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caite.info - Ebook download as PDF File .pdf), Text File .txt) or read book online. 1. caite.info - JAIIB CAIIB STUDY MATERIALS - CAIIB DISCUSSION [email protected], [email protected] JAIIB-Accounting and Finance for Bankers. c. 9 Years d. 9 Years 6 months 8. Which of the following is not true a. Depreciation is an expense charged to the P .

Let us say for the illustration that you make your first rent payment at the beginning of the month and are evaluating the present value of your five-month lease on that same day. When the required rate of return kd is greater than the coupon rate. Contingencies and events occurring after balance sheet. Maker Payee Bank None of above a. It refers to a method of calculating how much the present value PV of an asset or cash will be worth at a specific time in the future.

This process will continue and the loan will remain outstanding for ever. Loans from banks or financial institutions are one of the popular forms of debt. Bonds Debt capital consists of mainly bonds and debentures. You will observe that denominator in less than numerator by 1 only. It is to be repaid on maturity. Market value of the bond may be different form the face value and keeps changing.

The interest on bond also called coupon rate is fixed at the time of its issue. A bond carries a specific rate of interest. A bond is issued for a specified period. The market price or intrinsic value of a bond is different from the face value if the coupon rate is different from the market interest rate at that particular time. Redemption value. Terms Associated with Bonds iib m ……………………………………………………………………………………………………………… Face Value: Also known as the par value and stated on the face of the bond.

The value. It represents the amount borrowed by the firm. Face value and redemption value may be different but these are fixed and known. Issuer of the bonds pays interest to the purchaser for using his money. Terms associated with bonds: Face value. Irrespective of the level of profits or losses. In return for loaning this money. Market value is equal to PV of all the coupon receipts and redemption value discounted at the prevailing market rate.

Market Value: A bond may be traded on a stock exchange. Coupon rate. At the end of tenth year. A bond is generally issued at a discount less than par value and redeemed at par. This entitles the bondholder to receive Rs. But interest rate in the market keeps changing. Market value. Market value is the price at which the bond is usually bought or sold in the market. The required rate of return is 13 per cent. What is the value of this bond?

The required rate of return on bond is 10 per cent. The required rate of return on the bond is 10 per cent. Using it. The bond carries a coupon rate of 8 per cent and has the maturity period of nine years. What would be the rate of return that an investor earns if he purchases the bond and holds until maturity?

Solution ca If kd is the yield to maturity then. Market price of the bond will be equal to Rs. A decrease of 1 per cent YTM to 9 per cent changes the price to Rs. YTM of bond X rises to 12 per cent 10 x 1. Consider another identical bond Y but with differing YTM of 20 per cent. The market value of the bond will be Rs.

When the required Rate of Return is equal to the coupon rate. The market value of this bond will be Rs. When the required rate of return Kd is greater than the coupon rate.

Bond ABC: Let the YTM be 10 per cent. The total is It is a decrease in an asset's value caused by unfavorable market conditions. This is always negative as both move in opposite direction.

Businesses depreciate long-term assets for both tax and accounting purposes. Accountancy means compilation of accounts in such a way that one is in a position to know the state of affairs of the business.

Users of financial statements are income tax department. Balance Sheet. Accounting is an art of recording classifying and summarizing in a significant manner and in terms of money transactions and events which are in part at least of financial character and interpreting the results thereof. Communicate the result of business operations and its other aspects. Manufacturing Accounting.

Book-keeping and Accounting not one and the same — Book-keeping means recording the business Transactions. Trading Account. B es Accounting is language of business. Funds Flow Changes in Financial Position.

It is in the interest of all that financial statements reflect true and fair view of state of affiairs of a business entity. To facilitate rational decision-making. Management Accounting. But such depreciation has no relation to market value of asset. To compare the financial position w. To ascertain the financial position of business. Financial Accounting. To satisfy the requirements of law iib ca Advantages: To provide information to Investors. To keep a systematic record.

To ascertain the results of the operations. For Economic Decisions. Social Responsibility Accounting. To interpret the Financial Position es t. Cost Accounting. Human Resource Accounting. Hence accounts of each period is recorded. It is treated as realized on the date when property in goods passes to buyer and he becomes legally liable to pay. Is drawings. Ledger is book of secondary entry. All receipts are recorded on right side and all payments on left side.

If expenses have been incurred but not paid during that period. Journal is book of original or first entry. All expenses and income should properly be adjusted through accounting entries. GAAP cover such things as revenue recognition. That said. Final accounts are the final process of accounting.

One in either trading and profit and loss account and other in Balance sheet or one in trading account and other in Profit and loss account. While preparing balance sheet and profit and loss account of branch of bank the GLB balances are taken. Once the trial balance is prepared the books are half way closed. Will be shown in asset side of balance sheet and will be shown in credit side of trading account.

What is important that its underlying objectives are followed in true perspective. GAAP are a combination of authoritative standards set by policy boards and simply the commonly accepted ways of recording and reporting accounting information.

Will be shown on debit side of profit and loss account. Depreciation Dr. To asset account ca Accounting standards: Will be shown in credit side of trading account. Will be shown in debit side of profit and loss account. Will be shown in liabilities side of balance sheet. Candidates to the course will get extensive and detailed knowledge on banking and finance and details of banking operations. The Diploma is offered in the distance learning mode with a mix of educational support services like provision of study kits, contact classes, etc.

The key features of the Diploma is that it aims at exposing students to real-life banking environment and that it is equivalent to JAIIB. This would help the students to understand the various steps involved even in a computerized banking system since the mechanization is based on the basic accounting principles only.

The Institute had constituted teams consisting of eminent bankers and academicians to prepare the reading material for all the subjects as self-instructional study kits obviating the need for the intervention of a teacher. The Institute acknowledges with gratitude the valuable services rendered by the authors in preparing the courseware in a short period of time The team, which developed the book, has made all efforts to cover the entire syllabus prescribed for the subject.

However, the candidates could still refer to a few standard textbooks to supplement this. We have no doubt that the study material will be found useful and will meet the needs of the candidates to prepare adequately for the examinations. In addition, we are sure that these books will also be useful to practitioners, academicians, and other interested readers. We welcome suggestions for improvement of the book. Mumbai R. Bhaskaran 3. The Institute has prepared comprehensive courseware in the form of study kits to facilitate preparation for the examination without intervention of the teacher.

Candidates are also expected to take note of all the latest developments relating to the subject covered in the syllabus by referring to Financial Papers, Economic Journals, Latest Books and Publications in the subjects concerned. To introduce the students to the basics of financial mathematics, accountancy and to develop an understanding in the basic financial concepts. Calculation of Interest 3 2. Calculation of YTM 43 4.

Capital Budgeting 57 5. Depreciation 81 6. Foreign Exchange Arithmetic Definition, Scope and Accounting Standards 8. Basic Accountancy Procedures 9. Bank Reconciliation Statement Capital and Revenue Expenditure Inventory Valuation Bills of Exchange Consignment Account Joint Venture Leasing and Hire-Purchase Accounts of Non-Trading Organisations Depreciation Accounting Ratio Analysis Balance Sheet Equation Partnership Accounts Final Accounts of Banking Companies Company Accounts - I Company Accounts - II Accounting in Computerised Environment Calculation of Interest Unit 2.

Calculation of YTM Unit 4. Capital Budgeting Unit 5. Depreciation Unit 6. Foreign Exchange Arithmetic. The sums of the present value of the annuities are compared with the cash outflow to reach certain decisions.

The interest is payable either at periodic intervals or at the end of a loan period. The calculation of the interest will be based on the terms of agreement. Payment of annuities may be at the beginning of each period or at the end of each period. The calculations of annuities are different for each situation. When money is loaned. Annuities are essentially a series of fixed payments required to be paid at a specified frequency over the course of a fixed period of time. On lending to customers.

The rate is expressed as a decimal fraction. As the customers pay the principal in instalments. This fee is called 'interest'. It may also happen that the bank may want to recover the loan in equal instalments called annuities. The formula for calculating simple interest is as follows: The formula for simple interest is often abbreviated in this form: For an illustration.

Based on the method of calculation of the amount of interest given on the amount lent or borrowed. The total amount to be paid back. Interest rate: R and T. The amount of interest paid over the two years.

Compound interest is paid on the original principal and accumulated part of interest. The Illustration problem below shows you how to use these formulas: Illustration A student purchases a computer by obtaining a loan on simple interest. Against this. Find the total amount to be paid back.

In the simple interest formula. The weekly payment amount. The computer costs Rs. Repayment time: Find the amount of interest paid. The interest rate together with compound period and balance in the account determines how much interest is added to each compound period.

The above is more easily understandable by thinking in terms of a simplified compound interest. The time interval between which the interest is added to the account is called the compounding period.

This is compounding interest or more simply stated compound interest. If the balancing interest rate and length of the deposit all remain the same. Simple interest questions can be solved by applying the following formulas: Divide the number 72 by the percentage rate you are paying on your debt or earning on your investment.

Mohan would earn Rs. When interest is compounded continually in other words. The Rule of Allows you to determine the number of years before your money doubles whether in debt or investment. For an illustration: You borrowed Rs. Illustration Jhangir has one savings account with the interest rate of 3.

That makes 12 the number of years it would take for your debt to double to Rs. If he deposits Rs. Illustration Mohan invested Rs. Here is how to do it. Answer Savings account: How much interest would he earn after 2 years? She expects to be able to pay you back the Rs. Because the principal amount remained the same for each month. We just have to do it 12 times.

Illustration Your friend expects to pay you the principal back after she files her tax return. Jhangir will have Rs. This is where it starts to get complicated.

Here is what happens with monthly payments and simple interest: Illustration Your friend wants to repay you on a monthly basis rather than the whole amount all at once at the end of the year. The principal payment each month will be Rs. The extra step here is that the interest rate of 8 per cent is the annual rate and this needs to be divided by 12 to get a monthly rate.

Illustration Your friend borrows Rs. The extra step here is that she will owe you less in principal each month.

Our first two illustrations for calculating of simple interest assumed the principal amount remained the same for the entire period the loan was outstanding. In the real world. Most of us receive payment on a regular basis. She will owe you Rs. The principal owed at the end of the month is Rs. Table 1. And so on for the twelve months. Under this system. I want to pay the same amount every month and not have to look up this table.

Add up the twelve monthly payments Rs. Easy to see why calculators and computers are used. Third month: The EMI is fixed based on the loan amount. The formula for calculation of EMI given the loan.

The EMI payment loans are heavily tilted towards the interest payments at the start and principal repayments towards the end of the loan tenure. The interest is calculated on a monthly reducing basis. For example. Though it is an unequal combination of the principal repayment and interest cost. The most common payment frequencies are yearly once a year.

Floating Rate: In the floating rate or variable rate. Fixed Rate: In the fixed rate. If the loan is under an EMI system. Fixed Rates 2. You are usually required to pay rent when you first move in at the beginning of the month.

Rent is an illustration of annuity due. They are 1. Ordinary Annuity: Payments are required at the end of each period. It will not change during entire period of the loan. These are called annuities. At some point in your life. Depending on the prevailing market conditions. If you understand the time value of money and have an understanding of the future and present value. Annuity Due: Payments are required at the beginning of each period. The fixed rate is.

Since the present and future value calculations for ordinary annuities and annui ties due are slightly www. It may increase or decrease. There are two basic types of annuities: Floating Rates also called as variable rates.

Annuities are essentially a series of fixed payments required from you or paid to you at a specified frequency over the course of a fixed period. If you are making payments on a loan. Let us assume that you are receiving Rs. The following diagram shows how much you would have at the end of the five-year period: End of each period 1 1.

Consider the following annuity cash flow schedule: End of each period 1. Let us now run through the illustration 1. As such. To obtain the total discounted value. You would use this formula as part of a bond pricing calculation. For the illustration 2. The PV of ordinary annuity calculates the present value of the coupon payments that you will receive in the future.

Each of the values of the first calculation must be rounded to the nearest paise. The more you have to round numbers in a calculation the more likely rounding errors will occur. Here is the calculation of the annuity represented in the diagram for Illustration 2: A slight modification to the FV-of-an-ordinary-annuity formula accounts for payments occurring at the beginning of each period. Beginning of each period 1 1.

In the following Illustration 3. End of each period 0 1 1. The future value of annuity formula would then read: Let us say for the illustration that you make your first rent payment at the beginning of the month and are evaluating the present value of your five-month lease on that same day. When calculating the present value. Your present value calculation would work as follows: End of each period 1 2 1.

We could use this formula for calculating the present value of your future rent payments as specified in a lease you sign with your landlord. According to the first condition of the question. Find i the rate of interest. The present value of an ordinary annuity is less than that of an annuity due because the further back we discount a future payment.

Illustration Find the compound amount of Rs.

Solution Using formula. P and rate of interest be R per centp. Remember that the payment frequencies. Solution i Let the principal be Rs. Here we find the compound interest for 13 interest periods and simple interest for 1 month.

Now you can see how annuity affects and how you calculate the present and future value of any amount of money. Illustration Avichal Publishers buy a machine for Rs. What is the average rate of depreciation? If the present population is 1 million. Find the depreciated value of the machine after 3 years. Solution Present population. Rate of depreciation. The rate of depreciation is 10 per cent. The first and most common method is the amortisation method.

As time goes on. Not an easy task. Each payment pays the interest on the unpaid balance and repays a part of the outstanding principal. When a debt amortises. The common commercial practice is to round the payment up to the next rupee. The regular periods. R per payment period. The total time. When the payments are made at the beginning of the payment period. By using this method to liquidate an interest-bearing debt. The formula for paying back a loan in equal instalments is known as the amortisation formula.

This will www. Arlene will receive Rs. A is the initial loan balance. Monthly repayment If Arlene thinks in terms of living exactly 15 years from today.

When a loan is repaid in equal instalments. Although inflation is important. That is. Arlene can live for 15 years on Rs. If there is inflation of. If the insurance company earns 0. Both loans require a repayment of equal monthly payments made at the end of the month for the next five years. What is the monthly payment? Assume 10 per cent compounded monthly Bring everything back to the present value. It turns out that we can calculate this.

This says that by lending investing her Rs. Plugging in Rs. We can think of Arlene as lending the bank Rs. What will be the monthly repayments at 18 per cent compounded monthly?

If there were no inflation. Adjusting for inflation is what makes this a real annuity. In addition. Make out an amortisation schedule showing the distribution of the payments as to interest and the repayment of principal. Illustration A debt of Rs. The interest due at the end of the second quarter is 2. The totals at the bottom of the schedule are for checking purposes.

This procedure is repeated and the results are tabulated below in the amortisation schedule. The outstanding principal now becomes Rs. Note that the entries in the principal repaid column except the final payment are in the ratio That is.

The total amount of principal repaid must equal the original debt. We construct an amortisation schedule. When interest-bearing debts are amortised by means of a series of equal payments at equal intervals. The first payment of Rs. The second payment of Rs. Solution The interest due at the end of the first quarter is 2.

If Arlene dies early. C in the bank. Investing this way to meet some future obligation is commonly called sinking fund. In problems 4 and 5. How long will it take to have Rs. In problems 6 and 7.

How much will you have in the bank after 25 years? If you deposit Rs. How much will you have in the bank after 7 years? How much will you have in the bank after one year? After four years? This formula. Suppose that you want to have Rs. Since the amount needed in the sinking fund. In the problems B is the initial balance. If the inflation rate is 5 per cent. Find the monthly payment on a five year auto loan with a Rs.

Suppose that you deposit Rs. Calculate the real annuity payment assuming that inflation is 2 per cent per year. In the third year. The formula for finding the monthly payment on a mortgage or an auto loan is the same as the formula for an annuity.

Calculate the actual annuity payments for each of the four years. Show that after four years the ending balance is exactly zero. What is the real interest rate that would be used to calculate a real annuity payment?

How much will you have after you make your deposit at the start of the tenth year? Sinking funds are used to pay-off debts. How much will you have to deposit each year?

Suppose that you have Rs. Find the monthly payment on a thirty year mortgage with a Rs. Calculate the annuity payment for the second year and for the third year. A schedule www. What is the annuity payment? In the second year. Show that the annuity works. Do the same calculations as in the problem The annuity payment in the first year is equal to the real annuity payment. Suppose that the inflation rate is 2 per cent per year. Such a fund is called a sinking fund.

If you wish an annuity to grow to Rs. How much money will a student owe at graduation if she borrows Rs. An annuity consists of monthly repayments of Rs.

Determine the annual savings required to purchase the earthmover if the return on investment is 12 per cent. Illustration 1. A construction company plans to purchase a new earthmover for Rs. A new machine at that time is expected to sell for Rs. Illustration In 10 years. If the fund earns 7 per cent compounded annually. The amount of simple interest paid each year is a fixed percentage of the amount borrowed or lent at the start. This fee is called 'interest'— 'simple' interest or 'flat rate' interest.

When the sinking-fund method is used. Type To solve the previous two problems using Excels' built-in functions: It should be noted that the sinking fund remains under the control of the borrower. When money is lent.

The sum of the interest payment and the sinking-fund payment. In order to provide funds for the difference between the replacement cost and the salvage value. The book value of the debt. At the end of the term of the loan. The simple interest on a certain sum for 3 years is Rs.. A loan of Rs. Find the rate of interest and the principal. Compounding Period: The time interval.

Calculate the sum of money lent out. If the same sum of money is lent out at a compound interest at the same rate per cent per annum. The rule allows us to determine the number of years it takes your money to double whether in debt or investment. Calculate the amount outstanding at the end of the third payment. When interest is added to the account against returning it immediately to the customer.

A sum of Rs. Find the annual payment. A man borrows Rs. Find the value of each instalment. If the rate of compound interest was 4 per cent per annum and if he paid back Rs. Calculate the total amount of his savings at the end of the third year.

A person invests Rs. A man borrowed a certain sum of money and paid it back in 2 years in two equal instalments. The interest is compounded annually at 10 per cent. A man saves every year Rs. He repays Rs. This is compounding of interest or more simply stated compound interest. A sum of money is lent out at compound interest for two years at 20 per cent p. Sinking Fund: When there is a need for a specified amount of money at a specified future date.

Give your answer to the nearest Re. Divide the number 72 by percentage rate you are paying on your debt or earning on your investment Annuities: They are essentially a series of fixed payments required from you or paid to you at a specified frequency over the course of a fixed period of time. The rate of interest charged is 20 per cent annually. Assuming that land appreciates at 20 per cent annually and building depreciates at 20 per cent for first 2 years and at 10 per cent thereafter.

If the rate of depreciation is 10 per cent. Two partners A and B together invest Rs. After 3 years. The cost of a refrigerator is Rs. If its value depreciates 6 per cent in the first year. A debtor may discharge a debt by paying a Rs. Find the amount of each instalment. Also find the effective rate of interest.

The machinery of a certain factory is valued at Rs. The period in years is: Let the time be n years. The Rule of Allows you to determine the number of years before your money doubles whether in debt or investment.

Divide the number 72 by the percentage rate. Though it is a combination of interest payment and principal repayment, the total monthly amount is calculated in such a way that it remains constant all through the repayment tenure.

In Equated Monthly Installments EMIs , the principal and the interest thereon is repaid through equal monthly installment over the fixed tenure of the loan. The benefit of an EMI for borrowers is that they know.