi
l
lhav
eatt
heendof5y
ear
s.

7.Cal
cul
atet
hef
utur
eval
ueatt
heendof5y
ear
soft
hef
oll
owi
ngser
iesof
pay
ment
sat12%r
ateofi
nter
est
.

Rs.
2,000att
heendoff
ir
sty
ear
.

Rs.
4,000att
heendofsecondy
ear
.

Rs.
6,000att
heendoft
hir
dyear
.

Fi
nanci
alManagement,
BBA&B.
com,
School
ofCommer
ce,
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dencyUni
ver
sit
yPage43
 Modul
e2-
Timev
alueofMoney

Rs.
8,000att
heendoff
our
thy
ear
.

Rs.
10,
000att
heendoff
if
thy
ear
.

8.Mr
.Sahai
stor
ecei
veRs.
12,
000af
ter5y
ear
sfr
om now.Hi
sti
mepr
efer
ence
f
ormoneyi
s2%p.
a.cal
cul
atet
hepr
esentv
alue.Accor
dingt
odi
scountf
act
or
t
abl
e,t
hepr
esentv
aluedi
scountf
act
orat12%p.
a.f
or5y
ear
sforRs.
1is
0.
567.cal
cul
ati
onofpr
esentv
alue.

9.Cal
cul
atet
hef
utur
eval
ueofmoneyatt
heendoff
ivey
ear
soft
hef
oll
owi
ng
ser
iesofpay
ment
sat9%r
ateofi
nter
est
.

Rs.
22,
000att
heendoff
ir
sty
ear
.

Rs.
23,
000att
heendofsecondy
ear
.

Rs.
24,
000att
heendoft
hir
dyear
.

Rs.
26,
000att
heendoff
our
thy
ear
.

10.Fi
ndoutt
hepr
esentv
alueofannui
tyr
ecei
ptof7,
000r
ecei
vedf
or5y
ear
sat
t
her
ateof12%di
scountr
ate.

11.Cal
cul
atet
hepr
esentv
alueoft
hef
oll
owi
ngser
iesofpay
ment
smadeatt
he
endofeachy
earf
oraper
iodof5y
ear
sat9%i
nter
estr
ate.

Cashf
l heendof1sty
owatt earRs.
1,000

Cashf
l heendof2ndy
owatt earRs.
2,000

Cashf
l heendof3rdy
owatt earRs.
3,000

Cashf
l heendof4thy
owatt earRs.
4,000

Cashf
l heendof5thy
owatt earRs.
5,000

12.
Cal
cul
atet
hepr
esentv
alueoft
hef
oll
owi
ngser
iesofpay
ment
smadeatt
he
endofeachy
earf
oraper
iodof4y
ear
sat12%i
nter
estr
ate.

Cashf
l heendof1sty
owatt earRs.
11,
000

Cashf
l heendof2ndy
owatt earRs.
12,
000

Cashf
l heendof3rdy
owatt earRs.
13,
000

Fi
nanci
alManagement,
BBA&B.
com,
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ofCommer
ce,
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dencyUni
ver
sit
yPage44
 Modul
e2-
Timev
alueofMoney

Cashf
l heendof4thy
owatt earRs.
14,
000

Cashf
l heendof5thy
owatt earRs.
15,
000

13.
Det
ermi
net
hepr
esentv
alueofper
pet
uit
yRs.
2,20,
000pery
earf
ori
nfi
nit
e
per
iodatanef
fect
iver
ateofi
nter
estof8%p.
a.?

14.
Det
ermi
net
hepr
esentv
alueofper
pet
uit
yRs.
50,
000f
ori
nfi
nit
eper
iodatan
ef
fect
iver
ateofi
nter
estof6%p.
a.i
fst
eadyr
atei
s5%pery
ear
.

15.
Acompanyhasr
aisedal
oanamountofRs.
3,00,
000f
rom bankat12%per
annum r
ateofi
nter
est
.Theamounthast
obepai
dbacki
n5equal
annual
i
nst
all
ment
s.Whatshal
lbet
hesi
zeoi
nst
all
ment
?

*
***
***
***
***
***
***
*

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nanci
alManagement,
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com,
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ofCommer
ce,
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dencyUni
ver
sit
yPage45