MGT411

Assignment 1
Fall 2009
Money and Banking (MGT411)
Last Date of Submission: November 10, 2009
Marks: 20
· Make sure that you upload the solution file before due date. No assignment
will be accepted through e-mail after the due date.
Formatting guidelines
· Use the font style “Times New Roman” and font size “12”.
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created in any other version will not be accepted and marked zero.
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Solution guidelines
· The student will work individually and has to write in the form of an
analytical assignment.
· Give the answer according to question. Formula should be provided along
with the solution.
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Question #1 (Marks 6)
According to the data given below, calculate the GDP deflator and inflation rate.
Years Nominal GDP Real GDP GDP deflator Inflation rate
1997 Rs. 60,000 Rs. 60,000
1998 70,100 65,200
1999 81,200 74,600
Solution:
GDP Deflator = Nominal GDP/Real GDP * 100
Inflation Rate = CPIn – CPI0 / CPI0 * 100
In this question we will use GDP deflator instead of CPI.
Years Nominal GDP Real GDP GDP deflator Inflation rate
1997 Rs. 60,000 Rs. 60,000 100 n.a
1998 70,100 65,200 107.52 7.52
1999 81,200 74,600 108.85 1.23
Question #2 (Marks 4)
Determine the future value of an investment of Rs. 100 for 12 months at the following
interest rates:
a- 5%
b- 1%
Solution:
The FV of an investment of $100 at 5% interest rate in 12 months will be
FV = PV (1+i) n
= $100 (1+ 0.05)1
= $105
Similarly, at 1% interest rate, the FV of $100 in 12 months will be
FV = PV (1+i) n
= $100 (1+ 0.01)1
=$100 (1.01) 1
= $101
Question # 3 (Marks 10)
Assume that the economy can experience high growth, normal growth, or recession. You
expect the following stock-market returns for the coming year under these conditions:
State of the Economy Probability Return
High Growth 0.3 +30%
Normal Growth 0.4 +12%
Recession 0.2 -15%
a. Compute the expected value of a Rs. 1000 investment both in Rupees and as a
percentage over the coming year.
b. Compute the standard deviation of the return as a percentage over the coming
year.
c. If the risk-free return is 7 percent, what is the risk premium for a stock market
investment?
Solution:
a. Expected Value
= 0.3($1000)(1+30%) + 0.4($1000)(1+12%) +
0.2($1000)(1-15%)
= Rs. 390 + 448 + 170
= Rs. 1008
Expected Return
= 0.3(30%) + 0.4(12%) + 0.2(-15%)
= 10.8%
b. Standard Deviation =
% 64 . 15 %) 8 . 10 % 15 ( 2 . 0 %) 8 . 10 % 12 ( 4 . 0 %) 8 . 10 % 30 ( 3 . 0 2 2 2 = - - + - + -
c. Risk Premium
= 10.8% - 7%
= 3.8%