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Finance Quiz - 1 2019 SET A: (3 Marks)

The document provides instructions for a finance quiz consisting of 3 questions. Question 1 asks the maximum fee a person would be willing to pay to reduce their monthly loan payments by 10% for the remaining term of the loan after paying the first 36 payments. Question 2 asks how much an additional loan payment would be 5 years after taking out a 30-year fixed rate mortgage if 360 monthly payments of Rs. 16,000 are made. Question 3 asks if investing Rs. 63,000 now for an annual payment of Rs. 5000 forever is a good investment compared to alternatively investing at different annual rates compounded semi-annually and quarterly over 8 years and forever.

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50 views2 pages

Finance Quiz - 1 2019 SET A: (3 Marks)

The document provides instructions for a finance quiz consisting of 3 questions. Question 1 asks the maximum fee a person would be willing to pay to reduce their monthly loan payments by 10% for the remaining term of the loan after paying the first 36 payments. Question 2 asks how much an additional loan payment would be 5 years after taking out a 30-year fixed rate mortgage if 360 monthly payments of Rs. 16,000 are made. Question 3 asks if investing Rs. 63,000 now for an annual payment of Rs. 5000 forever is a good investment compared to alternatively investing at different annual rates compounded semi-annually and quarterly over 8 years and forever.

Uploaded by

PRITEE
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Finance Quiz – 1; 2019 SET A

Time: 30 minutes Marks 10

INSTRUCTIONS

1. All questions are mandatory.


2. Show all workings. You will get no credit if the process utilized to reach an answer is not clear.
3. In case you believe that more information is needed for any question, make reasonable
assumptions and write them clearly. In case there is information available in the question contrary
to the assumptions made by you, the answer will be evaluated according to the instructions given
in the question.
4. Write in clear legible handwriting. In case of illegible handwriting, you may lose the right to re-
evaluation.
5. Use of calculators (other than financial calculators) is allowed.
6. Use of other gadgets such as mobile phones, laptops and any other communication/computing
devices is NOT allowed.
7. Write answers with PEN ONLY. You will lose the right to re-evaluation for an answer written by
pencils.
8. It is a closed book exam. No books/notes are allowed in the exam hall.

Q1. Assume that three years ago you took a thirty-year loan for Rs. 1 million with an interest rate

of 12% per annum compounded monthly, and the loan is paid using equal monthly installments

(EMI). Today (at the end of year 3), after having paid the first 36 EMI, the bank offers to reduce

your EMI by 10% for all the remaining months, in exchange for a fee to be paid today. So, if you

paid an EMI of Rs. X originally, under this new offer you will be required to pay Rs. 0.9X for all

the remaining months. What is the maximum fee you will be willing to pay today for this offer?

(3 marks)
Q2. David Yermack has won the final round of a new fictional game show, “Pay What You Can

Afford.” David gets to take out a 30-year, fixed-rate mortgage for Rs. 50,00,000. The stated

annual interest rate of the mortgage is 6%, and is compounded monthly. David makes 360

monthly payments of Rs. 16,000 per month, starting one month from today. The producers of the

show make an arrangement with the mortgage company so that an additional payment is made

60 months (or 5 years) after David takes out the mortgage. How much will this payment be if we

assume that David makes all 360 monthly payments and that the balance of the loan will be zero

after 30 years? (3 marks)

Q3. Akash has been approached by a bank manager to invest in one of the bank’s investment

schemes which pays INR 5000 per year forever. The cash-flow is received continuously in a

uniform fashion rather than at a single point in time. The bank manager asks Akash to invest INR

63,000 right now. Akash being a finance MBA immediately checks what return he can get from

other investments of similar risk. He believes that he could invest the INR 63,000 elsewhere at

8.2% per annum compounded semi-annually for the next 8 years and at 8% per annum

compounded quarterly after that forever. Is the deal offered by the bank a good one? Show all

calculations. (4 marks)

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