Financial theory and financial market

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Solving Assignment Problems in BANK5014 When writing your answers, you may formulate many problems by showing suitable timelines as well as the appropriate keystrokes used on the financial calculator.Sometimes, formulae must be used (e.g. the EAR formula, or the formula FV = PVe jt ) /… In situations where the financial calculator is programmed suitably (e.g. annuity problems) you are welcome to use the relevant formula(e) as well as, or instead of, the programmed calculator functions – but there is no need to do so (the choice is yours).Most students will find that the financial calculator is faster and likely to be more accurate, and also less likely to make errors. Protocols for solving problems in assignments and exams All computations must be carried out in accordance with the following protocols:- · Interest rates as decimal numbers : 6 decimal places (e.g. 0 . 152785) · Interest rates as percentages :4 decimal places (e.g. 15 . 2785%) · Prices or dollar values :Cents to 4 decimal places (e.g. $103 . 6287) Assignment 1 , initial questions [ part of the first Assignment, due on 24 September ] NOTE :you must follow the abovementioned protocols , when answering assignment questions in this course.Marking penalties will be applied if the protocols are not followed. ü References 1.Lecture slides, Topic 1 2.Petty et. al. Financial Management ,6 th edition2012 chapter 4 * , pages 81-109 ( top of page ) Question. 1 : A sinking fund consists of an annuity payment that is invested each period in order to accumulate to a specific sum of money at a future date.This sum of money is typically earmarked for repayment of a debt at the future date. Required : (a) You have a debt of $20 million repayable in 5 years’ time, which you intend to repay by setting-up a sinking fund.How much must you invest at the end of each half-year if interest is at 8% APR ? (b) How much would you need to invest if payments are at the beginning of each half-year? Question. 2 : As an alternative to the annuity in Question 1 (a), you decide to invest $2 million at the end of year 1, $3 million at the end of year 2, $4 million at the end of year 3 and $5 million at the end of year 4. Required : How much would you need to put aside at the end of year 5 in order to be able to repay the debt of $20 million at that time? Question. 3 : When pricing Options in TOPIC 8, present values are computed using continuous compounding of interest.However, interest rates in the financial markets are usually quoted on an APR basis.Therefore, we must know how to convert APR s to continuously compounded rates. Required : (a) What is the continuously compounded rate (that is, j ¥ ) which is equivalent to 6% p.a. APR , compounded every half-year?[HINT: use the concept of equivalent interest rates ] (b) What is the present value of $400 due in a half-year’s time, at the rate j ¥ which you computed in question 3 (a)? Assignment 1, further questions [ part of the first Assignment, due on 24 September 2012 ] NUMBERS OF THE FOLLOWING QUESTIONS CONTINUE FROM Topic 1see over page /… ü References References 2 & 3 cover only part of the lecture material. 1.Lecture slides/handouts 2.Petty et. al. Financial Management , 6 th edition 2012 chapter 7 * ,p. 219/22 & 225/8 3.Petty et. al. Financial Management , 6 th edition 2012 chapter 18 * ,pages 627/35 Question. 4 SS Company Pty Ltd (SSC) retails a range of outdoor furniture, manufactured in China.Sales are highly seasonal, being strong in the warm months but negligible in the cold months.The next season’s inventory is ordered in about February each year, the order being delivered by the importer in about August, with the invoice being payable by the end of September.To pay the importer, the company typically arranges with its bank for a 180-day Bill, maturing in late March the following year, at which time the company’s accumulated Spring and Summer cash flows enable it to repay the maturing Bill. During August/September 2012, SSC negotiated with its bank for a Bill on the following conditions: Face Value $2,000,000 Drawdown 30 September 2012 * Maturity 180 days Bank to act as acceptor and discounter Interest rate:BBSW Bank to charge an acceptance and discounting fee, totalling 2.5% p.a. of the face value of the bill, payable ‘upfront’. * This is the date on which the funds are ‘drawn’ by SSC.On that date, BBSW was 5.6% p.a. Required : (a)What is the total cost of the Bill to SSC, expressed as a simple interest rate p.a? (b)Given that BBSW is 5.6% p.a. and the fees total 2.5% p.a., why is the interest rate not 8.1% p.a.? (c)Assume by March 2013, SSC has diversified into a product range that has strong winter sales and so the company wants to rollover the above Bill for an additional 180 days. If BBSW is 5.1% at the rollover date and if the fees are the same as for the previous Bill, what is the total cost of the finance for the 360-day period, expressed as: ( i ) APR ( ii ) EAR? Question. 5 You work for Uluru Resort ( UR ), a 5-star accommodation complex located near Ayer’s Rock in Australia’s Northern Territory. UR is seeking to finance an expansion via a $6 million term-loan repayable over 5 years.Northern Territory United Service bank ( NOTUS ) has offered the loan at an interest rate of 12% APR , repayable at the end of each quarter.A.S. International Finance group ( ASIF ) has quoted a $133,467 repayment per month (payable at the end of each period). Required : (a) Explain, with supporting computations, whether or not one of the above loans is preferable to the other on financial grounds. (b) Assume you have just discovered that NOTUS requires a $180,000 ‘application fee’ before it will approve the loan. What effect, if any, does this have on your loan choice?( Show all supporting computations ) (c) Suppose that ASIF also wants a fee – a ‘transaction fee’ of $3,000 per month – payable at the same time as the regular monthly instalment amounts.Does this change your loan choice? ( Show all supporting computations ) (d) NOTUS is a subsidiary of Northern Union Tampa State bank ( NUTS ). NUTS knows well the U.S. market and has advised that it could give UR a loan in U.S. dollars at 5% p.a., the sum borrowed being 6 million U.S. dollars (at the current exchange rate of 1.0 Australian dollar = 1.0 U.S. dollar), repayable by a single payment due at the end of 5 years. i. What would be the major risk of taking the loan from NUTS ? ii. Can you determine what exchange rate in 5 years’ time would make the NUTS loan equally costly as the NOTUS loan in part b. above? Assignment 1, further questions [ part of the first Assignment, due on 24 September 2012 ] see over page / ü References Reference 2 covers only part of the lecture material. 1.Lecture slides/handouts 2.Petty et. al. Financial Management ,6 th edition2012 chapter 7 * , pages 222/4 NUMBERS OF THE FOLLOWING QUESTIONS CONTINUE FROM Topic 2 Question. 6 The bank that discounted and accepted SS Company’s bill [ see TOPIC2, Assignment question 4(a) ] is contemplating selling it after holding it for 60 days.At that date, BBSW is quoted in the media as follows: maturityBBSW 30 days5.1% 60 days5.1% 90 days5.2% 120 days5.3% 150 days5.4% 180 days5.5% Required: (a) What price would the bank expect for the Bill? (b) What would be the profit (or loss) if the Bill is sold for the price that you determined in part (a) above? (c) Assuming the Bill is sold for the price that you determined in part (a) above, what yield did the bank earn for the period during which it held the Bill? (d) Assume that the company that bought the Bill from the bank is still holding the Bill on 31 December, at which date the balance sheet must be drawn up, with the Bill being reported at its estimated market value.What is your estimate of this value assuming quoted BBSW rates are unchanged since buying the Bill from the bank (that is, the rates are the same as listed above)? Question. 7 Your Thai business exports furniture from Thailand, whose currency is the Baht ( THB ). You see that interest rates in Europe are low compared to Thailand, where it presently costs 7% p.a. to borrow for 1 year. Thus, you decide to borrow 1 million Euros, EUR , at a time when the exchange rate is EUR 1 = THB 45, for a period of 1 year.The applicable interest rate in Europe is 2.5% p.a. Required : What would be the ‘breakeven’ exchange rate in 1 year’s time (when you must repay the debt)?(That is, if you borrow now in Euros, what future exchange rate would result in your Thai business also paying, in effect, 7% p.a.?) Assignment 1, further questions [ part of the first Assignment, due on 24 September 2012 ] NOTE : THESE QUESTIONS COVER TOPIC 4 & TOPIC 5 NUMBERS OF THE FOLLOWING QUESTIONS CONTINUE FROM Topic 3 ü References Reference 2 covers only a part of the lecture material, which is mainly ‘technical’. Lecture slides/handouts [no need to know the contents of the lecture APPENDIXES 2, 3 4 and 5, which are shown for the benefit of students who want to exploresome points in more detail] 2.Petty, Financial Management ,6 th edition (2012), chapter 18 * ,pages 618-624 * pdf file was emailed previously to class members for Topic 2 3.TheAPPENDIX at the back of this Topic Guide (pages 6 to 9 overleaf) Question. 8 You work in the small Treasury section of ACT Company’s finance division. The company’s new chief financial officer (CFO) has been asked by the ‘big boss’ (that is, the CEO) to investigate financing the company’s expansion by increasing the use of debt, because share (equity) issues are difficult in the current, poorly-performing sharemarket. The CFO comes mainly from an accounting background and so she is seeking your assistance in the following email: Date: 12 September 2012 To: Treasury Officer From: CFO Subject: Some queries regarding use of debt a. I am aware that ACT is too small to obtain a bond rating, but in 2010 the Federal government announced plans for a new scheme that will enable small bond issues (at least $50 million) to be listed on the ASX.What requirements would we have to satisfy in order to qualify for listing? b. If we made an issue with face value $50 million for 5 years, what would be the approximate yield required by investors?My friend, who works for PIMCO (Australia), has told me that we would have to offer about 3.5% p.a. above the yield on Commonwealth Treasury Bonds. [assume that the bonds would be issued at par, with half-yearly coupons] c. Pimco has also advised me that there would be issue costs of about 2% of the face value.What impact would that have on the cost of an issue? /... d. I have heard mention of a ‘discount bond’.Would we benefit from a discount for our bonds? Can you show me how this works? e. I have seen in recent times that some of the big Aussie banks issued ‘covered bonds’, apparently at attractive yields.What are they and are they suitable for us? To assist in answering the CFO’s email, you have researched the current yields for T-bonds, which include the following data as at 24/9/12: maturity yield 1 year3.7% 1.5 years3.7% 2 years3.8% 2.5 years3.8% 3 years3.9% 3.5 years3.9% 4 years4.0% 4.5 years4.0% 5 years4.1% 5.5 years4.1% 6 years4.2% 7 years4.3% 10 years4.5% Required Write a brief response to the CFO’s email, addressing points a . to e . [show any necessary supporting computations] Question. 9 Assume ACT’s bonds [ see Question 8(b) ] are eventually issued on 31 st May 2013, at which date yields are the same as in the above table.The issue is in accordance with the circumstances outlined in question 8 (including issue at par for a term of 5 years).PF, a pension fund, purchased $10 million face value of these ACT bonds, at issue date.During the year or so since the date of issue, bond yields moved down by 40 basis points. Required What bond data should PF report in its financial statements as at 30 th June 2014, assuming PF is required to “mark to market”?[show any necessary supporting computations] Question. 10 Assume that, on 1 st December 2014, PF receives an offer of $10,245,497 for its parcel of ACT bonds [ see Question 9 ]. Required (a) In your opinion, should PF accept the offer? (Bond yields have moved down a further 20 basis points since 30 th June 2014) [show any necessary supporting computations] (b) Assume that PF has accepted the offer
show the buyer’s amortisation schedule till maturity. Sep 21 2012 04:27 PM

 

Solution ID:609047 | This paper was updated on 26-Nov-2015

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