Skip to content
We use only essential cookies to keep you signed in and remember your preferences. See our Cookie Policy.
TestStop
MocksPracticeResourcesIndiaBlogPricing
Sign in
Questions › JNU › JNU SSS 2012 › Q71
1 mark, −0.25Macroeconomics › Time value of money and bond pricing › Present value, discounting and compoundingModerateabout 2 min

JNU SSS 2012 Question 71: Time value of money and bond pricing

Ms. Chi can repay a loan taken from Mr. Tao either by giving him uuu kg of gold today or by giving him vvv kg of gold after two years. The price of gold today is Rs xxx per gram. Ms. Chi is certain that after two years the price of gold will be Rs yyy per gram. If Ms. Chi chooses to repay the loan after two years, she will open a fixed deposit account at her bank today with a maturity period of two years and use the proceeds at maturity to purchase the necessary gold. Interest on such a deposit is compounded annually and is paid on the date of maturity. The rate of interest for a two-year fixed deposit is rrr percent per annum. Every year the interest paid into Ms. Chi's fixed deposit account will be taxed at the rate of ttt percent. Ms. Chi will decide when to repay the loan on the basis of which option will cost her the least amount of money today.

If u=vu = vu=v, x=2000x = 2000x=2000, y=2500y = 2500y=2500, r=12r = 12r=12, t=0t = 0t=0, when will Ms. Chi repay the loan?

Tap an option to check your answer.

Answer and worked solution

Checking your account…

Plain-text version

Ms. Chi can repay a loan taken from Mr. Tao either by giving him u kg of gold today or by giving him v kg of gold after two years. The price of gold today is Rs x per gram. Ms. Chi is certain that after two years the price of gold will be Rs y per gram. If Ms. Chi chooses to repay the loan after two years, she will open a fixed deposit account at her bank today with a maturity period of two years and use the proceeds at maturity to purchase the necessary gold. Interest on such a deposit is compounded annually and is paid on the date of maturity. The rate of interest for a two-year fixed deposit is r percent per annum. Every year the interest paid into Ms. Chi's fixed deposit account will be taxed at the rate of t percent. Ms. Chi will decide when to repay the loan on the basis of which option will cost her the least amount of money today. If u = v, x = 2000, y = 2500, r = 12, t = 0, when will Ms. Chi repay the loan? (A) Today (B) After two years (C) She will be indifferent between (a) and (b) (D) More information is necessary to provide the answer

Time value of money and bond pricing has come up 20 times in 5 exams since 2010.

What this question tests

This question is on Present value, discounting and compounding, part of Time value of money and bond pricing in Macroeconomics.

Comparing money at different dates.

TestStop has 12 past-paper questions on this subtopic.

Practise Time value of money and bond pricingMore on Present value, discounting and compounding

Similar questions from other papers

  • IIT JAM 2025 · Q52The present value of a perpetual cash flow of Rs.250 per year, discounted at the rate of 10% each year, is Rs..
  • GATE 2023 · Q42Suppose Amar borrows Rs. 1000 from Ujala. After one year, Ujala wants Rs. 1100 back from Amar. The yield to maturity in percent (%) on this borrowing is (round off to…
  • UoH 2021 · Q6If the current rate of interest changes from 5% to 4%, the market value of a pre-existing bond changes by:
  • UoH 2016 · Q44Which one is NOT TRUE about bonds?
  • UoH 2015 · Q47Assume you have the option to choose between receiving a given amount of money M 5 years from now or 10 years from now, and the discount rate is positive. Which option…

Question from the JNU SSS 2012 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.