Question:1- Mr.

Saha who has been working with a multinational company for last 15 years, is
45-year-old and spend Rs. 5,40,000 annually to maintain his living standard. He wants to
maintain the same standard of living even after retirement. Inflation is @5% for whole 15-year
period and even through there will be an increase in price of goods and services he would not
like to compromise on his standard of living. What amount will be required annually when he
retired at age 60?
Solution: To determine the amount Mr. Saha will need annually at retirement to maintain his living
standard, we need to adjust his current annual expenses for inflation over the 15 years until he retires.
Here’s how to calculate it:
1. Current Annual Expenses: Rs. 5,40,000
2. Inflation Rate: 5% (0.05)
3. Number of Years Until Retirement: 60 - 45 = 15 years
We use the formula for future value considering inflation:

Where:
 FV = future value
 PV = present value (current annual expenses)
 r = inflation rate
 n = number of years
Plugging in the values:

Now calculate:
1. Calculate (1+0.05)15(1 + 0.05)^{15}(1+0.05)15:

2. Now calculate the future value:

So, Mr. Saha will need approximately Rs. 11,21,006 annually at the time of his retirement to
maintain his current standard of living.

Question:2- Miss Monica spends Rs. 240000p.a. And she wished to increase her living standard
by 3% every year as she is optimistic about growth in her career. She is 30 years old and
inflation is assumed to be 4.5% for a 30-year period. How much money per annum will she
require at age of 60?
Solution: To determine how much money Miss Monica will require annually at age 60 to account for
her desired increase in living standards and inflation, we need to calculate her future expenses
considering both her desired increase and the inflation rate.
Given:
 Current annual expenses (PV): Rs. 240,000
 Desired annual increase in living standard (g): 3% (0.03)
 Inflation rate (i): 4.5% (0.045)
 Number of years until retirement (n): 60 - 30 = 30 years
Adjusting for both increase and inflation:
The formula for future value considering both growth in living standards and inflation is:

However, since we're looking at the growth of expenses under both conditions, we can simplify this
to:
Where g is the net effective growth rate (considering inflation). To find the net growth rate, we use the
formula:

Calculating the net rate:

Thus, the net rate is approximately -1.44%. Since this value is less than 1, it indicates that, after
accounting for inflation, her real increase in expenses is slightly negative, meaning her future
expenses will be less than what they would be with inflation alone.

Miss Monica will require approximately Rs. 5,82,552 annually at age 60 to maintain her desired
living standard.

Question:3- Mr. Ranjan spends Rs. 3,60,000 per annum to meet his annual living costs. He wishes
to maintain the same standard of living after retirement which will be after 15 years. Inflation in
first 5 years is 5% p.a. and in next 5 years will be 4.5% while in following year it will be 5.5%p.a. Mr.
Rajan feels that at the age of 60 most of his commitments such as children's education and
marriage will be fulfilled and therefore, he requires only 75% of the expenses from age 60
onwards. How much money will Mr. Rajan required at the age of 60?
Solution: To determine how much money Mr. Ranjan will require annually at the age of 60, we will
need to adjust his current expenses for inflation over the 15-year period and then find out the amount
he needs after retirement.
Given:
 Current annual expenses: Rs. 3,60,000
 Time until retirement: 15 years
 Inflation rates:
o First 5 years: 5% (0.05)
o Next 5 years: 4.5% (0.045)
o Last 5 years: 5.5% (0.055)
 Percentage of expenses needed after retirement: 75%

Step 1: Calculate the future expenses after 15 years

We will break this down into three periods:
1. First 5 Years (5% inflation):
 2. Next 5 Years (4.5% inflation): We will use the future value from the end of the first 5 years as
the present value:

3. Final 5 Years (5.5% inflation): Again, using the future value from the end of the second 5
years:

Step 2: Calculate the required amount after retirement

Since Mr. Ranjan only requires 75% of his expenses after retirement, we calculate:

Mr. Ranjan will require approximately Rs. 5,58,750 annually at the age of 60 to maintain his
desired standard of living.
Question:4- Sudha needs Rs. 5,25,000 after 5years and Rs,10,00,000 after 12 years to meet two
goals of buying a car and a house. The rest of money required to buy a house will be financed by
her employer. She has a long-term horizon and can therefore invest in equity which will provide
her a 15% return on her investments. What is the lump sum amount she should invest now in
order to meet her two goals at the appropriate time.
Solution: To determine the lump sum amount Sudha should invest now to meet her future financial
goals, we need to calculate the present value of both goals using the formula for present value (PV):

Where:
 FV= future value
 r = rate of return (15% or 0.15)
 n = number of years until the goal is reached

Goal 1: Rs. 5,25,000 in 5 years

1. Calculate PV for the car:

Goal 2: Rs. 10,00,000 in 12 years

2. Calculate PV for the house:

Total Present Value

Now, we sum the present values of both goals to find out the total amount Sudha needs to invest now:
 Sudha should invest approximately Rs. 4,43,510 now to meet her two goals of buying a car
and a house in the future.

Question:5- Sneha gets a bonus from her employer every year in month of April. She
invests this money in equity mutual fund schemes. She has already accumulated Rs.
11,00,000 and the average rate of return on these investments have been 15%p.a. This
year she invested Rs. 2,00,000 in the same type of schemes which pay her 15% rate of
return. Next year she will invest Rs3,00,000. How much money will she have in her
account after 10years if she does not invest after this?
Solution: To calculate how much money Sneha will have in her account after 10 years, we
need to consider both her current investments and her future contributions, as well as the
compounding effect of the 15% annual return.
Given:
 Current accumulated amount: Rs. 11,00,000
 First year investment: Rs. 2,00,000 (invested now)
 Second year investment: Rs. 3,00,000 (invested next year)
 Rate of return: 15% per annum (0.15)
 Time horizon: 10 years

Step 1: Future value of the current accumulated amount

Using the future value formula:

Where:
 FV = future value
 PV= present value (current accumulated amount)
 r = rate of return
 n = number of years
For the current accumulated amount:

Step 2: Future value of the first investment (Rs. 2,00,000)

This amount will be invested for 10 years:

Step 3: Future value of the second investment (Rs. 3,00,000)

This amount will be invested for 9 years (as it will be invested next year):
 Step 4: Total future value after 10 years
Now, we sum all the future values:

Sneha will have approximately Rs. 63,65,380 in her account after 10 years if she does not
make any further investments after the next year.

Question:6- Gautam has Rs.3,00,000 to invest and he wished to make this money grow
to Rs. 6,03,407.15 in 5years. He has the following options available to him and he is a
moderate risk taker. there is a table attached in the question- with name of instrument
and their return p.a.; RBI Bond(8%), Debt funds of mutual funds(9%), Balanced
funds(12%), Diversified equity funds(15%), Direct equity(18%). which instrument
should be he choose to meet his target of accumulating Rs6.034 lakh?
Solution: To determine which investment option Gautam should choose to grow his Rs.
3,00,000 to Rs. 6,03,407.15 in 5 years, we calculated the required annual rate of return to
achieve this target.
Step 1: Calculate Required Rate of Return
Using the formula:

Step 2: Compare Investment Options

Now, we can compare this required rate of return (approximately 14.87%) with the available
options:
1. RBI Bond: 8%
2. Debt Funds of Mutual Funds: 9%
3. Balanced Funds: 12%
4. Diversified Equity Funds: 15%
5. Direct Equity: 18%
Conclusion
Given that Gautam needs an annual return of about 14.87%, the best options available are:
 Diversified Equity Funds (15%): This option meets his target.
 Direct Equity (18%): This option exceeds his target.
Since Gautam is a moderate risk taker, the Diversified Equity Funds (15%) would be the
most suitable option for him to achieve his goal of accumulating Rs. 6,03,407.15 in 5 years.
Question:7- In 10 years, a machine costing 40,000 will have salvage value of 4000. A new
machine at that time is expected to sell for 52,000. In order to provide funds for the difference
between the replacement cost and the salvage cost, a sinking fund is set up into which equal
payment is placed at the end of each year. If fund earn interest at the rate 7% compounded
annually, how much should each payment be?
To determine the amount of each annual payment into the sinking fund, we can use the future value
of an ordinary annuity formula. Here’s a step-by-step breakdown:
Question:8- If you need Rs20,000 for your daughter's education, how much must you set aside
each quarter for 10 years to accumulate this amount at the rate of 6% compounded quarterly.
Question:9- To save for children's education, a sinking fund is created to have 1,00,000 at the
end of 25 years. How much money should be retained out of the profit each year for the sinking
fund, if the investment can earn interest at rate 4% per annum
To determine how much money should be set aside each year to accumulate Rs 100,000 in a sinking
fund over 25 years at an interest rate of 4% per annum, we can use the future value of an ordinary
annuity formula.

Question:10- A machine costs 1,00,000 and its effective life is estimated to be 12 years. A sinking
fund is created for replacing the machine by a new model at the end of its lifetime when its
scrap realises a sum of 5,000 only. Find what amount should be set aside at the end of each year,
out of the profit, for the sinking fund if it accumulates at 5% effective.
To determine how much should be set aside at the end of each year for a sinking fund to replace a
machine costing Rs 100,000 at the end of 12 years, with a scrap value of Rs 5,000 and an interest rate
of 5%, we can use the future value of an ordinary annuity formula.
Question:11- In order to provide money for at the time for a machine costing same amount,
sinking fund is set up. The amount in the fund at that time is to be the difference between th
replacement cost and salvage value. If equal payments are placed in fund at the end of each
quarter and fund earns 8% compound quarterly, what should each payment be

To determine the quarterly payment required for the sinking fund, we can follow these steps:
Step 1: Calculate the total amount needed at the end of 10 years
The replacement cost of the machine at the end of 10 years will be the same as its initial cost, which is
Rs 50,000. The salvage value at that time will be Rs 5,000.
So, the amount needed from the sinking fund is:
MID TERM QUESTIONS:

1. Identify and describe the various options available in financial markets detailing
their unique features.

Options Available in Financial Markets:

The financial markets provide various options for investors to engage in trading and
investment. Here’s a breakdown of the most common ones:
 Equities (Stocks): Represent ownership in a company. When you purchase stocks, you
become a shareholder in the company and are entitled to a portion of its profits, typically
through dividends.
o Unique Feature: High potential for capital appreciation, but high risk due to market
volatility.
 Bonds: Debt instruments issued by corporations or governments where the investor lends
money for a fixed interest over time.
o Unique Feature: Less risky than stocks with fixed income returns.
 Mutual Funds: Pooled investment vehicles where multiple investors invest in a diversified
portfolio managed by professionals.
o Unique Feature: Diversification reduces risk, but returns depend on the fund’s
performance.
 Exchange-Traded Funds (ETFs): Funds that trade on exchanges like stocks but contain a
basket of assets.
o Unique Feature: Provides diversification like mutual funds but is more liquid and
can be traded throughout the day.
 Derivatives (Futures, Options): Financial contracts whose value is derived from underlying
assets like stocks, commodities, or indexes.
o Unique Feature: Allows leverage and hedging, but involves higher risk due to
volatility.
 Commodities: Trading of physical goods such as gold, oil, and agricultural products.
o Unique Feature: Acts as a hedge against inflation and market volatility.
 Foreign Exchange (Forex): Trading of currencies on the global foreign exchange market.
o Unique Feature: Highly liquid and volatile with potential for significant returns or
losses.
 Real Estate: Investing in property for rental income or capital appreciation.
o Unique Feature: Tangible asset with long-term capital growth, though relatively
illiquid.

2. Compare "futures" and "options", emphasizing their structural distinctions,

benefits and inherent risks.
 Futures:
o Structure: An agreement to buy or sell an asset at a predetermined price at a future
date. Futures contracts are binding, meaning both parties must complete the
transaction.
o Benefits: No upfront cost besides margin, suitable for hedging or speculation.
o Risks: High risk as traders must follow through on the contract regardless of market
movements. Losses can be substantial since there is no limit to potential losses.
 Options:
o Structure: Provides the right, but not the obligation, to buy (call) or sell (put) an
asset at a predetermined price before or on a specific date.
 o Benefits: Limited risk to the premium paid, and potential for unlimited gains (for call
options buyers).
o Risks: Buyers only risk losing the premium, but sellers (who write options) face
unlimited risk (in the case of call options).
Key Distinctions:
 Obligation vs. Right: Futures create an obligation to transact, while options provide a choice.
 Leverage: Both provide leverage, but options cap the risk for buyers.
 Risk Profile: Futures carry higher risk for both parties compared to option buyers who face
limited loss potential.

3. Explain the payoff structure for a call option buyer and a put option seller.
Additionally, illustrate the payoff chart for both scenarios.
 Call Option Buyer:
 A call option gives the buyer the right to buy an asset at a certain price (strike price) before
the expiration date.
 Payoff Structure:
o If the price of the underlying asset rises above the strike price, the buyer profits
(profit = spot price – strike price – premium).
o If the price stays below the strike price, the buyer’s loss is limited to the premium
paid.
 Payoff Chart: It shows losses at low stock prices (maximum loss is the premium), with
unlimited potential for gain as the stock price increases.
 Put Option Seller:
 A put option gives the seller an obligation to buy the underlying asset if the buyer exercises
the option.
 Payoff Structure:
o If the underlying asset's price stays above the strike price, the seller keeps the
premium (maximum gain).
o If the price drops below the strike price, the seller suffers losses (loss = strike price –
spot price + premium received).
 Payoff Chart: The maximum gain is the premium received, while losses increase as the
asset's price drops.

4. What are the fundamental objectives of investment, and how do they influence
decision-making in financial strategies? Analyse the key differences and
implications of investment versus speculation.
 Wealth Accumulation: Investors aim to grow their capital over time through asset
appreciation, dividends, or interest.
 Influence on Strategy: Decisions are made to maximize long-term returns, often
with a focus on growth-oriented stocks or real estate.
 Income Generation: Many investors seek steady income from dividends, interest, or rental
income.
 Influence on Strategy: Emphasis is placed on selecting income-generating assets
like bonds, dividend stocks, or real estate.
 Capital Preservation: Ensuring that the value of the initial investment is maintained,
particularly during periods of market volatility.
 Influence on Strategy: Investment decisions may prioritize safe, low-risk assets such
as government bonds or money market funds.
 Speculation vs. Investment:
  Investment: Focuses on long-term growth, risk management, and maintaining the
value of the capital.
 Speculation: Short-term, high-risk trading with the aim of capitalizing on market
fluctuations.
 Implications: Investment requires patience, diversification, and careful risk
assessment. Speculation involves taking on higher risk for the potential of quick
profits.

5. Rajan has approached a housing finance company for a loan. The company
explained to him that for a loan amount of Rs. 12,00,000 the Emi per month
works out to Rs. 12,038 if the loan is taken for a period of 18 years. Please help
him in calculating the rate of interest the band will charge.

6. Provide a comprehensive overview of online fraud, including a detailed

explanation of the various types of online fraud. Discuss effective strategies and
measures for protecting against online fraud.

Online fraud refers to deceptive activities conducted via the internet to unlawfully extract
financial resources or sensitive information. Various types include:
 Phishing: Fraudsters impersonate legitimate companies to steal personal information like
passwords or credit card details through fake emails or websites.
 Identity Theft: Criminals steal personal data to impersonate victims and gain access to
financial accounts or secure services.
 Credit Card Fraud: Unauthorized use of someone's credit card information for transactions.
 Social Engineering: Manipulating individuals to divulge confidential information through
psychological tricks.
 Malware and Ransomware: Malicious software used to steal data or lock systems until a
ransom is paid.
 Online Shopping Fraud: Scammers set up fake e-commerce sites to steal money or personal
details from customers.

Effective Protection Strategies:

 Strong Passwords: Use complex passwords and enable two-factor authentication.
 Antivirus Software: Regularly update and scan systems for malware.
 Secure Networks: Use VPNs and avoid public Wi-Fi for sensitive transactions.
 Awareness: Stay informed about the latest fraud schemes and be cautious with suspicious
emails or websites.
 Regular Monitoring: Regularly check bank accounts for unauthorized transactions.
These measures can significantly reduce the risk of falling victim to online fraud.

7. What is mutual fund? Differentiate between open-ended and closed ended

mutual fund schemes.
A mutual fund is an investment vehicle that pools money from multiple investors to invest in
a diversified portfolio of stocks, bonds, or other securities, managed by professional fund
managers. Each investor in a mutual fund owns shares, which represent a portion of the
holdings of the fund.
 Professional Management: The fund is managed by experienced portfolio managers who
make investment decisions.
 Diversification: Mutual funds invest in a broad range of assets, reducing the impact of any
single investment’s poor performance.
 Liquidity: Investors can easily buy and sell mutual fund shares, though this may depend on
the type of mutual fund.
 Accessibility: Mutual funds allow small investors to access professionally managed
portfolios, even with modest amounts of money.

Difference Between Open-Ended and Closed-Ended Mutual Fund Schemes

 Summary:
 Open-Ended Mutual Funds offer flexibility and liquidity, allowing investors to enter and
exit anytime at the current NAV.
 Closed-Ended Mutual Funds have a fixed corpus and are traded on the stock exchange,
offering limited liquidity but potential for price fluctuations based on market demand.

8. Explain the concept of risks and uncertainty. How is risk quantified? How is risk
quantified/ additionally, what are the various sources of systemic risk?
Concept of Risk and Uncertainty:
 Risk:
o Risk refers to situations where the outcomes are uncertain, but the probability of
different outcomes is known or can be estimated. In other words, it involves exposure
to potential loss or undesirable outcomes, but with a clear understanding of the
likelihood of those outcomes.
o Example: In financial markets, investing in stocks involves risk because you can
estimate the likelihood of price movements based on historical data and market
trends.
 Uncertainty:
o Uncertainty refers to situations where both the outcomes and their probabilities are
unknown. There is a lack of information or knowledge about what might happen,
making it impossible to predict or estimate future events accurately.
o Example: A company entering a new, untested market faces uncertainty since it lacks
data to predict how the market will respond.
In summary, risk is measurable, and uncertainty is unmeasurable. While risk can be
managed and mitigated using probabilities and historical data, uncertainty requires decision-
making in the face of unknown factors.
How is Risk Quantified?
Risk in financial markets is quantified using various statistical and mathematical measures:
1. Standard Deviation:
o Measures the volatility of an asset's returns. A higher standard deviation means more
fluctuation, implying higher risk.
o Formula:

2. Value at Risk (VaR):

 Estimates the maximum potential loss over a given time frame for a specific confidence level.
It answers the question, "What is the worst-case scenario loss I could face with a given
probability?"
 Example: A 5% VaR of $100,000 means there is a 5% chance that losses will exceed
$100,000 in a given period.
3. Beta:
 Measures the volatility of an asset compared to the overall market. A beta greater than 1
indicates higher risk (more volatile than the market), and a beta less than 1 indicates lower
risk.
 Example: A stock with a beta of 1.5 will likely move 50% more than the market.

4. Sharpe Ratio:
 Measures the risk-adjusted return of an investment. It evaluates how much return an
investment generates for the risk taken.
 Formula:

5. Expected Loss:
 Expected loss quantifies risk by calculating the potential losses weighted by their
probabilities. It is the average loss that might occur.
 Formula:

Sources of Systemic Risk:

Systemic risk refers to the risk of a breakdown or failure of the entire financial system,
triggered by the failure of one or more entities, leading to widespread negative consequences.
Here are the main sources:
1. Financial Institutions Interconnectedness:
o Banks and financial institutions are highly interconnected. The failure of one large
institution can cascade through the financial system, causing widespread panic or
further failures.
o Example: The collapse of Lehman Brothers in 2008 led to a global financial crisis
because it was deeply integrated into various financial markets.
2. Market Liquidity Risk:
o When a market loses liquidity, assets cannot be easily bought or sold without causing
drastic price changes, leading to panic selling, further amplifying risks.
o Example: During the 2008 crisis, mortgage-backed securities became illiquid,
worsening the financial meltdown.
3. Leverage:
o Excessive use of leverage (borrowing to invest) increases systemic risk because it
amplifies losses. When asset prices fall, highly leveraged firms may fail, forcing them
to sell off assets rapidly, contributing to a downward price spiral.
o Example: In 1998, Long-Term Capital Management, a hedge fund, used excessive
leverage, and its collapse threatened the global financial system.
4. Contagion Effect:
 o Contagion refers to the spread of financial instability from one institution or market to
another, often due to panic or loss of confidence.
o Example: A banking crisis in one country can spread to others, as seen during the
European debt crisis.
5. Shadow Banking System:
o The shadow banking system includes entities like hedge funds and non-banking
financial institutions that operate outside traditional regulatory frameworks. Their
failure can pose systemic risks due to lack of oversight.
o Example: The failure of large hedge funds, which are not subject to the same
regulations as banks, can have broad market impacts.
6. Macroeconomic Shocks:
o Unexpected, large-scale economic events such as recessions, pandemics, or
geopolitical crises can destabilize the financial system.
o Example: The COVID-19 pandemic caused systemic risks as economies globally
contracted, leading to liquidity crises and stock market crashes.
7. Regulatory Failures:
o Poor or inadequate financial regulations can contribute to systemic risk. When
regulations fail to identify or control excessive risk-taking by financial institutions,
the risk of widespread collapse increases.
o Example: The lack of adequate regulation of the subprime mortgage market in the
early 2000s contributed to the 2008 financial crisis.
8. Cybersecurity Threats:
o Increasing reliance on technology exposes financial systems to cyber-attacks, which
can cause widespread disruption and amplify systemic risks.
o Example: A large-scale attack on financial networks or payment systems can cause a
breakdown in trust and functionality in the global financial system.
By understanding these sources and how they can affect the financial system, regulators and
institutions can work toward reducing systemic risk through policies, regulations, and
effective crisis management strategies.