BHMH2113 Financial Management (FM) 2021/22 Semester 1 Suggested Answer

Question 1
Part 1
a) timeline

0 1 2 20

C C C C C C C C C

b) Annual deposit per year C

FV(A) = C x [((1+r)t – 1) / r]

("#$%)!" '"
$1,000,000 = & × $%
C = $21,852.21

Part 2
Equation. = C + C/(1+r)1 + C/(1+r)2 +… + C/(1+r)t-1

= (1+r) C [1/(1+r)1 + 1/(1+r)2 +… + 1/(1+r)t ]

= (1+r) C x ([1-(1+r)-t ] / r)
Or
= C x ([1-1/(1+r)t ] / r) x (1+r)

Question 2
a) FV = PV x (1 + APR/m)^(m x t)
= $1,000 x (1 + 20%/12)^(12x15)
= $19,595.00

b) 12% = (1+ APR/4)4 – 1) or APR = 4x[(1+12%)^(1/4) – 1]

APR = 0.1149 or 11.49%

Quarterly rate = 0.1149 / 4
= 2.87%

Question 3
a)
é 1 ù
ê 1- ú
C (1 + YTM/2) 2t F
Bond Value = ê ú+
2ê YTM/2 ú (1 + YTM/2) 2t

êë úû

b) Let R = YTM/2
#
("'(#%&)#() $",---
$669 = $40 × + ("#*)#(
*

1
BHMH2113 Financial Management (FM) 2021/22 Semester 1 Suggested Answer

c)
By trial-and-error : any 15%<YTM<17%
(Assume) YTM (APR) = 16%
R = 16%/2 = 8%
#
("'(#%)%)#() $",---
$40 × + ("#$%)#( = $670.23
$%

Or
#
("'(#%#+%/!)#() $",---
$40 × + ("#".%/0)#( = $670.23
".%/0

Question 4
a) P0 = D1/(R – g)
= $20/(0.12 – 0.05)
= $285.71

b)

$0 $5 $0 $5 $0 $5

0 1 2 3 4 5 6

One year interest r = 10%

Two year effective interest rate = R = (1 + 10%)! − 1 = 21%
$"
PV =
#
$"
=
$.&'
= $23.81