CERTIFICATE OF DEPOSITS

Question: 1

19. Suppose a bank offers a 6 month certificate of deposits at an annual percentage rate
(APR) of 11.5% Compounded monthly and a one year certificate of deposits with an APR
of 11.3% compounded weekly. You required to find out which them offers a higher rate of
interest

Plan 1:

11.5% annual percentage rate, compounded monthly

Plan 2:

11.3% annual percentage rate, compounded daily

Plan 1:

ieff = (1 + r/k)k - 1

ieff = (1 + 0.115/12)12 - 1

ieff = (1.009583333)12 - 1

ieff = (1.121259328) - 1

ieff = 0.121259328

ieff = 12.12593281%

Plan 2:

ieff = (1 + r/k)k - 1

ieff = (1 + .113/52)^52 - 1
ieff = (1.0002173077)^52 - 1

ieff = (1.119494673) - 1

ieff = 0.119494672

ieff = 11.94946729%

In this Plan A gives higher rate of interest

LEASING

Question: 2

79. The most recent audited summarized balance sheet of M/s Aryan Financial Services
Limited is given below: Balance Sheet as on March 31, 2010
Liabilities Rs in Assets Rs in
million million
Equity share capital 45.00 Fixed assets:
Reserves and surplus 95.00 Assets on lease (Original 300.00
Term loan from IDBI 56.00 cost: 450 million)
Public deposit 120.00 Other fixed assets : 40.00
Bank borrowing 85.00 Investments (in wholly 15.00
ICD 60.00 owned subsidiaries)
180 day commercial paper 40.00 Current Assets:
Stock on hire 60.00
Receivables 25.00
Other current asset 25.00
Miscellaneous. expenditure 36.00
(not written off)

------------- ----------------
- 501.00
501.00
 a. You are required to calculate the net owned funds of the company as on March 31,2010.
b. The company intends to enhance its investments in the lease portfolio by Rs.450 million
and for this purpose it plans to raise funds by way of bank borrowings and term loans from
financial institutions in that order. Determine the financing mix
Solutions:
1. Net owned funds of the company as on March 31, 2009
= Equity share capital + Reserves and surplus – Investments in wholly owned
subsidiaries – Miscellaneous expenditure (not written off)
= 140 – 15 – 36
= Rs.89.00 million

2. Maximum debt capacity = 89 x 10 = Rs.890.00 million

Outstanding amount of debt= Rs.261.00 million (56 + 120 + 85)
Amount of debt that can be raised = Rs.629.00 million
Additional amount of bank borrowings that can be raised = 89 x 4 – 85 = Rs.271.00
million

Since the company wants to raise 450 million, the desired financing mix will be as follows:
Bank borrowings Rs.271.00 million
Term loan Rs.179.00 million

Question: 3

120. Tristar chemicals have recently acquired some equipment costing of Rs.100 lakh under
the industrial hire purchase scheme of Synergy finance. The company is required to pay a
hire purchase installment of Rs 3, 94,440 per month for 36 months

a) Calculate flat rate of interest charged by Synergy Finance

b) Calculate effective rate of interest p.a. implicit in the scheme. Assume that the hire
purchase installments are payable at the end of every month
c) Tristar chemicals follows the sum of digits method for allocating interest charged
over three year period. Calculate the interest allocated to each year by tristar
chemicals
SOLUTION:
Cash price: 100 lakh
Monthly installment: 394440
Total Hire price (36 months):141, 99,840
a)Flat rate =14199840 – 10000000
=4199840/3=1399946.667
= 1399946.667/10000000*100
=13.99 or 14% P.A
b) Rate of interest implicit in scheme is that rate which would equate the PV of rental to
cash price
394440 * 12* PVIFA p( i , 3) = 10000000
PVIFA p( i , 3) = 10000000 / 4733280 = 2.1127
i / i1 2 * PVIFA (i,3) = 2.1127
For i = 0.26 LHS of equation is 2.14
For i = 0.28 LHS of equation is 2.09
Interpolating in the range 26 & 28 %
i = 27.42%
If installment are paid in advance , use i /d12 instead i /i12
c) 3years from 36months to 25 month is the first year

Summing the all months =36+35+34…….1

=666

Year 1
(36+35+34…..25)/ (36+35+34…….1)
(366 /666)* 4199840 = 2308020

Year 2
= (24+23+22…..13) / (36+35+34…….1)
= (222/666)* 4199840
= 1399947

Year 3
12+11+10…..1/ (36+35+34…….1)
= (78 /666)* 4199840 = 491873