# JAIIB AFB Accounting & Finance for Banking Short Notes Part 2

## JAIIB AFB Accounting & Finance for Banking Short Notes Part 2

JAIIB Exams are conducted by IIBF. JAIIB is one of the flagship courses offered by it, twice a year. It is conducted in May & November every year. This course has 3 subjects and PPB or Principles & Practices of Banking is one.

Accounting & Finance for Banking has 4 modules which are further divided into units.

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 PAPER MODULE Accounting & Finance for Banking Business Mathematics and Finance Principles of Bookkeeping and Accountancy Final Accounts Banking Operations

To check out the detailed syllabus of JAIIB- PPB, AFB & LRAB click here.

JAIIB AFB Accounting & Finance for Banking Short Notes Part 1

PPB SHORT NOTES:-

I – MODULE: BUSINESS MATHEMATICS AND FINANCE:

Present Value: It’s the future sum of money that is worth today. It has the 3 most influential components i.e 1. time, 2. expected rate of return, and 3. the size of the future cash flow.

Present Value is one of the most fundamental and pervasive in the world of finance. It is the basis for stock pricing, bond pricing, financial modeling, banking, insurance, and pension fund valuation. In other words, present value accounts for the time value of money.

The formula for present value is:

 PV = CF / (1+r) n

Where,

 CF = Cash flow in future period r = the periodic rate of return or interest (aka discount rate or the required rate of return) n = no. of periods

Example:

Assuming that you are putting money in an account today to make sure that your child has enough money in the coming 10 years to buy a car. And you want to give your child Rs.10,00,000 in 10 years, & you know you can get 5% interest per year from savings to account during that time, how much should you put in the account now?

 Solution: PV = 10,00,000 / (1 + 0.05) 10 = 6,13,913/-

Thus, Rs. 6,13,913 will be accumulated to Rs.10,00,000 with interest in 10 years if you can earn 5% each year.

Future Value: The value of an asset or cash at a specified future date that is equivalent in value to a specified sum today. Its a method of calculating how much the present value (PV) of an asset or cash will be worth at a future time.

There are two ways to calculate the FV of an asset:

 Simple annual interest = Original Investment x (1+ (interest rate * no. of years)) Interest compounded annually = Original Investment x ((1+interest rate) ^ no. of years)

Example 1:

Rs. 10,000 invested for 5 years with simple annual interest of 10% would have a future value of?

 Solution: FV = 10000 (1+(0.10 * 5)) = 10000 (1+0.50) = 10000 * 1.5 = Rs. 15000.00

Example 2:

Rs. 10,000 invested for 5 years at 10%, compounded annually has a future value of?

 Solution: FV = 10000 (1+0.10) 5) = 10000 (1.10) 5 = 10000 * 1.61051 = Rs.16105.10

Annuities: These are essentially a series of fixed payments required from you or paid to you over the course of a fixed period of time at a specified frequency. The payment frequencies can range from yearly, semi-annually, quarterly and monthly. Types of annuities: ordinary annuities and annuities due.

Important Topic:- WHY SHOULD YOU ATTEMPT JAIIB AND CAIIB EXAM IN 2022 ?

Ordinary Annuity: Payments are required at every period end e.g. straight bonds usually pay coupon payments at the end of every 6 months until it’s matures.

Annuity Due: Payments are required at the beginning of each period e.g. Rent. Usually rent is required to be paid when you first move in (at the beginning of the month), and after that on the first of each month.

Present Value of an Annuity: It is the sum of the periodic payments (each) discounted at the given interest rate to reflect the money’s time value.

 PV (Ordinary Annuity) = R (1 − (1 + i) n) / i PV (Annuity Due) = R (1 − (1 + i) – n) / i × (1 + i)

Where,

 i = the interest rate per compounding period; n = no. of compounding periods; R = fixed periodic payment.

Read Also:- JAIIB EXAM LATEST STUDY MATERIAL 2022

Example 1:

Calculate the present value on Jan 1, 2019, of an annuity of Rs. 5,000 paid at the end of each month of the calendar year 2019. The interest rate is 12% p.a.

 Solution: Periodic Payment (R) = 5,000 Number of Periods (n)= 12 Interest Rate (i) = 12%/12 = 1% Present Value (PV) = 5000 × (1- (1+1%) (-12)) / 1% = 5000 × (1 – 1.01-12) / 1% = 5000 × (1 – 0.88745) / 1% = 5000 × 0.11255 / 1% = 5000 × 11.255 = Rs. 56,275.40

Example 2: A certain amount was invested on Jan 1, 2019, such that it generated a periodic payment of Rs. 10,000 at the beginning of each month of the calendar year 2019. The rate of interest on the investment was 13.2%. Calculate original investment and the interest earned.

 Solution: Periodic Payment (R) = Rs.10,000 Number of Periods (n) = 12 Interest Rate (i) = 13.2% / 12 = 1.1% Original Investment = PV of annuity due on Jan 1, 2019 = 10,000 × (1 – (1+1.1%) (-12) / 1.1% × (1+1.1%) = 10,000 × (1 – 1.011 (-12)) / 0.011 × 1.011 = 10,000 × (1 – 0.876973) / 0.011 × 1.011 = 10,000 × 0.123027 / 0.011 × 1.011 = 10,000 × 11.184289 × 1.011 = Rs. 1,13,073.20 Interest Earned = 10,000 × 12 − 1,13,073.20 = Rs. (1,20,000.00 – 1,13,073.20) = Rs. 6926.80

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