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# Assignment # 2 Discussion and Solution Last Date: Nov 29, 2012

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)

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)

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)

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.

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### Replies to This Discussion

thank u very very much bro for ur kind response :-)

JAZAK ALLAH

koi complte soluton b update kar day

Q1 a) - PV = FV/(1 + i)^n

Present Value = Future Value/ (1+(interest))^years

FV = 200,000, i = 12% = 0.12, n = 10years

put values & show cmplete calculations.

PV will be 64394.65 Rs.

b) -

The formula for yield to maturity is:

Price = Coupon payment   + Face value

(1+i)^n                  (1+i)^n

here, price = 850

face value = 1000

coupon payment = 6% *1000 = 60

putting values

850 = 60   + 1000

(1+i)^1  (1+i)^1

850 = 1060 / (1+i)^1

(1+i) = 1060 / 850

1+i = 1.2470

i = 1.2470 - 1 = 0.2470 = 24.70%

so YTM = 24.70%

Q2 a) -The GDP deflator, also called the implicit price deflator for GDP, measures the price of output relative to its price in the base year. It reflects what’s happening to the overall level of prices in the economy.

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) - ist find gdp deflator using following formula for all 3 years...then use that gdp deflator to calculate inflation rate...

GDP Deflator = (Nominal GDP / Real GDP) ×100

Inflation rate = [(Current Year’s GDP Deflator – Previous Year’s GDP Deflator) / Previous Year’s GDP Deflator] * 100

gdp deflator will be:

2009 = 104.5

2010 = 106.66

2011 = 111.88

Inflation Rate will be:

2009 = n.a

2010 = 2.1%

2011 = 4.9%

show complete calculations as it is the requirement..

Most of this is copied directly from the website, kindly rephrase before you submit.

Good Luck :)

Rizwan Ahmed gud keep it up & thanks

Note @ All: You don’t need to go any other site for this assignment/GDB/Online Quiz solution, Because All discussed data of our members in this discussion are going from here to other sites. You can judge this at other sites yourself. So don’t waste your precious time with different links.

JAZAK ALLAH

thanks

Q1 a) - PV = FV/(1 + i)^n

Present Value = Future Value/ (1+(interest))^years

PV = 64394.65

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%

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) - 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%

The formula for yield to maturity is:

Price = Coupon payment   + Face value

(1+i)^n                  (1+i)^n

here, price = 850

face value = 1000

coupon payment = 6% *1000 = 60

putting values

850 = 60   + 1000

(1+i)^1  (1+i)^1

850 = 1060 / (1+i)^1

(1+i) = 1060 / 850

1+i = 1.2470

i = 1.2470 - 1 = 0.2470 = 24.70%

so YTM = 24.70%

MGT 411 ASSIGNMENT SOL

Attachments:

My Solution:
Question No. 1(a)
Solution:
Topic: Present Value
Formula of PV:

Present Value = Future Value / (1 + i)^n

So,
Fv = 200,000
i = 12%
n = 10 years

Put the values in the formula:

Question No. 1(b)
Solution:

Topic: YTM (Yield to Maturity)

Formula of YTM:

Price = Coupon Payment + Face Value
(1+i)^n (1+i)^n

So,
Price = 850
Fv = 1000
CP = 6 % (6%*100) = 60

Putting the values in formula:

i =0.2470

Now the interest (i) is = 0.2470 * 100
i = 24.70%

Question No. 2(a)
Solution:

Topic: GDP deflator & Difference b/w GDP & CPI

GDP stands for Gross Domestic Product. GDP deflator is a measure of the level of prices of all domestically produced and final goods and services in an economy. GDP is the total value of all goods and services produced within that economy during a specified period.

GDP and CPI deflator generally seem to be the same thing but they have some few differences. Although they both are use to determine price inflation and reflect the current economic states. A few points where GDP deflator differ from CPI.

• The GDP deflator measures a changing of commodities while CPI always indicates the price of fixed basket.

• GDP deflator frequently changes weights while consumer price index revised very infrequently.

• CPI will consider always imported goods whereas GDP deflator will contain only price of domestic goods.

Question No. 2(b)
Solution:

Topic: GDP Deflator & Inflation rate

Formula of GDP deflator:
Nominal GDP *100
Real GDP

Formula of Inflation rate:

Current year GDP deflator – Previous year GDP deflator *100
Previous year GDP deflator

Year Nominal GDP Real GDP GDP Deflator Inflation Rate %
2009 48300 46200 104.54 n.a
2010 54400 51000 106.66 2.02%
2011 59300 53000 111.88 4.89%

Working:

Calculation of GDP Deflator:

2009 = = 104.54

2010 = = 106.66

2011 = = 111.88

Calculation of Inflation Rate:

2009 = n.a (because in this year no previous year GDP deflator is available)

2010 = = 2.02%

2011 = = 4.89%

Obedient Evil thanks

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