Question1

Calculatethenominalrateofinterestperannumconvertiblehalfyearlythatisequivalentto:
(i) aneffectiverateofdiscountof0.5%permonth;
[2]
(ii) anominalrateofdiscountof6%perannumconvertibleevery2years;
[2]
(iii) anominalrateofinterestof6%perannumconvertiblequarterly.
[2]
[Total6]

Question2
Thefollowingtablegivesinformationconcerninganinvestmentfund:

Year 2007 2008 2009 2010

Valueoffundat30
th
June 1,250,000 1,360,000 1,450,000
Netcashflowreceivedon1
st
July 50,000 40,000 30,000
Valueoffundat31
st
December 1,000,000 1,300,000 1,390,000 1,500,000

(i) Calculate,tothenearest0.1%,theeffectiveannualtimeweightedrateofreturn(TWRR)
achievedbythefundduringtheperiodfrom31
st
December2007to31
st
December2010.
[4]
(ii) Itcanbeshownthattheeffectiveannualmoneyweightedrateofreturn(MWRR)achieved
bythefundoverthesameperiodisdifferentfromtheanswerobtainedin(i).
ExplainbrieflythekeydifferencesbetweentheTWRRandtheMWRR.
[2]
[Total6]

Question3
Afixedinterestloanstockbearinginterestatarateof4%perannumpayablehalfyearlyinarrearsis
issuedbyacompany.
Thestockistoberedeemedat110%onanycouponpaymentdatefrom10to15yearsafterissue,
withtheexactdateofredemptionatthediscretionofthecompany.
Aninvestor,liabletoincometaxat25%andcapitalgainstaxat40%,purchasesthestockatoutsetat
apricewhichgivesaminimumnetyieldtoredemptionof4%perannumeffectiveaftertax.
Calculatethepriceper100nominalpaidbytheinvestor.
[6]
Question4
Aloanof10,000wasissuedonthe1
st
January2008,andwasrepaidatparexactlytwoyearslater.
Interestwaspaidontheloanatarateof8%perannumpayableannuallyinarrears.
ThevalueoftheRetailPricesIndexovertheperiodwasasfollows:

Date RetailPricesIndex
1
st
January2008 140.0
1
st
January2009 145.0
1
st
January2010 148.0

Calculate,tothenearest0.1%,therealrateofreturnperannumearnedbythelender.
[5]

Question5
Apropertydeveloperisconstructingablockofoffices.
Itisanticipatedthattheofficeswilltake6monthstobuild.Thedeveloperwillincurcostsof
400,000atthestartoftheprojectandafurther30,000attheendofeachmonthduringthe
buildingperiod.
Itisexpectedthatrentalincomefromtheofficeswillbe120,000perannum,receivedmonthlyin
arrearsfromtheendofthebuildingperiod.Inaddition,maintenanceandmanagementcostsare
expectedtobe20,000perannum,payablemonthlyinarrearsfromtheendofthebuildingperiod.
Usinganeffectiverateofinterestof1%permonth,findthediscountedpaybackperiodforthe
project.
[7]

Question6
AninvestorisconsideringthepurchaseofanumberofordinarysharesinABCplc.
Dividendsfromthesharearepayablehalfyearly.Thenextdividendisduein6monthsandis
expectedtobe5pencepershare.
(i) Usingarequiredrateofreturnof4%perhalfyeareffectiveandanestimatedrateoffuture
dividendgrowthof1%perhalfyear,findthemaximumpricethattheinvestorshouldpay
fortheportfolioof1,000shares.
[4]
(ii) Asaresultofthecompanyannouncingthelaunchanewproduct,theinvestorincreasesthe
estimatedrateoffuturedividendgrowthto2%perhalfyear.
Calculatethemaximumpricetheinvestorshouldnowpayfortheportfolioof1,000shares
andcommentonyouranswer(comparedwiththatin(i)above).
[2]
(iii) ThecompanyhasjustappointedanewChiefExecutiveand,asaresult,theinvestordecides
toincreasetherequiredrateofreturnto5%perhalfyeareffective.
(a) Brieflyexplainwhyitmightbeappropriatefortheinvestortoincreasethe
effectiverateofinterestinthiscase.
[1]
(b) Usingtheoriginalestimateddividendgrowthrateof1%perhalfyear,calculate
themaximumpricethattheinvestorshouldnowpayfortheportfolioof1,000
sharesandcommentonyouranswer(again,comparedwith(i)above).
[2]
(iv) Theinvestorfearsthat,asaresultofchangeingovernmentpolicy,inflationratesinthe
economyarelikelytoriseinfuture.Asaresult,heincreasesboththeestimatedrateof
dividendgrowthandtherequiredrateofreturnby2%perhalfyeareffective(i.e.to3%and
6%perhalfyearrespectively).
(a) Brieflyexplainwhyitisappropriatefortheinvestortoincreaseboththefuture
dividendgrowthrateandtherequiredrateofreturninthiscase.
[2]
(b) Calculatethemaximumpricethattheinvestorshouldnowpayfortheportfolio
of1,000sharesandcommentonyouranswer(again,comparedwith(i)above).
[2]
[Total13]

Question7
Acompanyisconsideringaprojectwhichrequiresanimmediatepaymentof2,000,000anda
furtherpaymentof4,450,000inoneyearstime.
Incomefromtheprojectwillbereceivedcontinuouslyfromthestartofthesecondyearatarateof
1,500,000perannum,andthisrateisexpectedbe3%greaterineachsubsequentyearuntilthe
projectfinishesattheendofyear10.
Calculatethenetpresentvalueoftheprojectat10%perannumeffective.
[6]

Question8
Thefollowingspotratesofinterestwereobservedattime 0 t = :

term, n years 1 2 3 4 5 6
spotrateperannum,
n
y 4.0% 4.5% 5.0% 6.0% 6.5% 6.5%

(i) Calculatethetwoyearforwardrateofinterestattime 2 t = ,
2,2
f .
[2]
(ii) Calculatethe6yearparyieldattime 0 t = .
[3]
[Total5]

Question9
2,000isinvestedinabankaccountwhichpaysinterestattheendofeachyear.
Therateofinterestisfixedrandomlyatthebeginningofeachyearandremainsunchangeduntilthe
beginningofthenextyear.Therateofinterestapplicableinanyoneyearisindependentoftherate
applicableinanyotheryear.
Duringthefirstyeartheeffectiverateofinterestperannumwillbeoneof4%,7%or9%withequal
probability.Duringthesecondyear,theeffectiverateofinterestperannumwillbeeither5%with
probability0.7or8%withprobability0.3.
Assumethattheinterestearnedisreinvestedintheaccount.
(i) Calculatetheexpectedaccumulatedamountinthebankaccountattheendoftwoyears.
[3]
(ii) Calculatethestandarddeviationoftheaccumulatedamountinthebankaccountattheend
oftwoyears.
[5]
[Total8]

Question10
Theforceofinterestattime t , ( ) t o ,isgivenby:
( )
0.03 0.005 for0 2
0.045 0.0025 for2< 10
0.02 for 10
t t
t t t
t
o
+ s s

= s

>

(i) Calculatetheaccumulatedamountattime 8 t = ofaninvestmentof10,000madeattime

1 t = .
[4]
(ii) Calculatethepresentvalueattime 0 t = ofapaymentstream,paidcontinuouslyfromtime
10 t = totime 12 t = ,underwhichtherateofpaymentattime t is ( )
0.02
100
t
t e = .
[6]
[Total10]

Question11
Aloanisrepayablebyannualinstalmentsinarrearsfor20years.Theinitialinstalmentisofamount
5,000,witheachsubsequentinstalmentdecreasingby200.
Theeffectiverateofinterestovertheperiodoftheloanis4%perannum.
(i) Calculatetheamountoftheoriginalloan.
[3]
(ii) Calculatethecapitalrepaymentinthe12
th
instalment.
[3]
(iii) Afterthe12
th
instalment,theborrowerandlenderagreetoarestructuringofthedebt.
The200reductionperyearwillnolongercontinue.Instead,futureinstalmentswillremain
atthelevelofthe12
th
instalmentandtheremainingtermofthedebtwillbeshortened.
Thefinalpaymentwillthenbeareducedamountwhichwillclearthedebt.
(a) Calculatetheremainingtermoftherevisedloan.
(b) Calculatetheamountofthefinalreducedpayment.
(c) Calculatethetotalinterestpaidduringthetermoftheloan.
[8]
[Total14]

Question12
(i) Anirredeemablefixedintereststockpayscouponsof c perannum,withthenextcoupon
paymentdueinexactlyoneyearstime.
Theeffectiveinterestrateis i perannum.
Showthatthediscountedmeantermofthestockis:
( )
1
1 i
i
t = +
[4]
(ii) Alargeinstitutionalinvestorhasliabilitiesof20milliondueattime 5 t = and30million
dueattime 10 t = .
Thecorrespondingassetsconsistofazerocouponbondredeemableinexactlyoneyears
timeandanirredeemablestockpayingannualcouponsof3%perannumwiththenext
couponbeingdueinexactlyoneyearstime.
Iftheeffectiverateofinterestis4%perannum,calculatethenominalamountofeachasset
thattheinstitutionalinvestorshouldholdinorderthatRedingtonsfirsttwoconditionsfor
immunisationagainstsmallchangesintherateofinterestaresatisfied.
[8]
(iii) Withoutundertakinganyfurthercalculations,commentonwhetheritislikelythatthethird
conditionforimmunizationisalsobeingsatisfied.
[2]
[Total14]