STQA2133 Taxes and Expenses Should Be Ignored Unless Otherwise Indicated

1. 2.

Find limp i(p) if i = 10%. Show that

[2 marks]

Ia n|

an| d

nv n

[4 marks]

3.

A fund had a value of $300,000 on 1 May 2004. A net cash flow of $50,000 was received on 1 May 2005 and a further $100,000 on 1 May 2006. The value of the fund on 30 April 2005 and 30 April 2006 was $310,000 and $350,000 respectively. a. Calculate the value of the fund on 30 April 2007 if the MWRR (money weighted rate of return) earned on the fund between May 1 2004 until 30 April 2007 is 2% per annum. [3 marks] b. Calculate the TWRR (time weighted rate of return) p.a. earned on the fund over the same period. [3marks] (Total: 6 marks)

4.

The current value of a share in a company is $100. The company is not doing well, and nobody is expecting it to pay out dividend for at least a year. Your brother observes that the one year forward price of the share is $106 and comments that things might not be that bad if traders predict a price rise of 6%. Explain to him why he is wrong, and what the figure 6% represents. Assume your brother understands mathematics, even though his finance knowledge is limited. [(3 marks]

5.

A hairdressers chain is opening a large new outlet with an initial cost of $250,000. There will also be a rent of $10,000 per annum payable quarterly in advance for 10 years. The net revenue taking into account all costs other than rent for the first year will be $25,000 and for the second year $50,000. Thereafter, the revenue will rise by 4.5% per annum so that it will be $52,250 in the third year, $54,601.25 in the fourth year and so on. The revenue is received continuously throughout each year. In 20 years time, the outlet will close and will have no further value.

STQA2133 a. Calculate the net present value (NPV) of the project using effective interest rate of 15% per annum. [9 marks] b. Suppose a higher interest rate is used. Would the NPV of the project be higher or lower? [2marks] (Total: 11 marks) 6. The force of interest at time t is given by
0.10 t t 4 4

(t) =

1 15 t

An investor is investing at a continuous rate (t), where

(t) =

0 12 15 t 0

1 t 4 4 t 6 t 6

Find the present value of the investment at time 0 and its accumulated value at time 10. [Total: 10 marks]

7.

A loan is to be repaid by 12 annual instalments (payable at the end of each year) of capital and interest at 6% per annum. The size of instalments is $1500, except the 2nd and 10th instalments whose size is $2500. a. Find the amount of the loan, the interest content of the first instalment and the capital content of the 2nd instalment. [4 marks] b. An investor that buys the loan at issue requires a return of 5% per annum. What price should she pay for the loan? [2 marks] c. Suppose she is now liable to income tax of 40% per annum. What will her price be then? [5marks] [Total: 11 marks]

8.

A bond having nominal value of $3 million is issued repayable in 15 equal annual instalments at par annually in arrears subject to interest at 8% per annum payable at the end of each of the next 15 years. An investor is subject to income tax at the rate of 50% and capital gain tax at 30%. In calculating his capital gain, the investor is allowed to inflate his cost at the rate of 1% per annum to the time of

STQA2133 capital gain. Find the price the investor should pay to realise a net yield of 5%. [11 marks]

9.

The value of a share in a football club is currently $150. The club is hoping to qualify in a years time for the Semi-Pro League. If this happens, the value of a share in the club will rise to $156. Otherwise, it will stay at $150. Moreover, the price of a European put option on the share with strike price $153 is $1. An investor buys one share and invest an amount x into European put options. a. Calculate x so that the investor eliminates all risk. [3 marks]

b. Assuming no arbitrage opportunities exist, calculate the annual effective interest rate in the country. [2 marks] c. What would be the odds that a bookmaker would give on the club qualifying, if he were not to introduce arbitrage in the market? [2 marks] [Total: 7 marks]

10.

Suppose the 3-year spot rate is 4.5%, the 1-year forward rate in 3 years time is 7%, the 2-year forward rate in 3 years time is 8%, the 3-year forward rate in 3 years time is 9% and the 4-year forward rate in 3 years time is 10%. Calculate the following, or state you have insufficient information to do so, if you believe this is the case a. The 5-year spot rate of interest. b. The 2-year forward rate of interest in 5 years time c. The 1-year forward rate of interest in 2 years time d. The price of a 6 year zero coupon bond [2 marks] [2 marks] [2 marks] [2 marks]

e. The price a 6 year bond redeemable at par, with an annual coupon of 5% payable annually in arrears. [2 marks] [Total: 10 marks]

SELAMAT MAJU JAYA