STQA2133 Taxes and Expenses Should Be Ignored Unless Otherwise Indicated

1. 2.

Find limp → ∞ i(p) if i = 10%. Show that

[2 marks]

 Ia n|

 an| d

nv n

[4 marks]


A fund had a value of $300,000 on 1 May 2004. A net cash flow of $50,000 was received on 1 May 2005 and a further $100,000 on 1 May 2006. The value of the fund on 30 April 2005 and 30 April 2006 was $310,000 and $350,000 respectively. a. Calculate the value of the fund on 30 April 2007 if the MWRR (money weighted rate of return) earned on the fund between May 1 2004 until 30 April 2007 is 2% per annum. [3 marks] b. Calculate the TWRR (time weighted rate of return) p.a. earned on the fund over the same period. [3marks] (Total: 6 marks)


The current value of a share in a company is $100. The company is not doing well, and nobody is expecting it to pay out dividend for at least a year. Your brother observes that the one year forward price of the share is $106 and comments that things might not be that bad if traders predict a price rise of 6%. Explain to him why he is wrong, and what the figure 6% represents. Assume your brother understands mathematics, even though his finance knowledge is limited. [(3 marks]


A hairdressers’ chain is opening a large new outlet with an initial cost of $250,000. There will also be a rent of $10,000 per annum payable quarterly in advance for 10 years. The net revenue taking into account all costs other than rent for the first year will be $25,000 and for the second year $50,000. Thereafter, the revenue will rise by 4.5% per annum so that it will be $52,250 in the third year, $54,601.25 in the fourth year and so on. The revenue is received continuously throughout each year. In 20 years time, the outlet will close and will have no further value.

STQA2133 a. A bond having nominal value of $3 million is issued repayable in 15 equal annual instalments at par annually in arrears subject to interest at 8% per annum payable at the end of each of the next 15 years. An investor is subject to income tax at the rate of 50% and capital gain tax at 30%. the interest content of the first instalment and the capital content of the 2nd instalment. [Total: 10 marks] 7. a. Would the NPV of the project be higher or lower? [2marks] (Total: 11 marks) 6.10 t t 4 4 δ(t) = 1 15 t An investor is investing at a continuous rate ρ(t). The size of instalments is $1500. In calculating his capital gain. The force of interest at time t is given by 0. What price should she pay for the loan? [2 marks] c. except the 2nd and 10th instalments whose size is $2500. Suppose a higher interest rate is used. Calculate the net present value (NPV) of the project using effective interest rate of 15% per annum. [9 marks] b. A loan is to be repaid by 12 annual instalments (payable at the end of each year) of capital and interest at 6% per annum. the investor is allowed to inflate his cost at the rate of 1% per annum to the time of . What will her price be then? [5marks] [Total: 11 marks] 8. where ρ(t) = 0 12 15 t 0 t 1 1 t 4 4 t 6 t 6 Find the present value of the investment at time 0 and its accumulated value at time 10. Suppose she is now liable to income tax of 40% per annum. Find the amount of the loan. [4 marks] b. An investor that buys the loan at issue requires a return of 5% per annum.

if he were not to introduce arbitrage in the market? [2 marks] [Total: 7 marks] 10. Assuming no arbitrage opportunities exist. The value of a share in a football club is currently $150. the value of a share in the club will rise to $156. What would be the odds that a bookmaker would give on the club qualifying. The price of a 6 year zero coupon bond [2 marks] [2 marks] [2 marks] [2 marks] e. Calculate the following. [3 marks] b. The club is hoping to qualify in a year’s time for the Semi-Pro League. [2 marks] c. [11 marks] 9. An investor buys one share and invest an amount x into European put options.STQA2133 capital gain. the 1-year forward rate in 3 years time is 7%. the 2-year forward rate in 3 years’ time is 8%. the price of a European put option on the share with strike price $153 is $1. Find the price the investor should pay to realise a net yield of 5%. if you believe this is the case a. the 3-year forward rate in 3 years time is 9% and the 4-year forward rate in 3 years time is 10%. calculate the annual effective interest rate in the country. If this happens. The 5-year spot rate of interest. a. [2 marks] [Total: 10 marks] SELAMAT MAJU JAYA . Otherwise. The 1-year forward rate of interest in 2 years time d.5%. Calculate x so that the investor eliminates all risk. or state you have insufficient information to do so. it will stay at $150. Suppose the 3-year spot rate is 4. The 2-year forward rate of interest in 5 years time c. The price a 6 year bond redeemable at par. b. Moreover. with an annual coupon of 5% payable annually in arrears.

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