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Unit 2 of 4 · BBA Sem 6

Unit 2: Time value of money & risk management

Personal Financial Planning notes · PTU syllabus (BBA 621-18)

3 min read5 topics10 exam questions
On this page
  1. Unit summary
  2. Time value of money
  3. Factors affecting time value of money
  4. Personal financial statements
  5. Personal risk measurement and identification
  6. Life and general insurance planning
  7. Key terms
  8. Quick revision
  9. Important questions

Unit summary

A rupee today is worth more than a rupee tomorrow — the time value of money underlies every saving and borrowing decision. This unit covers present and future value calculations, factors affecting time value, personal financial statements, identifying and measuring personal risks, and life and general insurance planning.

After this unit you can

  • Calculate future value and present value of a sum and an annuity
  • Explain factors affecting the time value of money
  • Prepare a personal balance sheet and cash-flow statement
  • Identify personal risks and plan life and general insurance cover

PTU syllabus topics

  • Meaning and calculation of present and future value
  • factors affecting time value of money and personal financial statements
  • personal risk measurement and identification
  • life and general insurance planning
Key formulasTime value of money

  • Future value

    FV = PV × (1 + r)^n

  • Present value

    PV = FV / (1 + r)^n

  • Rule of 72

    Years to double ≈ 72 / interest rate

  • Net worth

    Total assets − total liabilities

1

Topic 1

Time value of money

Time value of money (TVM) means a sum of money received today is worth more than the same sum in future, because it can be invested to earn a return. Reasons: earning opportunity, inflation, risk and uncertainty, and preference for present consumption.

Key formulasTime value formulas

  • Future value (lump sum)

    FV = PV × (1 + r)^n

  • Present value (lump sum)

    PV = FV ÷ (1 + r)^n

  • FV with m compounding periods

    FV = PV × (1 + r/m)^(m × n)

  • FV of an annuity

    FVA = A × [((1 + r)^n − 1) ÷ r]

  • PV of an annuity

    PVA = A × [(1 − (1 + r)^−n) ÷ r]

  • Rule of 72

    Years to double ≈ 72 ÷ interest rate %

Example

₹1,00,000 invested at 8% for 5 years: FV = 1,00,000 × (1.08)^5 = 1,00,000 × 1.4693 = ₹1,46,933.

Example

PV of ₹5,00,000 needed after 10 years at 10%: PV = 5,00,000 ÷ (1.10)^10 = 5,00,000 ÷ 2.5937 = ₹1,92,772.

Example

SIP of ₹1,000 at year-end for 3 years at 10%: FVA = 1,000 × [(1.331 − 1) ÷ 0.10] = 1,000 × 3.31 = ₹3,310.

Exam tip

Show the formula, substitution and final answer with units — most marks in TVM numericals are for method.

2

Topic 2

Factors affecting time value of money

  • Rate of interest/return: higher rate increases future value and reduces present value.
  • Time period: longer horizon magnifies compounding.
  • Frequency of compounding: monthly compounding gives more than annual.
  • Inflation: reduces the real value of future money.
  • Risk: riskier cash flows are discounted at higher rates.
  • Liquidity preference: people prefer cash now.
3

Topic 3

Personal financial statements

ComparisonPersonal balance sheet vs cash-flow statement
Personal balance sheet
Personal cash-flow statement

Shows

What you own and owe at a point in time

Money in and out over a period

Key result

Net worth = Assets − Liabilities

Surplus or deficit = Income − Expenses

Items

House, car, savings, investments; loans, card dues

Salary, rent, interest; groceries, EMIs, fees

Personal financial ratios

Key formulasPersonal financial ratios

  • Liquidity ratio

    Liquid assets ÷ Monthly expenses (target: 3–6)

  • Savings ratio

    Savings ÷ Gross income (target: 20%+)

  • Debt-to-income ratio

    Monthly EMIs ÷ Monthly income (keep below 40%)

  • Solvency ratio

    Net worth ÷ Total assets

Example

Assets: house ₹40 lakh, car ₹5 lakh, mutual funds ₹6 lakh, bank ₹1 lakh = ₹52 lakh. Liabilities: home loan ₹25 lakh, car loan ₹2 lakh = ₹27 lakh. Net worth = ₹25 lakh.

4

Topic 4

Personal risk measurement and identification

ClassificationPersonal risks
Personal risks

  • Personal (life) risks

    Premature death, disability, illness, old age (outliving savings)

  • Property risks

    Fire, theft, flood, damage to home or vehicle

  • Liability risks

    Legal claims for harm caused to others

  • Income risks

    Job loss, business failure

Risk management process

ProcessRisk management process
  1. 1Identify risks
  2. 2Measure risk

    Probability × severity

  3. 3Choose method

    Avoid, reduce, retain, transfer

  4. 4Implement

    Buy insurance, build fund

  5. 5Review
  • Avoid: do not undertake the risky activity.
  • Reduce: safety measures (smoke detectors, healthy lifestyle).
  • Retain: bear small losses yourself (emergency fund).
  • Transfer: shift to an insurer by paying a premium — best for low-probability, high-severity risks.
5

Topic 5

Life and general insurance planning

Life insurance

  • Human Life Value (HLV) method: cover = present value of future income the family would lose.
  • Need-based method: cover = future expenses + outstanding loans + goals − existing assets.
  • Rule of thumb: cover of 10–15 times annual income.
PolicyFeature
Term planPure protection, lowest premium, no maturity benefit
EndowmentInsurance + savings; maturity benefit
Whole lifeCover up to age 99/100
Money-backPeriodic payouts during the term
ULIPInsurance + market-linked investment

Exam tip

Financial planners usually recommend a term plan + separate investments for adequate cover at low cost.

General insurance

  • Health insurance: hospitalisation costs; family floater; deduction under Section 80D.
  • Motor insurance: third-party cover is compulsory under the Motor Vehicles Act; comprehensive covers own damage too.
  • Home insurance: structure and contents against fire, theft, natural disasters.
  • Travel and personal accident insurance.

Principles of insurance: utmost good faith, insurable interest, indemnity (not for life), contribution, subrogation, proximate cause.

Key terms

Time value of money
A rupee today is worth more than a rupee in future
Annuity
A series of equal payments at regular intervals
Net worth
Total assets minus total liabilities
Term insurance
Pure life cover without maturity benefit
Human Life Value
Present value of future income a family would lose on the earner's death

Quick revision

  • FV = PV(1 + r)^n; PV = FV ÷ (1 + r)^n.
  • Rule of 72: years to double ≈ 72 ÷ rate.
  • Balance sheet → net worth; cash-flow → surplus.
  • Risk methods: avoid, reduce, retain, transfer.
  • Life cover via HLV or need-based; term plans give maximum cover at least cost.

Important exam questions

Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).

Short-answer questions

  1. Q1.What is time value of money?
  2. Q2.State the Rule of 72.
  3. Q3.Calculate FV of ₹10,000 at 10% for 2 years.
  4. Q4.What is net worth?
  5. Q5.What is Human Life Value?
  6. Q6.Name four principles of insurance.

Long-answer questions

  1. Q1.Explain the concept of time value of money and the factors affecting it with examples.
  2. Q2.Explain present value and future value of a lump sum and an annuity with numericals.
  3. Q3.Explain the preparation of personal financial statements and ratios.
  4. Q4.Discuss personal risk management and life and general insurance planning.

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