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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Time Value of Money

Mrs. Sharma needs Rs 10,00,000 after 2 years for her daughter's education and will invest equal amounts at the end of each half-year (4 instalments) in a fund earning 12% per annum compounded half-yearly (6% per period). Using (1.06)^4 = 1.262477, which is closest to the required instalment?

The required instalment is about Rs 2,28,590. At 6% per half-year over four periods the annuity future value factor is 4.3746, so Rs 10,00,000 divided by 4.3746 gives the periodic investment. Simply dividing by four ignores earned interest and overstates it.

  1. ARs 2,50,000
  2. BRs 2,28,590Correct
  3. CRs 2,05,000
  4. DRs 2,38,000

Explanation

FV annuity factor = (1.262477 - 1)/0.06 = 4.37462. Instalment = 10,00,000 / 4.37462 = Rs 2,28,591, about Rs 2,28,590. Rs 2,50,000 ignores interest completely (10,00,000/4). Rs 2,05,000 is far too low since it would yield only about Rs 8.97 lakh.

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