Bobby Brown Case Study - Reserve Bank of Australia - Accounting and Finance Assignment Help

Assignment Task:

Question 1:  [20 marks]
This question relates to topics 1 and 3 and LO6.
a. You plan to take a trip around the world in five (5) years and predict you will need $50,000 for all anticipated costs.  You do not have any current savings but your bank has offered you 3% p.a. compounded monthly on future savings. Assuming you have five (5) full years to reach your goal, calculate the payments you will have to make each month to save the target amount of $50,000.

b. Bobby Brown has just turned 48 years of age and has come to you seeking retirement advice.  During your discussion the following information was communicated:
• Bobby wants to retire on his 65th birthday;  
• he currently has $198,000 in his superannuation fund;
• he contributes $800 per fortnight into his super account; and
• the investment returns are 8% p.a.

In addition to the super fund, Bobby has also invested $100,000 today (his 48th birthday).  The investment is in a direct share portfolio which produces average returns of 6% p.a. after tax.  The investment returns are paid every 6 months.

When Bobby retires at the age of 65, he will use his super and non-super investments to purchase an ordinary annuity which will provide him with a regular monthly income stream until he reaches life expectancy at 83 years of age.   The rate of return for the annuity will be 4% p.a.

Bobby is concerned that he may live beyond life expectancy and wishes to ensure he has a residual value of $150,000 remaining in his annuity when he turns 83.  He will use the money to supplement the aged pension.

Task
i. What will be the value of Bobby’s financial assets when he retires at age 65?   Present all calculations to support your answer.  [5 marks]
ii. What will be the annual pension amount that Bobby will receive until age 83?  Returns are compounded annually at year end. Present all calculations to support your answer.  [5 marks]

Question 2 [20 marks]
This question relates to Topic 1 and LOs 2, 3 and 5.
a. Tony is applying for a new home loan.  He wishes to borrow $250,000 and make his repayments monthly. The interest rate the bank has quoted him is 4% per annum and the inflation rate is 3% pa.                                                                                                                   
i. Is this the real rate of interest or the nominal rate of interest?    [1 mark]
ii. Explain the difference between the real rate of interest and the nominal rate of interest.      [3 marks]
iii. Calculate the real rate of interest and the nominal rate of interest for Tony.    [3 marks]
iv. Is it possible for the real rate of interest to equal the nominal rate of interest? Explain.   [3 marks]
b. The Reserve Bank of Australia has announced a 0.25% decrease in the cash rate.  What effects does this have on the economy and the financial markets?  Provide examples of who might benefit from this decrease and those who may not.

Question 3 [20 marks]
The question relates to topics 1 - 5 and LOs 5 and 6.

a. GenTech Ltd needs to save $50 million to expand its production lines in six years’ time. There are three investment options to consider:
• ABC bank: monthly payments due at the end of each month.  The interest rate is 3.5% p.a. compounding monthly.
• XYZ bank: annual payments due at the end of each year.  The interest rate is 3.55% p.a.
• CDC bank: payments to be made at the end of year 2, 4 and 6.  The interest rate is 3.56% p.a.

i. Calculate the payments for each of these options, (show all workings).      [7.5 marks]
ii. Indicate which one you prefer.  You will need to justify your decision     [2.5 marks]

b. i. Is ‘risk’ a bad thing? Define risk in terms of investment.      [3 marks]
ii Explain the Australian dividend imputation credit system and how it applies in Australia. 

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