Assignment Task:

Question 1
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 2
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]

Question 3
a. In terms of share investment define what beta (β) represents.    [2.5 marks]
b. According to au.finance.yahoo.com, APT has a beta of 1.88.  What does this mean?  [2.5 marks]
c. In terms of riskiness how would you compare APT’s beta to the market?   [2.5 marks]
d. Calculate the expected returns for APT using the Capital Asset Pricing Model (CAPM) and the following yields.  [5 marks]
• The risk free rate (Rf) as measured by the yield on Australian 10 year treasury bonds is 1.5% p.a.
• The average return on the market for the past 10 years has been 10.5% p.a.
• Use the APT beta (β) of 1.88.

e. i. Using the CAPM data from (d), create an Excel scatter plot graph to plot the Security Market Line (SML)using the Rf, return on the market and APT.
ii. Based on your CAPM findings, construct a portfolio made up of 40% market and 60% APT. Calculate the estimated return and beta for this portfolio. 


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  • Uploaded By : Alex Cerry
  • Posted on : June 02nd, 2019

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