Question No. 1:
a) Today, most of the people in our country acknowledge the importance of education in our lives. Therefore, Mr. Akram is also planning to provide the best education to his son. In this regard, he is planning to set aside a handsome amount for his son education. Suppose the university fee
of his son after 10 years will be Rs.200, 000. His bank is offering him
12% interest rate compounded annually. How much amount he has to
deposit in his bank account today in order to get Rs.200, 000 from his
bank after 10 years? (5 marks)
solution:
Q1 a) - PV = FV/(1 + i)^n
Present Value = Future Value/ (1+(interest))^years
PV = 64394.65
b) Suppose you have some extra funds with you and you want to make investment in bonds with
those funds. Currently a 6% coupon bond with face value of Rs.1, 000
is selling at Rs.850. If you want to keep that bond till its maturity
(which is one year), then what will be the yield to maturity of
this bond? (5 marks)
Qno.1 b) -
Subtract the purchase price (850) from par value (1000) = 150
Divide the discount (150) by the remaining years to maturity (1) of the bond = 150
Add the annualized capital gain (150) to the yearly interest (60), to obtain total annualized return (210)
Subtract annualized capital gain (150) from par (1000), to obtain 850.
Divide the annualized return (210) by the result from the previous step (850), Yield to Maturity 24.70%
Question No. 2:
a) Define GDP deflator and explain how it differs from CPI (Consumer Price Index) although both are used to measure inflation rate in an economy? (4 marks)
Q2 a) – Although at first glance it may seem that CPI and GDP
Deflator measure the same thing, there are a few key differences. The
first is that GDP Deflator includes only domestic goods and not anything
that is imported. This is different because the CPI includes anything
bought by consumers including foreign goods. The second difference is that the GDP Deflator is a measure of the prices of all goods and services while the CPI is a measure of only goods bought by consumers.
Solution:
Q2 a) – Although at first glance it may seem that CPI and GDP
Deflator measure the same thing, there are a few key differences. The
first is that GDP Deflator includes only domestic goods and not anything
that is imported. This is different because the CPI includes anything
bought by consumers including foreign goods. The second difference is that the GDP Deflator is a measure of the prices of all goods and services while the CPI is a measure of only goods bought by consumers.
b) Suppose you are given the responsibility to calculate the inflation rate prevailing in an economy.
You, along with your team members, collect the following data related to that particular economy:
Years Nominal GDP Real GDP
2009 Rs. 48,300 Rs. 46,200
2010 54,400 51,000
2011 59,300 53,000
How you will measure the inflation rate based on the above data? (6 marks)
Note: You are required to provide complete working and formulas while calculating GDP deflator and Inflation rate.
Solution:
b) – GDP Deflator = (Nominal GDP / Real GDP) ×100
Inflation rate = (Current Year’s GDP Deflator – Previous Year’s GDP Deflator) / Previous Year’s GDP Deflator X 100
Inflation Rate
n.a
2.1%
4.9%
