The Banking Tutor

CAIIB Notes - Advanced Bank Management

Module B – Business Mathematics

[Link] principle of Present Value of Money (PVM) are used in Corporate

Finance in evaluation of projects and in valuation of company shares and also in
personal finance and investment.

002. Present Value is a concept which shows that money has a time value.

003. the concept of time value of money is intuitive and simple.

004. The Time Value of Money (TVM) is the concept that a sum of money is
worth more now than the same sum will be at a future date due to its earnings
potential in the interim.

005. TMV is a core principle of finance. A sum of money in the hand has greater
value than the same sum to be paid in the future.

006. The time value of money is also referred to as present discounted value.

007. Money can grow only through investing.

008. An investment delayed is an opportunity lost.

009. If the Money is not invested, the value of the money erodes over time.

010. A payment delayed is an opportunity missed.

011. TVM depends not only on the interest rate and time horizon but also on how
many times the compounding calculations are computed each year.

012. Opportunity cost is key to the concept of the time value of money.

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013. The time value of money is the central concept in discounted cash flow (DCF)
analysis, which is one of the most popular and influential methods for valuing
investment opportunities.

014. Future Value (FV) is the value of a current asset at a future date based on an
assumed rate of growth. The future value is important to investors and financial
planners, as they use it to estimate how much an investment made today will be
worth in the future. Knowing the future value enables investors to make sound
investment decisions based on their anticipated needs. However, external
economic factors, such as inflation, can adversely affect the future value of the
asset by eroding its value.

015. Compound interest (or compounding interest) is the interest on a loan or

deposit calculated based on both the initial principal and the accumulated interest
from previous periods.

016. When calculating compound interest, the number of compounding periods

makes a significant difference. The basic rule is that the higher the number of
compounding periods, the greater the amount of compound interest.

017. Opportunity costs represent the potential benefits an individual, investor, or

business misses out on when choosing one alternative over another.

018. The discount rate is the interest rate used to determine the present value of
future cash flows in a discounted cash flow (DCF) analysis.

019. The cost of capital refers to the required return needed on a project or
investment to make it worthwhile.

020. The cost of capital is the minimum rate needed to justify the cost of a new
venture, where the discount rate is the number that needs to meet or exceed the
cost of capital.

021. Many companies calculate their weighted average cost of capital (WACC)
and use it as their discount rate when budgeting for a new project.

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022. Discount Rate is a rate at which present and future cash flows are traded off.

023. The Discount Rate incorporates the following.

a) The Preference for present consumption (greater the preference - higher the
discount rate).

b) Expected Inflation (higher inflation - higher discount rate)

c) The uncertainty in future cash flows (higher risk - higher discount rate.

024. The discount rate usually takes into consideration a risk premium and
therefore is usually higher than the cost of capital.

025. The cost of capital and the discount rate work hand in hand to determine
whether a prospective investment or project will be profitable.

026. Real rate of return is the annual percentage of profit earned on an

investment, adjusted for inflation. Therefore, the real rate of return accurately
indicates the actual purchasing power of a given amount of money over time.

027. Relation of Risk to Present Value.

Net present value (NPV) is the difference between the present value of cash
inflows and the present value of cash outflows over a period of time. NPV is used
in capital budgeting and investment planning to analyze the profitability of a
projected investment or project.

028. Net present value (NPV) and the risk have a strong relationship with each
other. With an inappropriate assessment of risk, one cannot arrive at correct or
near correct net present value.

The net present value of any asset or investment is the present value of future
cash flows (generated out of that asset or investment) discounted using an
appropriate discounting rate. Risk is uncertainty attached to the future cash flows.

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In the calculation of NPV, we use present cash outflow (or initial investment),
future cash inflows, and a discounting rate. Risk has relevance with 2 out of 3
components of net present value.

Commonly, we know initial investment or cash outlay with certainty. But, future
cash inflow is an estimation based on certain assumptions which may or may not
turn right. Therefore, risk is associated with future cash flows.

029. Rate of Return (RoR) is the net gain or loss of an investment over a
specified time period, expressed as a percentage of the investment's initial cost.
When calculating the rate of return, we are determining the percentage change
from the beginning of the period until the end.

030. Two rules for capital investment decisions →

a) NPV Rule – Accept investments that have positive NPVs

b) Rate of Return Rule – Accept investments that offer RoR in excess of their
Opportunity Cost.

031. Discounting cash flow means converting the cash flow into present value.

032. Other things kept constant, the Present Value (PV) of Cash Flow will decrease
as the Discount Rate increases. Thus PV is a decreasing function of the Discount
Rate.

033. PV of a cash flow decreases as the period of future flow increases. Thus PV is
a decreasing function of Time Period.

034. Compounding is the process by which cash flows are converted from PV to
FV (future value).

035. The Ibbotson-Sinquefield data shows that as the length of the holding
period is extended, small differences in discount rates can lead to large
differences in future value.

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036. The Rule of 72 is a simple way to determine how long an investment will
take to double given a fixed annual rate of interest. By dividing 72 by the annual
rate of return, investors obtain a rough estimate of how many years it will take for
the initial investment to duplicate itself.

037. The Effective Annual Interest Rate is the real return on a savings account or
any interest-paying investment when the effects of compounding over time are
taken into account. It is also called the effective interest rate, the effective rate, or
the annual equivalent rate.

038. The effective interest rate is that rate of interest actually earned on an
investment or loan over the course of a year, incorporating the effects of
compounding. Thus, an investment that has a stated (nominal) interest rate of 5%
may actually have a higher effective interest rate, once the impact of
compounding is added to the calculation of interest.

039. Effective Rate of Interest is the True Rate of Interest, taking into account the
compounding effects of more frequent interest payments.

040. As compounding become more frequent, the effective rate increases, and the
PV of future cash flows decreases.

041. Annuity is a constant cash flow that occurs at regular intervals at fixed
period of time. The term is also applied to any series of periodic payments made
at regular, fixed intervals; the length of the interval is called the annuity period.

042. An ordinary annuity is a series of equal payments made at the end of

consecutive periods over a fixed length of time. While the payments in an
ordinary annuity can be made as frequently as every week, in practice they are
generally made monthly, quarterly, semi-annually, or annually.

043. Ordinary annuity is also called annuity-immediate or an annuity in

arrears.

044. The opposite of an ordinary annuity is an annuity due, in which payments

are made at the beginning of each period.

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045. Annuities Due are annuities where payments are made at the beginning of.
each period and the compounding period is equal to the payment period. These
are also known as BOP (Beginning-of-Period) Annuity.

046. If the number of payments is known in advance, the annuity is an annuity

certain or guaranteed annuity. Valuation of annuities certain may be calculated
using formulas depending on the timing of payments.

047. If the payments are made at the end of the time periods, so that interest is
accumulated before the payment, the annuity is called an annuity-immediate, or
ordinary annuity.

048. A Growing Annuity is a finite stream of equal cash flows that occur after
equal interval of time and grow at a constant rate. It is also called an increasing
annuity. Many cash flows stream constitute a growing annuity. For example,
rental contracts may stipulate an increase in annual rental at a constant rate.

049. PV of an Annuity can be calculated by taking each cash flow and

discounting it back to the present and then adding up the present values.

050. When the present value of instalment payment (in case of a proposed loan) is
less than the cash down price, better to avail loan.

051. when the present value of instalment payment exceed the cash down price,
better to pay cash down.

052. Future value is the value of an asset at a specific date. It measures the
nominal future sum of money that a given sum of money is "worth" at a specified
time in the future assuming a certain interest rate, or more generally, rate of
return; it is the present value multiplied by the accumulation function.

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053. Balloon Repayment is the lump sum payment of the Principal amount of the
loan at the end of the loan period and interest to be paid at periodical specified
intervals (say, monthly, quarterly, half-yearly) during the period of the loan.
Balloon payment is higher than what you might be paying towards the loan on a
monthly basis. By attaching a balloon payment to a loan, the borrower is able to
cut down on the interest payment that is being made on a monthly basis by the
borrower. This can only be possible because the entire loan is not amortised.

054. Sinking Fund is a fund containing money set aside or saved to pay off a
debt or bond. A company that issues debt will need to pay that debt off in the
future, and the sinking fund helps to soften the hardship of a large outlay of
revenue.

055. Bullet Repayment loans require the borrower to make a large lump-sum
payment (total of principal and interest) at the end of their term. In a full lump
sum bullet loan, interest will accrue according to the loan terms, usually monthly
or annually, and the borrower will be required to pay the total balance in the form
of a large lump sum at maturity.

056. A perpetuity is a type of annuity that lasts forever, into perpetuity. It is a

constant cash flow paid (or received) at regular time intervals forever.

057. Annuity Vs Perpetuity

Annuity is the a series of cash flows, usually of fixed amount, paid/received at

regular intervals. The interval can be annually, semi-annually or tri-monthly,
monthy etc.

Perpetuity, on the other hand, is a type of annuity that continues for infinite
number of years. It is also known as perpetual annuity.

In other words, Annuity has a definite end, but Perpetuity is never ending, it is
indefinite.

058. A growing perpetuity is a cash flow that is not only expected to be received
ad infinitum, but also grow at the same rate of growth forever.

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059. Inflation impacts fixed income investments the most due to its inverse
relationship with interest rates. As inflation inches higher, investors expected
returns to also move higher to beat inflation. Similarly, floating rate bonds could
also be looked at in times of rising interest rates.

060. In an inflationary period a rupee today represents greater real purchasing

power than a rupee a year hence. This is called Inflation Effect.

061. Interest Payment Frequency means the frequency with which interest is paid
on the Loan or Deposit Account. The Interest Payment Frequency may be
monthly, quarterly or half-yearly.

062. A population is the entire group that you want to draw conclusions about.

063. A sample is the specific group that you will collect data from.

064. The size of the sample is always less than the total size of the population.

065. Methods of Sampling

a) Probability sampling involves random selection, allowing you to make strong

statistical inferences about the whole group. Probability Sampling is also called
Random Sampling.

b) Non-probability sampling involves non-random selection based on

convenience or other criteria, allowing you to easily collect data. Non-probability
Sampling is also called Judgement Sampling.

066. The following 4 are Probability sampling methods :

a) Simple random sampling.

b) Systematic sampling.

c) Stratified sampling. ...

d) Clustered sampling.

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067. In a Simple Random Sample, every member of the population has an equal
chance of being selected. Your sampling frame should include the whole
population. To conduct this type of sampling, you can use tools like random
number generators or other techniques that are based entirely on chance.

Example - You want to select a simple random sample of 100 employees of

Company X. You assign a number to every employee in the company database
from 1 to 1000, and use a random number generator to select 100 numbers.

068. Systematic Sampling is similar to simple random sampling, but it is usually

slightly easier to conduct. Every member of the population is listed with a number,
but instead of randomly generating numbers, individuals are chosen at regular
intervals.

Example - All employees of the company are listed in alphabetical order. From
the first 10 numbers, you randomly select a starting point: number 6. From
number 6 onwards, every 10th person on the list is selected (6, 16, 26, 36, and so
on), and you end up with a sample of 100 people.

069. Stratified Sampling involves dividing the population into subpopulations

that may differ in important ways. It allows you draw more precise conclusions by
ensuring that every subgroup is properly represented in the sample.

To use this sampling method, you divide the population into subgroups (called
strata) based on the relevant characteristic (e.g. gender, age range, income
bracket, job role).

Based on the overall proportions of the population, you calculate how many
people should be sampled from each subgroup. Then you use random or
systematic sampling to select a sample from each subgroup.

Example - The company has 800 female employees and 200 male employees. You
want to ensure that the sample reflects the gender balance of the company, so
you sort the population into two strata based on gender. Then you use random
sampling on each group, selecting 80 women and 20 men, which gives you a
representative sample of 100 people.

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070. Cluster Sampling also involves dividing the population into subgroups, but
each subgroup should have similar characteristics to the whole sample. Instead of
sampling individuals from each subgroup, you randomly select entire subgroups.

If it is practically possible, you might include every individual from each sampled
cluster. If the clusters themselves are large, you can also sample individuals from
within each cluster using one of the techniques above. This is called multistage
sampling.

This method is good for dealing with large and dispersed populations, but there is
more risk of error in the sample, as there could be substantial differences between
clusters. It’s difficult to guarantee that the sampled clusters are really
representative of the whole population.

Example : The company has offices in 10 cities across the country (all with roughly
the same number of employees in similar roles). You don’t have the capacity to
travel to every office to collect your data, so you use random sampling to select 3
offices – these are your clusters.

071. Difference between cluster sampling and stratified sampling

Stratified sampling is used when each group has small variation within itself but
there is wide variation between the groups.

Cluster sampling is used when there is considerable variation within each group
but the groups are essentially similar to each other.

072. Sampling Distribution is a probability distribution of a statistic obtained

from a larger number of samples drawn from a specific population. The sampling
distribution of a given population is the distribution of frequencies of a range of
different outcomes that could possibly occur for a statistic of a population.

073. Standard Deviation (SD or σ) is a measure of how dispersed the data is in

relation to the mean.

074. Low standard deviation means data are clustered around the mean, and
high standard deviation indicates data are more spread out.

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075. Standard Error of the Mean (SEM) measured how much discrepancy there is
likely to be in a sample's mean compared to the population mean. The SEM takes
the SD and divides it by the square root of the sample size.

076. Standard deviation of the distribution of the sample means is called Standard
Error.

077. Standard Error (SE) indicates both the size of the chance error and the
accuracy we are likely to get if we use the sample statistic to estimate a
population statistic.

078. Central limit theorem (CLT) states that the distribution of sample means
approximates a normal distribution as the sample size gets larger, regardless of
the population's distribution. Sample sizes equal to or greater than 30 are often
considered sufficient for the CLT to hold.

079. Standard Error and Standard Deviation - Relation.

Standard error increases when standard deviation, i.e. the variance of the
population, increases. Standard error decreases when sample size increases – as
the sample size gets closer to the true size of the population, the sample means
cluster more and more around the true population mean.

080. Finite population refers to the population that can be ascertained easily i.e.
they are not unlimited in size. Example of finite population : the books in a library,
as it can be calculated easily and the cars in a town.

[Link] Population Multiplier is a factor used to correct the standard error of

the mean for studying a population of finite size that is small in relation to the size
to the sample.

082. Infinite population refers to the population that cannot be calculated easily
i.e. they are unlimited in size. Example : births of insect, as one cannot calculate
the birth of insects easily.

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081. A census is a study of every unit, everyone or everything, in a population. It is
known as a complete enumeration, which means a complete count.

082. A sample (partial enumeration) a subset of units in a population, selected to

represent all units in a population of interest.

083. Sampling is called with replacement when a unit selected at random from
the population is returned to the population and then a second element is
selected at random. Whenever a unit is selected, the population contains all the
same units, so a unit may be selected more than once.

084. In sampling without replacement, each sample unit of the population has
only one chance to be selected in the sample. For example, if one draws a simple
random sample such that no unit occurs more than one time in the sample, the
sample is drawn without replacement.

085. A parameter is a number describing a whole population (e.g., population

mean), while a statistic is a number describing a sample (e.g., sample mean). The
goal of quantitative research is to understand characteristics of populations by
finding parameters. ... Instead, data is collected from samples.

086. A sampling error is a statistical error that occurs when an analyst does not
select a sample that represents the entire population of data. As a result, the
results found in the sample do not represent the results that would be obtained
from the entire population.

087. Sampling Error & Standard Error

Generally, sampling error is the difference in size between a sample estimate and
the population parameter. The standard error of the mean (SEM), sometimes
shortened to standard error (SE), provided a measure of the accuracy of the
sample mean as an estimate of the population parameter.

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088. Random numbers are numbers that occur in a sequence such that two
conditions are met: (1) the values are uniformly distributed over a defined interval
or set, and (2) it is impossible to predict future values based on past or present
ones. Random numbers are important in statistical analysis and probability theory.

089. Correlation refers to the statistical relationship between two entities. In other
words, it's how two variables move in relation to one another.

090. Positive correlation: A positive correlation would be 1. This means the two
variables moved either up or down in the same direction together.

091. Negative correlation: A negative correlation is -1. This means the two
variables moved in opposite directions.

092. Zero or no correlation: A correlation of zero means there is no relationship

between the two variables. In other words, as one variable moves one way, the
other moved in another unrelated direction.

093. While correlation studies how two entities relate to one another, a correlation
coefficient measures the strength of the relationship between the two variables. In
statistics, there are three types of correlation coefficients. They are (1) Pearson
correlation (2) Spearman correlation (3) Kendall correlation

094. Variables are any characteristics that can take on different values, such as
height, age, species, or exam score.

095. The independent variable is the cause. Its value is independent of other
variables in your study. This is the basis of prediction.

096. The dependent variable is the effect. Its value depends on changes in the
independent variable. This is predicted variable.

097. Trend analysis is the process of comparing business data over time to
identify any consistent results or trends. You can then develop a strategy to
respond to these trends in line with your business goals. ... Done well, it will give
you ideas about how you might change things to move your business in the right
direction.

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098. Regression analysis is a method of identifying which variables have impact
on a topic of interest. The process of performing a regression allows us to
confidently determine which factors matter most, which factors can be ignored,
and how these factors influence each other.

099. In statistics, the method of estimating equations is a way of specifying how

the parameters of a statistical model should be estimated. This can be thought of
as a generalisation of many classical methods—the method of moments, least
squares, and maximum likelihood—as well as some recent methods like M-
estimators.

100. Direct Relationship: This is where two variables do the same thing. If one
increases, the other increases.

101. Inverse Relationship: This is where two variables do the opposite thing. If
one increases, the other decreases.

102. Projecting time based changes is called Time Series.

103. Data or Statistical information accumulated over a period of time at regular

intervals is called Time Series.

104. Traditional methods of time series analysis are concerned with

decomposing of a series into a trend, a seasonal variation, and other irregular
fluctuations.

105. Seasonal Variation (Seasonal effect or Seasonal Fluctuations)

Seasonal Fluctuations describes any regular variation (fluctuation) with a period of

less than one year. for example cost of various types of fruits and vegetables,
clothes. The changes which repeat themselves within a fixed period, are also
called seasonal variations, for example, traffic on roads in morning and evening
hours.

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106. Secular Trend (or Long Term Variation)

It is a longer-term change. Here we take into account the number of observations

available and make a subjective assessment of what is long term. The trend may
be linear or non-linear (curvilinear). Some examples of the secular trends are:
Increase in prices, Increase in pollution, increase in literacy rate, decrease in
deaths due to advances in science.

107. Cyclic Variation (Cyclical Fluctuations or Cyclic Changes )

Time series exhibits Cyclical Variations at a fixed period due to some other
physical cause, such as daily variation in temperature. Cyclical variation is a non-
seasonal component that varies in a recognizable cycle. Sometimes series exhibits
oscillation which does not have a fixed period but is predictable to some extent.
For example, economic data affected by business cycles with a period varying
between about 5 and 7 years.

The cyclical variation is periodic in nature and repeats itself like a business cycle,
which has four phases (i) Peak (ii) Recession (iii) Trough/Depression (iv) Expansion.

108. Irregular Variation (Irregular Fluctuations)

These variations occur due to sudden causes are called residual variation (irregular
variation or accidental or erratic fluctuations) and are unpredictable, for example,
a rise in prices of steel due to strike in the factory, accident due to failure of the
break, flood, earth quick, war, etc.

109. Seasonal variation is measured in terms of an index, called a seasonal index.

It is an average that can be used to compare an actual observation relative to
what it would be if there were no seasonal variation. An index value is attached to
each period of the time series within a year.

110. In Trend Analysis while measuring time, we use a process for coding to
simplify computation.

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111. A scatter diagram is used to examine the relationship between both the
axes (X and Y) with one variable. In the graph, if the variables are correlated, then
the point drops along a curve or line. A scatter diagram or scatter plot gives an
idea of the nature of relationship.

In a scatter correlation diagram, if all the points stretch in one line, then the
correlation is perfect and is in unity. However, if the scatter points are widely
scattered throughout the line, then the correlation is said to be low. If the scatter
points rest near a line or on a line, then the correlation is said to be linear.

112. Four components of Time Series are known as TSCI

Trend (Secular Trend) which describe the movement along the term;

Seasonal variations, which represent seasonal changes;

Cyclical fluctuations, which correspond to periodical but not seasonal

variations;

Irregular variations, which are other non random sources of variations of

series.

113. There are two types of estimates: point and interval.

114. A point estimate is a value of a sample statistic that is used as a single

estimate of a population parameter. A statistic used to estimate a parameter is
called a point estimator or simply an estimator, the actual numerical value
obtained by estimator is called an estimate.

115. The objective of point estimation is to obtain a single number from the
sample which will represent the unknown value of the population parameter.

116. Population parameters (population mean, variance, etc) are estimated from
the corresponding sample statistics (sample mean, variance, etc).

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117. Interval Estimation - A point estimator provides a single number as an
estimate of the population parameter, which can not be expected to be exactly
equal to the population parameter because the mean of a sample taken from a
population may assume different values for different samples. Therefore we
estimate an interval/ range of values (set of values) within which the population
parameter is expected to lie with a certain degree of confidence. This range of
values used to estimate a population parameter is known as interval estimate or
estimate by a confidence interval, and is defined by two numbers, between which
a population parameter is expected to lie.

118. Criteria for a Good Estimate – Unbiased; Efficient; Consistent and Sufficient.

119. Confidence Interval displays the probability that a parameter will fall
between a pair of values around the mean. Confidence intervals measure the
degree of uncertainty or certainty in a sampling method. They are most often
constructed using confidence levels of 95% or 99%.

120. Confidence Level indicates the probability, with which the estimation of the
location of a statistical parameter (e.g. an arithmetic mean) in a sample survey is
also true for the population.

121. Confidence Interval & Confidence Level

The confidence level is the percentage of times you expect to get close to the
same estimate if you run your experiment again or resample the population in the
same way. The confidence interval is the actual upper and lower bounds of the
estimate you expect to find at a given level of confidence.

122. A government bond is a debt instrument issued by the Central and State
Governments of India.

123. The Government Bond interest rates, also called a coupon, can either be fixed
or floating disbursed on a semi-annual basis. In most cases, GOI issues bonds at a
fixed coupon rate in the market.

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124. When the market interest rate exceeds the coupon rate, bonds sell for less
than the face value.

125. When the market interest rate is below the coupon rate, bonds sell for more
than the face value.

126. Current yield is an investment's annual income (interest or dividends)

divided by the current price of the security. This measure examines the current
price of a bond, rather than looking at its face value.

127. A Bond that is priced above its face value is said to sell at premium. Investors
who buy a bond at premium , face capital loss over life of the bond. Hence the
return on these bonds is always less than the bond’s current yield.

128. A Bond that is priced below its face value is said to sell at discount. Investors
who buy a bond at discount, face capital gain over life of the bond. Hence the
return on these bonds is always greater than the bond’s current yield.

129. Current Yield focuses only on current income and ignores prospective price
increases or decreases, the current yield mismeasures the bond’s total rate of
return. It overstates the return of premium bonds and understates that of
discount bonds.

130. Current Yield & Coupon Rate

The difference between current yield and coupon rate is that current yield is a
ratio of annual income from the bond to the current price of the bond, and it tells
about the expected income generated from the bond. In contrast, the coupon rate
is a fixed interest paid by the issuer annually on the face value of a bond.

131. Yield to Maturity (YTM) is the total return anticipated on a bond if the
bond is held until it matures. In other words, it is the internal rate of return (IRR)
of an investment in a bond if the investor holds the bond until maturity, with all
payments made as scheduled and reinvested at the same rate.

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132. Rate of Return (RoR) is the net gain or loss of an investment over a
specified time period, expressed as a percentage of the investment's initial cost.
When calculating the rate of return, we are determining the percentage change
from the beginning of the period until the end.

133. Yield to Maturity (YTM) & Rate of Return (RoR)

The rate of return is a specific way of expressing the total return on an investment
that shows the percentage increase over the initial investment cost. Yield shows
how much income has been returned from an investment based on initial cost,
but it does not include capital gains in its calculation.

134. Risks in Bond Investments

a) Call risk is the likelihood that a bond's term will be cut short by the issuer if
interest rates fall.

b) Default risk is the chance that the issuer will be unable to meet its financial
obligations.

c) Inflation risk is the possibility that inflation will erode the value of a fixed-price
bond issue.

135. Bonds mean indebtedness; the bondholder is a creditor. The buyer lends the
corporation money for a certain period of time (the maturity) at a fixed rate of
interest (the coupon).

136. Types of Bonds - Following are the types of bonds:

Fixed Rate Bonds - In Fixed Rate Bonds, the interest remains fixed through out
the tenure of the bond. Owing to a constant interest rate, fixed rate bonds are
resistant to changes and fluctuations in the market.

Floating Rate Bonds - Floating rate bonds have a fluctuating interest rate
(coupons) as per the current market reference rate.

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Zero Interest Rate Bonds - Zero Interest Rate Bonds do not pay any regular
interest to the investors. In such types of bonds, issuers only pay the principal
amount to the bond holders.

Inflation Linked Bonds - Bonds linked to inflation are called inflation linked
bonds. The interest rate of Inflation linked bonds is generally lower than fixed rate
bonds.

Perpetual Bonds - Bonds with no maturity dates are called perpetual bonds.
Holders of perpetual bonds enjoy interest throughout.

Subordinated Bonds - Bonds which are given less priority as compared to other
bonds of the company in cases of a close down are called subordinated bonds. In
cases of liquidation, subordinated bonds are given less importance as compared
to senior bonds which are paid first.

Bearer Bonds - Bearer Bonds do not carry the name of the bond holder and
anyone who possesses the bond certificate can claim the amount. If the bond
certificate gets stolen or misplaced by the bond holder, anyone else with the
paper can claim the bond amount.

War Bonds - War Bonds are issued by any government to raise funds in cases of
war.

Serial Bonds - Bonds maturing over a period of time in installments are called
serial bonds.

Climate Bonds - Climate Bonds are issued by any government to raise funds
when the country concerned faces any adverse changes in climatic conditions.

137. Negotiable bonds are bonds issued by private corporations or

municipalities which are payable to order or bearer. Such bonds are payable to
order or bearer, whether the interest coupons are attached or detached. These
bonds are traded in the Market and their Market Value changes, depending upon
the current interest rates.

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138. Price risk is the risk that the market price of a bond will fall, usually due to a
rise in the market interest rate.

139. A zero-coupon bond, also known as an accrual bond, is a debt security that
does not pay interest but instead trades at a deep discount, rendering a profit at
maturity, when the bond is redeemed for its full face value.

140. A convertible bond is a fixed-income corporate debt security that yields

interest payments, but can be converted into a predetermined number of
common stock or equity shares. The conversion from the bond to stock can be
done at certain times during the bond's life and is usually at the discretion of the
bondholder.

141. Linear programming (LP, also called linear optimization) is a method to

achieve the best outcome (such as maximum profit or lowest cost) in a
mathematical model whose requirements are represented by linear relationships.

142. Common terminologies used in Linear Programming

Decision Variables: The decision variables are the variables that will decide my
output.

Objective Function: It is defined as the objective of making decisions.

Constraints: The constraints are the restrictions or limitations on the decision

variables.

143. Non-negativity condition is an important component of LP model because

value of variables make sense & correspond to real-world problems. Non-
negativity restriction indicates that all decision variables must take on values equal
to or greater than zero.

144. In the theory of linear programming, a basic feasible solution (BFS) is a

solution with a minimal set of non-zero variables.

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145. In an optimization problem, a slack variable is a variable that is added to an
inequality constraint to transform it into an equality. If a slack variable is posiis
tive at a particular candidate solution, the constraint is non-binding there, as the
constraint does not restrict the possible changes from that point.

146. The Simplex Method is an iterative method for solving linear programming
problems. The Simplex Method reduces things to solving equivalent systems of
linear equations.

147. Iteration is the process of doing something again and again, usually to
improve it.

148. Simplex method, standard technique in linear programming for solving an

optimization problem, typically one involving a function and several constraints
expressed as inequalities.

149. In linear programming, the shadow price of a constraint is the difference

between the optimised value of the objective function and the value of the
objective function.

150. Sensitivity analysis is a systematic study of how sensitive solutions are to

changes in the data. The basic idea is to be able to give answers to questions of
the form. Sensitivity Analysis deals with finding out the amount by which we can
change the input data for the output of our linear programming model to remain
comparatively unchanged. This helps us in determining the sensitivity of the data
we supply for the problem. If a small change in the input (for example in the
change in the availability of some raw material) produces a large change in the
optimal solution for some model, and a corresponding small change in the input
for some other model doesn't affect its optimal solution as much, we can
conclude that the second problem is more robust then the first. The second
model is less sensitive to the changes in the input data.

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151. Simulation is a model or representative example of something. When you
create a computer program that is intended to model flying a plane, this is an
example of a simulation. A simulation is the re-creation of a real world process in
a controlled environment. It involves creating laws and models to represent the
world, and then running those models to see what happens. Simulations are used
for scientific exploration, for safety tests, and to create graphics for video games
and movies.

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20-12-2021 Sekhar Pariti

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