COAF 1105 ASSIGNMENT 1(GROUP ASSIGNMENT)
INSTRUCTIONS TO CANDIDATES
1. Answer ALL questions.
2. Show all workings.
3. Write neatly and legibly.
QUESTION ONE
(a) An investor pays $400 every quarter in advance into a 10-year savings account.
Calculate the accumulated balance at the end of the term if the interest rate is 12%
per annum convertible monthly. [4 marks]
(b) Given an effective discount rate of 6% p.a., calculate:
(i) The effective annual rate of interest. [2 marks]
(ii) The equivalent force of interest. [2 marks]
(iii) The quoted annual rate of interest convertible monthly. [3 marks]
(iv) The quoted annual rate of discount convertible monthly. [3 marks]
(c) Find the total present value as at 1 June 2015 of payments of $250 on 1 October
2015 and $300 on 1 January 2016, valued at an interest rate of 12% p.a. effective.
[3 marks]
(d) Find the present value of $5000 received 7 years from today given the following
interest rate quotations:
(i) A quoted rate of interest of 12% p.a. convertible quarterly. [2 marks]
(ii) A quoted rate of discount of 12% p.a. convertible half-yearly. [2 marks]
(e) You borrow $10 000 for 6 months from a local bank that charges a flat establishment
fee of 3% and an interest rate of 24% per annum convertible half-yearly. Calculate
the effective annual cost of the loan if the loan is repaid as a lump-sum, with
interest, at the end of the 6 months. [4 marks]
Total [25 marks]
QUESTION TWO
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(a) A machine depreciates by 20% in the first year, then by 15% per annum for the next
5 years and by 5% per annum thereafter. Find its value after 8 years if its initial price
is $850,000. [4 marks]
(b) Given the choice between either investing at an interest rate of 12% per annum
convertible monthly or investing at an interest rate of 12.2% convertible half-yearly,
which investment option would you take? Why? [3 marks]
(c) Let X denote the present value of an annuity consisting of 10 payments of $3,000
each payable at the beginning of each year starting immediately, valued using an
interest rate of 8% pa convertible quarterly. Let Y denote the present value of an
annuity consisting of 40 payments of $600 each, payable at the end of every quarter
starting immediately, valued using an interest rate of 8% pa convertible half yearly.
Calculate the ratio X / Y. [8 marks]
(d) Calculate the fair purchase price of an annuity that promises to pay $400 at the end
of every month for 10 years, with the first payment due to be made at the end of the
first month of year 6. The rate of interest is 10% p.a. effective. [5 marks]
e) A property development company in Bulawayo is selling serviced residential stands
at $27 000 each. Buyers are given 18 months to pay the purchase price by way of
equal monthly instalments of $1 500 each at the end of every month. What is the fair
cash price for each stand if the rate of interest is 12% p.a. effective? [5 marks]
Total [25 marks]
QUESTION THREE
(a) A recently-married couple takes out a 10-year mortgage loan for $30 000 at 12% p.a.
convertible monthly. The mortgage loan is repayable in equal monthly installments of
principal and interest.
(i) What is the gross monthly installment? [5 marks]
(ii) Construct the loan amortization schedule for the first 3 months. [6 marks]
(iii) How much interest is paid in the last 4 years? [5 marks]
(b) Sam Chihuhu recently graduated from LSU with a first class degree in finance. He
has taken out a one-year loan for $5 000 to buy basic furniture for his new residential
apartment. The bank charges interest at 12% p.a. convertible monthly. Sam will pay
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$X at the end of the first month, increasing by $20 every month thereafter until the
loan is fully repaid at the end of the 12th month. Calculate the value of X.[4 marks]
(c) You have invested $150 000 in a 10-year project that is expected to generate net
cash flow of $12 000 at the end of the first year, increasing by a constant dollar
amount, Q every year thereafter. If the required return on the project is 12% p.a.
effective, how much must be the annual dollar increment in net cash flow so that the
project breaks even (i.e. has a net present value of zero)? [5 marks]
Total [25 marks]
QUESTION FOUR
(a) You borrow $5 000 from your bank for 5 years to start a small clothing business in
town. The bank charges interest at a fixed rate of 24% p.a. convertible monthly.
There are two repayment options: Option 1- Monthly payments of interest only and
one balloon repayment of principal at the end of the loan term; and Option 2- Equal
monthly installments of principal and interest.
Required:
(i) Calculate the level monthly installment that would amortize the loan over
the 5-year term. [4 marks]
(ii) How much extra interest will you pay under Option 1 compared to Option
2 for the first 2 years? [4 marks]
(iii) Calculate the minimum number of payments required to repay 50% of the
loan principal under Option 2. [4 marks]
(b) You have invested $120 000 in a project that is expected to generate net cash flow
of $21 238 at the end of each year. If the required return on the project is 12% p.a.
effective, how long will it take for the project to break even (i.e. have a net present
value of zero)? [3 marks]
(c) An investor buys a 91 day Treasury bill at a discount of 6% p.a. and holds it for 55
days before selling it to another investor at a discount of 5.4% p.a. The first investor
invests the proceeds from the sale of the Treasury bill in a 91 day negotiable
certificate of deposit (NCD) with 36 days remaining to maturity, a deposit rate of
6.0911% and a yield of 5.4298% p.a. NB: Assume a 365 day year and face value
of $1000.
Required:
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(i) Calculate the Treasury bill holding period yield for the first investor.[3 marks]
(ii) How does the annualized yield for the first investor over the entire 91 days
compare to the annualized yield he would have earned if he had held the
Treasury bill to maturity? [4 marks]
Total [22 marks]
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