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BANK1002FinancialManagement,SP22009
OnCampusStudents
AssignmentTwo
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Coursecodeandtitle:FinancialManagement(BANK1002)
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UniversityofSouthAustralia
SCHOOLOFCOMMERCE
06627FinancialManagement(BANK1002),SP2,2009
OnCampusStudents
Assignment2Topics17
Canbecompletedindividuallyoringroupsofupto3students
DueDate:5pm(S.A.Time)Friday29May
Instructions

1.

ReadtheAssignmentInstructionsthatcanbeaccessedfromthecoursewebsite.

2.

ThisassignmentcontainsFIVEQuestions.YoushouldprovideanswersforALLofthequestionsinthespaceprovidedfor
eachquestion.

3.

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4.

Markswillnotbegivenforanycalculationtypeofquestionswithoutshowingfullcalculations.

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8.

Theaimofthisassignmentistoreinforcetheconceptsandskillsdevelopedintopics1to7.Aswiththefirstassignmentitis
importantthatyouincludeinyourassignmentthedetailsofhowyouarrivedatyouranswer.Thiswillincludedrawing
timelines,writingequationsorcalculatorkeystrokesusedforyourcalculations.

9.

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calculations)thenyouhavetheopportunitytogetsomemarksforthequestion.

10. Ignoreinflationinyouranswersandallinterestratesaretobecalculatedaspercentagesto4decimalplaces(e.g.1.2678%).
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12.

Ensurethatyouhaveproperlyacknowledgedtheworkofothersthatenabledyoutocompleteyourassignment.A
financeassignmentthatmostlycomprisescalculationsisnodifferentfromawritten(e.g.essay)assignment.Youmust
acknowledgebyareferenceand/orbibliographyalltextsandsourcesthatprovidedyouwiththeformulaeetc.todoyour
calculations.

13. Onceallassignmentshavebeenmarkedyouwillbeprovidedwithfeedbackincludingasuggestedsolutionthatyouwillbe
abletoaccessfromthecoursewebsite.

Question1[7marks]
Abillofexchangewithafacevalueof$100,000and90daystomaturitywastakenouton
15May2009atsimpleinterestof8%p.a.Ifthebillwassubsequentlysoldon30June2009
atasimpleinterestrateof7.5%p.a.
Whatwasthe%p.a.rateofsimpleinterestearnedbythesellerfortheperiod?
(3marks)
Whatwastheeffectiveinterestrateearnedbytheseller?

(4marks)

(a)
(b)

Drawappropriatetimeline(s)todemonstrateyourcalculations.

StartanswerQuestion1
r=8%

FV=+$100,000

.
PV?
P1 =

365 V
365 + rn

90days
=

365 (100 ,000 )

365 + 0.08 (90 )

36 ,500 ,000
372 .20

= $98 ,065 .56

Holderofthebillsellsitafter46daysat7.5%p.a.
Daysremainingtomaturity=9046=44days
Sot=44/365
r=7.5%p.a.
Therefore, P2 =

365 V
365 + rn

365 (100 ,000 )

365 + 0.075 ( 44 )

36 ,500 ,000
368 .30

= $99 ,103 .99

46daysInterest=SalepricePurchaseprice
=$99,103.99$98,065.56
=$1,038.43
Interestrateper46days=$1,038.43/$98,065.56
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=0.010589
=1.0589%
AnnualInterestRate=1.06%(365/46)
=0.0841
=8.41%p.a.
46daysInterestrate=1.06%
Compoundperiodsinoneyear=365/46=7.9348
Effectiverate
Calculator:7.93482ndFEFF(1.06% 7.9348) 8.41 = 8.726% p.a.

Finishanswer

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Question2[13marks]
Somelendersareencouragingborrowerstorepaytheirloanswithweeklypayments,
insteadofwithpaymentsattheendofeachmonth.Oneoftheselendersrecently
advertised:
Ifyoudividethenormalmonthlyloanpaymentby4andpaythisamountweekly,youwill
reducethetermofyourloanandtherebyreapbigreductionsinthecostofyourloan.
(a)

Fora5yearloantoborrow$45,000withinterestchargeddailyataninterestrateof
15%p.a.usefinancialmathsonly(notanamortisationschedule)todemonstratethe
effectonthetermoftheloanifaborrowertakestheweeklypaymentalternative.
(10marks)

(b)

Discusswhetheritiscorrectfortheadvertisementtosaythattheweekly
repaymentswillresultinbigreductionsinthecostofyourloan.
(3marks)

Drawappropriatetimeline(s)todemonstrateyourcalculations.
StartanswerQuestion2

Finishanswer

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Question3[27marks]
YouareconsideringinvestinginCommonwealthBondsandhavefoundthefollowing
informationaboutthemfromthefinancialpressinthemiddleofMarch2009:
Couponrate(%)
8.0

Maturity

Coupondates
th

August2011

th

15 February,15 August

Price($)

Yield

103.36

6.75

Bythetimeyoumakeupyourmindtopurchasethesebondson10April2009,theReserve
Bankhasreducedinterestratesandtheyieldhasfallento6.25%.
(a) Whatpricewillyouhavetopayforthebond?

(7.5marks)

(b) Whatarethevariouscomponentsofthepricepaidbyyou?

(3marks)

(c) Prepareanamortisationschedulefortheremainingtermofthebondtillmaturity.
(6marks)
(d) Ifyousubsequentlysoldthebondon6July2010forayieldof8.15%,whatarethe

componentsofyoursaleproceeds?

(10.5marks)

Drawappropriatetimeline(s)todemonstrateyourcalculations.
StartanswerQuestion3
181days

127days

FV=100

15Feb
2009

15Aug

15Feb

15Aug

15Feb

15Aug

2009

2010

2010

2011

2011

10April2009
Pricetopayon10April2007:

BOND
8ENT
100ENT

FV=100

Couponrate=8%
Maturitydate=15/8/2011

04102007ENT

YTM=6.25%

08152009ENT

Dateofpurchase=10/4/2009

2ENT
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6.25ENT
COMPPrice=$103.76
ACC=$1.19(Sellersshareofinterest)***
BondPrice=$104.95
Thebuyersamortisationschedule:

(1)
HALFYEAR
ENDING
15August
2009

(2)

(3)

BEGINNING INTEREST=
BALANCE
(1)3.125%

COUPON
PAYMENT

(4)

(5)

CHANGEIN CLOSING
PRINCIPAL BALANCE=
=(2)(3)
(1)+(4)

$103.76*

$2.276**

$2.81***

$0.53

$103.23

$103.23

$3.226

$4.00

$0.77

$102.46

$102.46

$3.202

$4.00

$0.80

$101.66

$101.66

$3.177

$4.00

$0.82

$100.84

$100.84

$3.151

$4.00

$0.84

$100.00

15February
2010
15August
2010
15February
2011
15August
2011
NOTES:

*Thisisthebondsworthon10thApril2009
**Thisiscalculatedas:$103.76 3.1256% (127 / 181)
[(127 / 181) is the fraction of the period for which the buyer is to earn interest]
***Buyersnextshareofthenextcouponpayment.Thesellerssharewascalculatedaboveas$1.19.
Thus,thebuyersshare=$4$1.19=$2.81

Amountpaidbeseller:
BOND
8ENT
100ENT

FV=100

Couponrate=8%
Maturitydate=15/8/2011

07062008ENT

YTM=6.25%

08152009ENT

Dateofpurchase=6/7/2009

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2ENT
8.15ENT
COMPPrice=$99.83
ACC=$3.12
BondPrice=$102.95
Finishanswer

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Question4[38marks]
Borrowingcasestudy
(Martin,P.J.,2008,FinancialMathematicsforFinancialManagement,SchoolofCommerce,
UniversityofSouthAustraliaChapter6,page110.)
Youwanttobuy Playstation6,whichnotonlydoeseverythingthat Playstation5 willdo
butalsoitwilltransportyouintorealmsofvirtualfantasybyallowingyoutopluginto
allsortsofspectacularsituationsinthreedimensionalhyperreality.Playstation6connects
directlytoyourbrainsothatthebrainisfooledintothinkingthatyouarepartofthe
action!Theonlydownsideisthatitcosts$8,000.However,thepricehaskeptthewaiting
listatbayandsoyouhaveplentyoftimetoshoparoundforthebestfinance.
YouhavepaidavisittoGadfleesstore,wherethenewplaystationisonspecialatacash
priceof$7,750.Ifyouhavenotgotthecashinhand,theywillezyrentittoyoufortwo
years,atarentalof$388.76permonth,thefirstofwhichispayableimmediatelyandin
effectactsasadeposit.Toencourageyoutoaccepttheezyrentdeal,theywillmatchthis
deposit with an equal value of accessories, which you would otherwise have bought
anyway.Howevertheywishtopointoutthatthespecialcashpriceisnotavailableunder
theezyrentscheme.
Another possibility is to borrow money from Friendlyfinance company. They have a
special personal leasing scheme for hightech equipment. This scheme allows goods
valuedat$8,000tobeleasedforapaymentof$342.65permonth,witha30%residual.
Paymentsaremonthlyinadvancefortwoyears.
A further possibility is to obtain finance from Bigbank, where you have been saving
moneysinceyoustartedworking.Theyhaveaspecialcustomerloyaltyprogramwhere
theywillreduce the normal $200 application fee byhalf andalsoreduce the monthly
accountkeepingfeeof$10byhalf.ThebankisquotinganAPRof18%forthistypeof
loan.Paymentsaremonthlyattheendofeachmonthfor2yearsandtheloanisofacredit
fonciertype.
Bigbankscompetitor,BanditgoBank,hasaloanofferatthesameAPRasBigbank,butits
fees($150applicationand$8accountkeeping)arenotdiscounted.However,theloanhas
a honeymoon offer of a 3% p.a. discount on the interest rate, for the first 3 months,
providedthatyouagreetotransferyourbankingbusinesstothatbank.
Required:Identifythenumberofdifferentfinancingalternativesanddeterminewhichyou
wouldpreferonfinancialgrounds.
Note: 1.Youarerequiredtodrawappropriatetimeline(s)foreachborrowingoption.
2.PrepareanamortisationschedulefortheBanditgoBankscheme.
3.Fullydocumentandexplainallofyourcalculations.
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StartanswerQuestion4
ForGladfeesStore:
Thetermis2yearsor24months.Sincetherepaymentsaremonthly,theimplicitinterestrateis
alsomonthly.

PV=$7750+$388.76

(BGN)

n=24,388.76+/PMT,

..
12322 2324

Calculations:
(BGN)
24n,388.76+/PMT,8138.76PV,COMPi=1.2264%(permonth)
j12=1.2264% 12
= 14.7168%
Effectiveannualrate:
122ndFEFF14.7168=15.75%p.a
ForFriendlyFinanceCompany:
Therepaymentsare$342.65permonthatthebeginningofeachmonthandtheresidual
paymentis$2,400(30%of$8,000),sotheimplicitinterestrateis:
(BGN)

PV= 8,000n=24,388.76+/PMT,

FV$2,400

..
12322 2324
Calculations:
(BGN)
24n,2400+/FV,8,000PV,342.65+/PMT,COMPi=2.1001%(permonth)
j12=2.1001% 12
= 25.2006%
Effectiveannualrate:
122ndFEFF25.2006=28.3251%p.a
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ForBigBank
j12=18%
i=1.5%(permonth)

PV= 7,750n=24i=1.5PMT=?

..
12322 2324
Calculations
24n,7,750+/PV,1.5i,COMPPMT=$386.91
Reductionofapplicationfeefrom$200to$100
Reductionofmonthlyaccountkeepingfeefrom$10to$5
+7,750
..
10012322 2324

386.91

386.91

386.91

386.91 386.91386.91

5.00

5.00

5.00

5.005.00

391.91

391.91

391.91

391.91391.91391.91

5.00

Calculations
24n,7650PV,391.91+/PMT,COMPi=1.72%(permonth)
j12=1.7212
=20.64%p.a.
Effectiveannualrate:
122ndFEFF20.64=22.71%p.a

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ForBanditgoBank:

(1)
MONTH

(2)

(3)

BEGINNING INTEREST= REPAYMENT

PRINCIPAL
(1)1.25%

(4)

(5)

CHANGE
CLOSING
IN
BALANCE=
PRINCIPAL
(1)+(4)
=(3)(2)

$7,750

$96.88

$386.91

$290.03

$7,459.97

$7,459.97

$96.25

$386.91

$293.66

$7,166.31

$7,166.31

$89.58

$386.91

$297.33

$6,868.97

$386.91

$283.87

$6,585.10

INTEREST=
(1)1.5%
4

$6,868.97

$103.04

$6,585.10

etc

6
7

$0.00

8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
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Atthebeginningofmonth4,principalbalance=$6,868.97
Timetorepaythisamount:
6,868.97PV,386.91+/PMT,1.5i,COMPn=20.798months
(20monthlypaymentsof$386.91fromthestartofmonth4plusonepaymentoflessthan
$386.91attheendofmonth24)
Principalpaidatstartofmonth4withpaymentsof$386.91:
20n,386.91+/PMT,1.5i,COMPPV=$6,642.72
Principaloutstandingatstartofmonth4:
$6,868.97$6,642.72=$226.25
Amountoffinalpaymentatendofmonth24:
226.25PV,21n,1.5i,COMPFV=309.30

$150applicationfee,$8monthlyaccountkeepingfee
+7,750

150

386.91

23386.91

24

309.30

8.00

8.00

8.00

394.91

317.30

394.91

7600DATA394.91+/(x,y)23DATA317.30+/DATA

2ndCASHCOMP=1.789%(permonth)
j12=1.78912
=21.47%p.a.
Effectiveannualrate:

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122ndFEFF21.47=23.71%p.a

Amongthefourfinancingalternatives:
Thelowestcost

:Gadfleesstore,15.75%p.a

Secondlowestcost:Bigbank,22.71%p.a
Thirdlowestcost:BanditgoBank,23.71%p.a
Mostexpensive :FriendlyFinancecompany,28.3251%p.a

Finishanswer

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Question5[15marks]
RebeccaWongsuncleisthemanagingdirectorofAjexFinancialPlanninginAdelaide.
RebeccacouldhavetakenajobasajuniorwithAjexFinancialPlanningatthebeginningof
2009foranannualsalaryof$18,000paidinequalinstallmentsattheendofeachmonth.
Insteadshedecidedtospend2009,2010and2011studyingforafinancedegreeatthe
UniversityofSouthAustralia.Heruncleindicatedtherewasahighlikelihoodthathis
companywouldemployherasagraduatefinancialplanneronthe1Januaryoftheyear
aftershefinishedherdegree,atanannualsalaryof$30,000paidbyequalinstalmentsat
theendofeachmonth.Rebeccaturned18on1January2009andintendstoworkuntilher
25thbirthdaywhensheplanstotravelaroundtheworld.
(a)

Ignoringinflation,iftheinterestrateisj12=4%p.a.,whatislikelytobetheextra
value(ifany)atthestartof2009,ofRebeccaobtainingthefinancedegree?

(10
marks)

(b)

Givenyouranswerin(a)discussthefinancialandnonfinancialfactorsthat
Rebeccashouldconsiderinmakingadecisionaboutundertakingthefinancedegree.

(5marks)

Drawappropriatetimeline(s)todemonstrateyourcalculations.
StartanswerQuestion5

Finishanswer
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