Actuarial Science

by

Sant Kumar

1
 Syllabus
Unit I
Time of value of money, Present Value, Accumulated Value, Valuing Multiple Regular
Payments, Equations of Value, Application in Spreadsheets.
Unit II
Two State Model (Active/Dead), Calculating Probabilities using Two State Model.
Unit III
Introduction to the Life Table, Calculating Probabilities using the Life Table, Expected
Present Value, Accumulated Value and Uncertainty.
Unit IV
The life Insurance Company Scenario, Single Projection, Simulations, Analysing the
Simulation Output, Adjustment to Reserves, Additional Scenarios.

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 Unit I
1. Meaning of Time Value of Money
The Time Value of Money (TVM) is a financial concept that recognizes the idea that
money available today is worth more than the same amount of money in the future. This
principle is based on the understanding that money has the potential to earn interest or
investment returns over time. In other words, a dollar received today is more valuable
than a dollar received at some point in the future. TVM is a fundamental concept in
finance and is used in various financial calculations, including those related to
investments, loans, and annuities. It is used to determine the value of future cash flows
in today's terms, taking into account factors like interest rates, inflation, and the time
period involved.

You should receive now

only because it is more
valuable in present than
future. This is known as
the concept of time
value of money.

Mr. Economist, should I

receive ₹ 1 now or after
1 year?

There are a few key components associated with the time value of money:
(1) Future Value (FV)
This is the value that a sum of money will have in the future, based on a specific
interest rate and time period.
(2) Present Value (PV)
This is the current value of a future sum of money, discounted back to today's
dollars based on a specific interest rate and time period.
(3) Interest Rate (or Discount Rate)
The rate used to calculate the present value or future value of money. It reflects
the cost of capital or the potential return on investment.
(4) Time Period
The length of time involved in the calculation, which can range from days to
years.
(5) Compounding
The process of earning interest not only on the initial amount but also on the
accumulated interest from previous periods. Compounding can significantly
impact the future value of an investment.

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 (6) Discounting
The process of reducing the future value of money to its present value by
applying a discount rate. This is the reverse of compounding.

2. Accumulated Value / Future Value

If ₹ P are invested at i interest rate for n years, and interest is compounded for m times
in a year, then the accumulated value (also known as future value) is given by
𝒊 𝒎𝒏
𝑨 = 𝑷 (𝟏 + )
𝒎
For different values of m, the formula becomes as given in Table - 1.
Table -1
Interest compounding Value of m Formula
Annual m=1 𝐴 = 𝑃(1 + 𝑖)𝑛

Semi-annual m=2 𝑖 2𝑛
𝐴 = 𝑃 (1 + )
2

Quarterly m=3 𝑖 3𝑛
𝐴 = 𝑃 (1 + )
3

Monthly m = 12 𝑖 12𝑛
𝐴 = 𝑃 (1 + )
12

Weekly m = 52 𝑖 52𝑛
𝐴 = 𝑃 (1 + )
52

Daily m = 365 𝑖 365𝑛

𝐴 = 𝑃 (1 + )
365

However, if interest is compounded continuously, then

𝒊 𝒎𝒏
𝑨 = 𝐥𝐢𝐦 𝑷 (𝟏 + )
𝒎→∞ 𝒎

𝑨 = 𝑷𝒆𝒊𝒏
Where, e = 2.7182
Question 1: Calculate the accumulated amount of ₹ 2,725 deposited with a bank
(yielding annual interest of 7%) for 8 years. Assume that interest is compounded:
a) Annually
b) Semi-annually

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 c) Continuously
Answer
Part (a): Annual compounding of interest
If interest is calculated annually, then
𝑨 = 𝑷(𝟏 + 𝒊)𝒏
Therefore,
𝐴 = 2725 × (1 + 0.07)8
= 2725 × (1.07)8
= 2725 × 1.719
𝐴 = 4684.28
Working note:
To calculate (1.07)8, we use the technique of log
Let 𝑥 = (1.07)8
Taking log in both sides
log 𝑥 = log(1.07)8
= 8 log(1.07)
= 8 × 0.0294
= 0.2352
Taking antilog in both sides
𝑥 = Antilog (0.2352)
𝑥 = 1.719
Part (b): Semi-annual compounding of interest
If interest is calculated semi-annually, then

𝒊 𝟐𝒏
𝑨 = 𝑷 (𝟏 + )
𝟐
Therefore,

0.07 2×8
𝐴 = 2725 × (1 + )
2
= 2725 × (1.035)16
= 2725 × 1.742
𝐴 = 4746.95

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Working note:
To calculate (1.035)16, we use the technique of log
Let 𝑥 = (1.035)16
Taking log in both sides
log 𝑥 = log(1.035)16
= 16 log(1.035)
= 16 × 0.0149
= 0.2384
Taking antilog in both sides
𝑥 = Antilog (0.2384)
𝑥 = 1.742

Part (c): Continuous compounding of interest

If interest is calculated semi-annually, then
𝑨 = 𝑷𝒆𝒊𝒏
Therefore,
𝐴 = 2725 × (𝑒 0.07×8 )
= 2725 × (𝑒 0.56 )
= 2725 × 1.751
𝐴 = 4771.46
Working note:
To calculate 𝑒 0.56 , we use the technique of log
Let 𝑥 = 𝑒 0.56
Taking log in both sides
log 𝑥 = log 𝑒 0.56
= 0.56 log(𝑒)
= 0.56 × 0.4343
= 0.2432
Taking antilog in both sides
𝑥 = Antilog (0.2432)

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 𝑥 = 1.751
3. Present Value
Present value of a future amount means its worth in present for a given discounting
rate/opportunity cost. The process of calculating present value is called discounting an
amount. The calculation of present value can be studied in the following two cases:
Case I : When interest is not compounded continuously
Present value (PV) (also known as discounted value) means the value of a given amount
at zero point of time. The mathematical formula to calculate present value of a given
amount A (called future value) is given by
𝑨
𝑷𝑽 =
(𝟏 + 𝒊)𝒏
Where i = interest rate or discounting rate or opportunity cost (expressed in non-
percentage form); n = time-period for which money is deposited.
Assumption: While applying the above formula, it is assumed that the interest is
compounded annually i.e., interest is credited one time in a year. However, if interest is
compounded for m times, then the formula of present value is
𝑨
𝑷𝑽 =
𝒊
(𝟏 + 𝒎)𝒎𝒏

To illustrate, imagine a scenario where a bank commits to giving you ₹ 110 one year
from now, provided you deposit a certain amount today at an annual interest rate of
10%. The question at hand is: how much should you deposit today in order to have it
grow to ₹ 110 after one year? The solution to this query is the present value of ₹ 100.
Here, i = 10% = 0.10 ; A = ₹ 110, therefore,
110
𝑃𝑉 =
(1 + 0.10)1
110
=
1.10
= 100
Thus, deposit ₹ 100 today and get ₹ 110 after one year. Technically, ₹ 100 is called the
present value of ₹ 110.
Case II : When interest is compounded continuously
If interest is compounded continuously, then the present value of a given amount A is
calculated using the formula:
𝑨
𝑷𝑽 = = 𝑨𝒆−𝒊𝒏
𝒆𝒊𝒏

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Suppose that we are interested in calculating the present value of an amount, say, A = ₹
4580 provided that the interest is compounded continuously at interest rate 9% per
annum for 5 years. Then,
4580
𝑃𝑉 =
𝑒 0.09×5
4580
𝑃𝑉 =
𝑒 0.45
4580
=
1.568
𝑃𝑉 = 2920.91
Working note:
To calculate 𝑒 0.45 , we use the technique of log
Let 𝑥 = 𝑒 0.45
Taking log in both sides
log 𝑥 = log 𝑒 0.45
= 0.45 log(𝑒)
= 0.45 × 0.4343
= 0.1954
Taking antilog in both sides
𝑥 = Antilog (0.1954)
𝑥 = 1.568

4. Nominal interest rate versus Effective interest rate

Case I: Interest is not compounded continuously
Suppose that interest is compounded for m times in a year, and interest rate is i per
annum, then a principal amount of ₹ P accumulates to
𝑖 𝑚
= 𝑃 (1 + )
𝑚
𝑖 𝑚
Therefore, by investing ₹ P we get ₹ 𝑃 (1 + 𝑚) , consequently, the actual interest is

𝑖 𝑚
= 𝑃 (1 + ) − 𝑃
𝑚
𝑖 𝑚
= 𝑃 [(1 + ) − 1]
𝑚

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The above actual interest in percentage form is called the effective interest rate (denoted
by R), which is given by the following equation
𝑖 𝑚
𝑃 [(1 + 𝑚) − 1]
𝑅= × 100
𝑃

𝑖 𝑚
𝑅 = [(1 + ) − 1 ] × 100
𝑚

Example: If nominal interest is 12% p.a., then calculate its effective interest rate.
Assume that interest is compounded quarterly.
Answer:
Effective interest rate is given by
𝑖 𝑚
𝑅 = [(1 + ) − 1 ] × 100
𝑚

Where i = nominal interest rate (in non-percentage form); m = compounding

frequency.

0.12 4
𝑅 = [(1 + ) − 1 ] × 100
4

= [(1.03)4 − 1 ] × 100
= 0.1255 × 100
= 12.55%
Case II: Interest is compounded continuously
Suppose that interest is compounded for m times in a year, and interest rate is i per
annum, then a principal amount of ₹ P accumulates to
= 𝑃𝑒 𝑖
Therefore, by investing ₹ P we get ₹ 𝑃𝑒 𝑖 , consequently, the actual interest is
= 𝑃𝑒 𝑖 − 𝑃

= 𝑃(𝑒 𝑖 − 1)

The above actual interest in percentage form is called the effective interest rate (denoted
by R), which is given by the following equation

𝑃(𝑒 𝑖 − 1)
𝑅= × 100
𝑃

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 𝑅 = (𝑒 𝑖 − 1) × 100

Example: If nominal interest is 15% p.a., then calculate its effective interest rate.
Assume that interest is compounded continuously.
Answer:
Effective interest rate is given by

𝑅 = (𝑒 𝑖 − 1) × 100

𝑅 = (𝑒 0.15 − 1) × 100
= (1.1618 − 1) × 100
= (1.1618 − 1) × 100
= 0.1618 × 100
= 16.18%
5. Valuing Multiple Regular Payments : Annuity
An annuity is a series of equal payments. Pension, interest on bond, etc. are some
examples of annuity. The most popular types of an annuity are as follows:
(a) Annuity immediate (or ordinary annuity): Under this type of annuity,
payment is made at the end of each period. For example, if at the end of each
month, the Government pays ₹ 5,000 to a person as person, then this pension
stream is called an annuity immediate.

(b) Annuity due: Under this type of annuity, payment is made at the beginning of
each period. For example, if in the beginning of each month, a company pays
interest of ₹ 3,000 to the bond holders, then such stream is called an annuity
due.

(c) Perpetuity: This is a type of annuity in which the life of annuity is infinity.

6. Accumulated Value of An Annuity Immediate

Suppose that a payment of ₹ x is made at the end of each period (let a year) upto n years.
Then the accumulated value of this annuity is given by
𝐴 = 𝐾(1 + 𝑖)𝑛−1 + 𝐾(1 + 𝑖)𝑛−2 + 𝐾(1 + 𝑖)𝑛−3 + ⋯ . +𝐾
= 𝐾[(1 + 𝑖)𝑛−1 + (1 + 𝑖)𝑛−2 + (1 + 𝑖)𝑛−3 + ⋯ . +1]
𝐴 = 𝐾[1 + ⋯ + (1 + 𝑖)𝑛−3 + (1 + 𝑖)𝑛−2 + (1 + 𝑖)𝑛−1 ]
We know that if 𝑎, 𝑎𝑟, 𝑎𝑟 2 , … , 𝑎𝑟 𝑛−1 is a GP series, then
𝑎(1 − 𝑟 𝑛 )
𝑆 = 𝑎 + 𝑎𝑟 + 𝑎𝑟 2 + ⋯ + 𝑎𝑟 𝑛−1 =
1−𝑟
Where, 𝑎 = the first term; r = common ratio.

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The expression (in accumulated value equation) within the square-bracket is a
Geometric Progression Series with common ratio (1 + 𝑖) , and the first term 1,
therefore,
1 − (1 + 𝑖)𝑛
𝐴 = 𝐾[ ]
1 − (1 + 𝑖)

1 − (1 + 𝑖)𝑛
= 𝐾[ ]
1−1−𝑖

1 − (1 + 𝑖)𝑛
= 𝐾[ ]
−𝑖
(1 + 𝑖)𝑛 − 1
𝐴 = 𝐾[ ]
𝑖

7. Present Value of An Annuity Immediate

Suppose that a payment of ₹ x is made at the end of each period (let a year) upto n years.
Then the present value of this annuity is given by
𝐾 𝐾 𝐾 𝐾
𝑃𝑉 = + 2
+ 3
+ ⋯.+
(1 + 𝑖) (1 + 𝑖) (1 + 𝑖) (1 + 𝑖)𝑛
𝐾 1 1 1
= [1 + + + ⋯ . + ]
(1 + 𝑖) (1 + 𝑖) (1 + 𝑖)2 (1 + 𝑖)𝑛−1
We know that if 𝑎, 𝑎𝑟, 𝑎𝑟 2 , … , 𝑎𝑟 𝑛−1 is a GP series, then
𝑎(1 − 𝑟 𝑛 )
𝑆 = 𝑎 + 𝑎𝑟 + 𝑎𝑟 2 + ⋯ + 𝑎𝑟 𝑛−1 =
1−𝑟
Where, 𝑎 = the first term; r = common ratio.
The expression (in PV equation) within the square-bracket is a Geometric Progression
1
Series with common ratio (1+𝑖) , and the first term 1, therefore,

1 𝑛
1 − (
𝑃𝑉 =
𝐾
[ 1 + 𝑖) ]
(1 + 𝑖) 1 − 1
1+𝑖
(1 + 𝑖)𝑛 − 1
𝐾 (1 + 𝑖)𝑛
= [ ]
(1 + 𝑖) 𝑖
1+𝑖
(1 + 𝑖)𝑛 − 1
𝑃𝑉 = 𝐾 [ ]
𝑖(1 + 𝑖)𝑛

8. Accumulated Value of An Annuity Due

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Suppose that a payment of ₹ x is made in the beginning of each period (let a year) upto
n years. Then the accumulated value of this annuity is given by
𝐴 = 𝐾(1 + 𝑖)𝑛 + 𝐾(1 + 𝑖)𝑛−1 + 𝐾(1 + 𝑖)𝑛−2 + 𝐾(1 + 𝑖)𝑛−3 + ⋯ . +𝐾(1 + 𝑖)1
= 𝐾(1 + 𝑖)[(1 + 𝑖)𝑛−1 + (1 + 𝑖)𝑛−2 + (1 + 𝑖)𝑛−3 + ⋯ . +1]
𝐴 = 𝐾(1 + 𝑖)[1 + ⋯ + (1 + 𝑖)𝑛−3 + (1 + 𝑖)𝑛−2 + (1 + 𝑖)𝑛−1 ]
We know that if 𝑎, 𝑎𝑟, 𝑎𝑟 2 , … , 𝑎𝑟 𝑛−1 is a GP series, then
𝑎(1 − 𝑟 𝑛 )
𝑆 = 𝑎 + 𝑎𝑟 + 𝑎𝑟 2 + ⋯ + 𝑎𝑟 𝑛−1 =
1−𝑟
Where, 𝑎 = the first term; r = common ratio.
The expression (in accumulated value equation) within the square-bracket is a
Geometric Progression Series with common ratio (1 + 𝑖) , and the first term 1,
therefore,
1 − (1 + 𝑖)𝑛
𝐴 = 𝐾(1 + 𝑖) [ ]
1 − (1 + 𝑖)

1 − (1 + 𝑖)𝑛
= 𝐾(1 + 𝑖) [ ]
1−1−𝑖

1 − (1 + 𝑖)𝑛
= 𝐾(1 + 𝑖) [ ]
−𝑖
(1 + 𝑖)𝑛 − 1
𝐴 = 𝐾(1 + 𝑖) [ ]
𝑖

9. Present Value of An Annuity Due

Suppose that a payment of ₹ x is made in the beginning of each period (let a year) upto
n years. Then the present value of this annuity is given by
𝐾 𝐾 𝐾 𝐾
𝑃𝑉 = 𝐾 + + + + ⋯ . +
(1 + 𝑖) (1 + 𝑖)2 (1 + 𝑖)3 (1 + 𝑖)𝑛−1
1 1 1
= 𝐾 [1 + + 2
+ ⋯.+ ]
(1 + 𝑖) (1 + 𝑖) (1 + 𝑖)𝑛−1
We know that if 𝑎, 𝑎𝑟, 𝑎𝑟 2 , … , 𝑎𝑟 𝑛−1 is a GP series, then

2 𝑛−1
𝑎(1 − 𝑟 𝑛 )
𝑆 = 𝑎 + 𝑎𝑟 + 𝑎𝑟 + ⋯ + 𝑎𝑟 =
1−𝑟
Where, 𝑎 = the first term; r = common ratio.
The expression (in PV equation) within the square-bracket is a Geometric Progression
1
Series with common ratio (1+𝑖) , and the first term 1, therefore,

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 1 𝑛
1 − (1 + 𝑖 )
𝑃𝑉 = 𝐾 [ ]
1
1−1+𝑖

(1 + 𝑖)𝑛 − 1
(1 + 𝑖)𝑛
= 𝐾[ ]
𝑖
1+𝑖
(1 + 𝑖)𝑛 − 1
𝑃𝑉 = 𝐾 [ ] (1 + 𝑖)
𝑖(1 + 𝑖)𝑛

This is obvious that

𝑃𝑉 of Annuity due
= 𝑃𝑉 of Annuity Immediate × (1 + 𝑖)

10. Equations of Value

Any financial transaction can be represented in the form of an equation. The
components of the equation are the interest rate and the amounts of money disbursed
and received. These amounts are termed dated cash flows (inflow and outflow). The
equation is called an equation of value for the transaction, because it balances the
accumulated and present values of the payments made at different time points.
In order to formulate an equation of value for a transaction, it is necessary to choose a
reference time point called valuation date/focal date/comparison date. At the focal
date, the sum of the values of one set of obligations is the same as the sum of the values
of another set of obligations. Thus, an equation of value makes us enable to re-arrange
the payments so that a transaction can be settled.
Example: A loan of ₹ 5,000 is due 5 years now and ₹ 5,000 due 10 years now. However,
the borrower wants to pay the entire loan by paying ₹ 2,000 2 years now, ₹ 4,000 4
years now, and an unknown final payment at the end of 6 years now. Find that unknown
final payment.
Solution
This is obvious that the focal date is 6 years later from now.

₹ 5,000 ₹ 5,000

0 1 2 3 4 5 6 7 8 9 10
₹ 2,000 ₹ 4,000 ₹x

Focal date
Let the unknown payment at the focal date is ₹ x. On the basis of above diagram, we
have the following equation of value:

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 2000 × (1 + 0.07)4 + 4000 × (1 + 0.07)2 + 𝑥
= 5000 × (1 + 0.07) + 5000 × (1 + 0.07)−4
5000
2000 × (1.07)4 + 4000 × (1.07)2 + 𝑥 = 5000 × (1.07) +
(1.07)4
5000
2000 × 1.3107 + 4000 × 1.1449 + 𝑥 = 5000 × (1.07) +
1.3107
2621.4 + 4579.6 + 𝑥 = 5350 + 3814.755

7201 + 𝑥 = 9164.755

𝑥 = 1963.755

Example: Vibhuti borrowed ₹ 10,000 from Manmohan at 9% simple interest and

agreed to make two equal payments, one due in 6 months and the other in 12 months.
Find the payment at the end of 12 months.
Solution
Here the focal date is 12 months from now.
Equation of value is
6
10000 × (1 + 0.09)1 = 𝑥 (1 + 0.09 × )+𝑥
12
10000 × 1.09 = 1.045𝑥 + 𝑥

10900 = 2.045𝑥
10900
𝑥= = 5330.07
2.045

Example: Tillu owes ₹2,000 due in 2 months, ₹ 1,000 due in 5 months, and ₹ 1,800
due in 9 months. He wishes to discharge his obligations by two equal payments due in
6, and 12 months respectively. Find the equal payments if money is worth 6% simple
interest and at the end of 1 year is the agreed focal date.
Solution
The equation of value is
10 7 3
2000 × (1 + 0.06 × ) + 1000 × (1 + 0.06 × ) + 1800 × (1 + 0.06 × )
12 12 12
6
= 𝑥 (1 + 0.06 × ) + 𝑥
12
2000 × (1.05) + 1000 × (1.035) + 1800 × (1.015) = 𝑥(1.03) + 𝑥

14
 2.03𝑥 = 4962
4962
𝑥= = 2444.335
2.03

Example: On February 7,14,21, and 28, a person draws ₹ 1,000 credit that charges an
effective weekly interest rate of 8% on all credit extended. He pays his loan in four
instalments which he makes on March 7, 14,21, and 28. He pays ₹ 1,200 on each March
7, 14, and 21. How much must he pay on March 28 to repay his loan completely?
Answer: ₹ 1923.18
Solution: This problem will be solved in the class lecture.

11. Applications in Spreadsheets

This topic shall be discussed in the class lecture with the help of MS-Excel.

15
 Practice Questions
Question 1
If ₹ 5,67,882 are invested in a company that promises to pay annual interest at 4.45%.
If the annual interest is reinvested, then what is the accumulated sum of money at the
end of 12 years?
Answer: ₹ 9,57,545.5

Question 2
Mr. Smart wants to receive ₹ 12,00,000 at the end of 15 years from now. What should
be the expected return on his one-time investment of ₹ 1,50,000?
Answer: 14.86%

Question 3
If interest (13% per annum) is compounded continuously, then find the accumulated
value of ₹ 3,60,000 at the end of 30 years.
Answer:₹ 1,77,82,793.8

Question 4
To receive ₹ 15,00,000 at the end of 15 years from now. What should be the one-time
investment if the expected return is 14.86% per annum?
Answer: ₹ 18,77,40.98 (Approx)

Question 5
How much time will ₹ X take to get doubled? Assume that interest rate is 8% p.a., and
interest is compounded annually.
Answer: 9 years

Question 6
How much time will ₹ X take to get doubled? Assume that interest rate is 12% p.a., and
interest is compounded annually.
Answer: 6 years

Question 7
A credit card account charges 24% on unpaid balances, payable monthly. The quoted
rate of 24% is a nominal annual interest rate. A person puts ₹ 1,000 on his credit card,
and doesn’t pay for one year.
(a) How much does he owe according to his 13th statement?
(b) Compute an effective interest rate.
Answer
(a) ₹ 1268.23
(b) 26.82%

16
Question 8
A person invests ₹ X in a risky fund, which average annual rate of return is 19.5%.
What amount must the person invest in order to accumulate ₹ 10,00,000 in 25 years?
Answer: ₹ 11,636 (Approximately)

Question 9
Bank A offers an annual interest rate of 15.25% compounded semi-annually, and Bank
B offers an annual rate of 15% compounded monthly. Which bank offers a higher
effective annual interest rate?
Answer: Bank B.

Question 10
Suppose an effective annual rate of interest is 12%. Find the equivalent nominal annual
rate for m = 1, 12, 365, and ∞.
Answer: 12%, 11.39%, 11.334%, and 11.3329% (Approximately)

Question 11
A person deposits ₹ 30 in a bank account on the last day of each month. The annual
interest rate is 9% compounded monthly, and the interest is paid into the account on the
last day of each month. Find the account balance after the 140th deposit.
Answer: ₹ 7,386 (Approximately)

Question 12
A person takes a $12,000 loan and has to make monthly payments for 3 years, starting
one month from now, with a nominal interest rate of 12% compounded monthly. Find
a monthly payment on this loan and the total amount of payment.
Answer: $ 398.57

Question 13
Suppose in the previous question, the 1st payment starts 9 months from now. Find
monthly and total payments.
Answer: $ 431.60

Question 14
A person takes a $12,000 loan and has to make monthly payments for the first year at
the interest rate of 10% compounded monthly, and for the following 2 years with the
interest rate of 12% compounded monthly. The first payment is due one month from
now. Find a monthly payment on this loan and the total amount of payment.
Answer: $ 400

Question 15
Could you please calculate the Equated Monthly Installment (EMI) for Shri Prashant,
who is planning to take a home loan of ₹1 crore for a 2 BHK flat in Noida, from SDFC,
where the annual interest rate is 8.5%?

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Answer: ₹ 86,782 per month

Question 16
A company issues a bond with coupon rate 6% p.a., and face value ₹ 1,000 which is
redeemable at ₹ 1,100. The maturity of the bond is 10 years. Determine the intrinsic
value or price of the bond if the discounting rate is 9%. If the bond is selling at ₹ 400,
then is it worth to buy?
Answer: ₹ 385.06

Question 17
Digital Limited issues a bond with coupon rate 10% p.a., and face value ₹ 1,000 which
is redeemable at ₹ 1,100. The maturity of the bond is 10 years. Determine the intrinsic
value or price of the bond if the discounting rate is 9% for the 4 years; 7% for the next
4 years, and 6% for the remaining years. If the bond is selling at ₹ 500, then is it worth
to buy?
Answer: ₹ 697.41

Question 18
What single payment 5 years hence will discharge the debt of ₹ 800 and ₹ 500 in 3 years
and 9 years respectively, if the money is worth 6% compounded quarterly?
Answer: ₹ 1,295.21

Question 19
Find the amount of an ordinary annuity if payment of ₹ 500 is made at the end of every
quarter for 10 years at the rate of 8% per annum compounded quarterly.
Answer: ₹ 30,200

Question 20
A person decides to put aside ₹ 100 at the end of every month in a money market fund
that pay interest at the rate of 8% compounded monthly. After making 12 deposits, how
much money does he have ?
Answer: ₹ 1,245

Question 21
At 6 months interval, Mr. X deposited ₹ 100 in a saving account carrying interest at
10% p.a. compounded semi-annually. The first deposit was made when his son was 6
months old and last deposit was made when his son was 8 years old. The money
remained in the account and was presented to his son when he was 10 years old. What
much did he received?
Answer: ₹ 2,875

Question 22

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If a bank pays 6% interest compounded quarterly, what equal deposits have to be made
at the end of each quarter for 3 years to have ₹ 1,500 at the end of 3 years?
Answer: ₹ 115

Question 23
A company set aside a sum of ₹ 4,500 at the end of each year for 7 years to pay off a
debenture issue of ₹ 40,000. If the fund accumulates at 9% compounded annually, find
the surplus after full redemption of the debenture issue.
Answer: ₹ 1401.96

Question 24
Find the number of years for which an annuity of ₹ 1,500, payable per annum
accumulates to ₹ 30,000 at the rate of 9% effective.
Answer: 12 years (approximately)

Question 25
An account fetches interest at 5% per annum compounded continuously. An individual
deposits ₹ 1,000 each year in the account. Find how much will be in the account after
5 years.
Answer: ₹ 5,680

Question 26
An equipment is purchased on an instalment basis such that ₹ 500 is to be paid at the
end of every month for five years. If the money is worth 6% per annum compounded
monthly, find the purchasing price of the equipment.
Answer: ₹ 25,389.80

Question 27
A person buys a house for which he agrees to pay ₹ 5,00,000 now and ₹. 5,000 at the
end of each month for 6 years. If the money is worth 12% compounded monthly, what
is the cash price of the house?
Answer: ₹ 7,55,751.97

Question 28
What should be the quarterly sales volume of a company if it desires to earn an 8%
annual return convertible quarterly on its investment of ₹ 1,50,000 ? Quarterly costs
are ₹ 2,000. The investment will have ten years .life with no scrap value.
Answer: ₹ 7,483.36

Question 29
A person purchased a house paying ₹ 5,00,000 cash down and promising to pay Rs.
15,000 every month for the next 5 years. The seller charges interest at 9% per annum
compounded quarterly.
(a) What was the cash price of the house ?

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 (b) If he missed the first 15 payments, what must he pay at the time of 16th payment
to bring him up to date ?
(c) After making 22 payments, he wishes to discharge his remaining indebtedness
by a single payment at the time when 23rd regular payment is due. What single
payment must he pay ?
(d) If he missed the first 20 payments, what must he may when the 21st is due to
discharge his entire debt ?

Answers: ₹ 12,22,600.60; ₹ 2,53,984.23; ₹ 4,98,078.99; ₹ 8,45,365.41

Question 30
To save for a child's education, a family decides to invest ₹ 1,800 at the beginning of
each 3-month period in a fund, paying interest at 8% per annum compounded quarterly.
Find the amount of the investment at the end of 15 years.
Answer: ₹ 2,09,398.63

Question 31
A debt of ₹ 5,000 due in five years is to be repaid by a payment of ₹ 2,000 now and a
second payment at the end of 6 years. How much should the second payment be if the
rate of interest is 6% compounded quarterly?
Answer: ₹ 2447.81

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 Theory Questions

1. What is Time Value of Money?

2. Write some concepts which are based on time value of money.
3. Distinguish between nominal interest and effective interest rate.
4. What is the difference between the simple interest and compound interest? Use an
example to explain the difference.
5. What do you mean by the Equation of Value?
6. What are the applications of the time value of money?
7. How will you determine the present value of an ordinary annuity and annuity due?
8. What is a loan amortization table?
9. How can we value the multiple regular payments?

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