BUS704: Case Study - Financial Management Time Value of Money and Project Evaluation - Finance Assignment Answers

Internal Code: H_AH_CDEA_BA

Case Study: Financial Management Assignment 

Question 1 

Now that they have accumulated a deposit of $61,000, Rex and his partner Rhonda wish to use the deposit and take out a housing loan to purchase a home. The house costs $666,000. The loan is to be repaid in equal monthly instalments over a term of 25 years.  Rhonda recalls that the interest rate quoted by the bank is an annual nominal rate of 6.5%pa.  Rex has misplaced the paperwork showing the annual effective rate, so you may need to work this out. Interest is added monthly. They would like to know:

1. How much is the monthly repayment?
2. How much interest will be paid in the 104th repayment?
3. How much would Rex and Rhonda owe the bank immediately before making the 200th repayment?

(Answers should be accurate to the nearest dollar)

Question 2 

Jara has just been advised of a bequest of a lump sum of $119,750 from his Aunt’s will, but it is not due to be available for him for fifteen years (at t = 15 he will receive $123,750). Jara wants to receive some cash earlier than this. He is investigating using the bequest to purchase an annuity, in exchange, with the first annual cash flow of the annuity to be received at the end of year 2 (thirteen cash flows).  Assume that the annuity and the lump sum are of equivalent risk and 5.35% pa is the appropriate interest rate (opportunity cost of funds for Jara). How much is the annual cash flow associated with the annuity? (Accurate to the nearest dollar) Question 3  Your supervisor has asked you to do the following calculations:

1. A bank bill with 90 days to maturity has a price of $98,980. What is the effective annual yield implied by this price and maturity? What is the annual nominal yield? Face value is $100,000. Label your answers clearly. Provide a brief explanation of why these rates differ.
2. The All Ordinaries price index opened the year at 5528 and closed at 6223 by the end of the year. The equivalent accumulation index went from 56123 to 65103. What is the annual rate of return on each of these indices? Explain the difference.

Question 4 

Consider the following three bonds: Each bond has a face value of $100 and the current yield is 7% p.a.  Assume all bonds pay annual coupons. Required:

1. Calculate the current price of each bond.
2. Calculate the duration of each bond.
3. Calculate what would be the price of each bond if market interest rates were to rise to 8%.

Question 5

“The Internal rate of return (IRR) technique is reputed to be one of the most reliable project evaluation methods there is.”   Discuss and compare the attributes that give the IRR method its reliability and assess its capacity to price real options. Your answer should be in long-form, and of approximately 1000 words.  Include 4-5 references where appropriate.