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FIM - End-Of-Chapter Questions - ResultsFIM - End-Of-Chapter Questions - ResultsFIM - End-Of-Chapter Questions - ResultsFIM - End-Of-Chapter Questions - Results...

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Financial Institutions, Instruments and Markets 9th edition Christopher Viney and Peter Phillips

CHAPTER 5 Corporations issuing equity in the share market 2 Disney Corporation is considering the re-release of its classic film library. The project will involve an investment of $78 000 000 and will produce a positive cash flow of $25 000 000 in the first year. The cash flows will increase by 10 per cent each year thereafter for another five years (i.e. the project runs for six years). At that stage the project will cease. The company expects a rate of return of 17 per cent on this type of project.

NPV = $32 491 841 IRR = 31%

CHAPTER 6 Investors in the share market 3 An investor holds the following shares in an investment portfolio: JB Hi-Fi

$6500

beta 1.20

Telstra

$8600

beta 0.95

ANZ Bank

$7900

beta 1.05

b. What is the portfolio’s beta?

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 c. If the investor added to the portfolio with the purchase of $5000 worth of shares in AGL Energy (beta 1.60), what impact would that purchase have on the risk structure of the portfolio?  If the investment in Myer is added to the portfolio the weighted average beta of the portfolio becomes: 1.1523 6 Condor Limited is listed on the ASX and earns part of its income in Australia, and part overseas, where it is required to pay tax overseas. The Australian company tax rate is 30 per cent. Condor Limited can provide dividend imputation to Australian shareholders from Australian tax paid. Assume the shareholder’s marginal tax rate is 37 per cent, plus Medicare levy of 2 per cent. The investor receives a 70 per cent partly franked dividend of $12 700.00. c. Calculate the income tax payable by the investor.

• If dividend payments are expected to  Calculation of tax payable: $2 628.90 remain constant, such that D0 = D1 = D2 = …. Dn, the share price can be calculated 11 Caltex Australia Limited pays a constant based on a perpetuity. • The present value of a perpetuity is the manager is considering purchasing the shar cash flow divided by the relevant discount manager requires a return of 15 per cent onrate:P0 = D0 / rs funds manager would be willing to pay for th• Caltex is expected to pay a constant dividend of $0.60 cents per share, and the funds manager’s required rate of return is P = $4.00 15%, therefore: 0= 0.60/0.15=$4.00 12 The last dividend paid to shareholders by Vicinity Centres was $0.10 per share. Assume that the board of directors of the company plans to maintain a constant dividend growth policy of 7.00 per cent. An investor, in evaluating an investment in the company, has determined that she would require a 12 per cent rate of return from this type of investment. If the current price of Vicinity shares in the stock market is $4.00, should the investor purchase the shares? (Show your calculations.) P = $2.14

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13 AGL Energy Limited has declared a $0.33 cents per share dividend, payable in one month. At the same time the company has decided to capitalise reserves through a onefor-three bonus issue. The current share price at the close of business on the final cumdividend date is $16.15. b. Calculate the theoretical price of the share after the bonus issue and the dividend payment have occurred.  Calculate the theoretical share price: $11.86 14 Alumina Limited has a share price of $2.82. The company has made a renounceable rights issue offer to shareholders. The offer is a three-for-ten pro-rata issue of ordinary shares at $2.60 per share. b. What is the price of the right? 16.92 cents c. Calculate the theoretical ex-rights share price: $ 2.77

CHAPTER 8 Mathematics of finance: an introduction to basic concepts and calculations

b. An investor makes a $3500 deposit from 1 June to 31 August at 4.25 per cent per annum simple interest. How much interest will the investor earn? $37.49 c. A bank accepts a $5000 term deposit to mature in 547 days and pays 5.75 per cent per annum. How much interest will the bank have to pay? $430.86

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d. A bank accepts a deposit of $6500 for a term of one year and 90 days, with an interest rate of 5.95 per cent per annum simple interest. Interest is payable six monthly and at the maturity date. What amount will be paid at each interest date and at the maturity date? (Assume the deposit is made on 1 July 2016.) i. First six-monthly interest payment (184 days): $194.96 ii. Second six-monthly interest payment (181 days): $191.79 iii. Amount paid at maturity: $6,595.36 e. What is the future value of $10 000 invested for 270 days at a current yield of 6.50 per cent simple interest? $10,480.82

b. What amount did an investor lodge in a term deposit that has a maturity value in 270 days of $27 470.34 if the term deposit earns 4.95 per cent per annum simple interest? $26,500.00 c. A customer has received an invoice for $23 000 due in 30 days. The supplier offers a 2.50 per cent per annum discount for payment within 7 days. If the customer accepts the early payment offer, what amount would be due? $22,952.84 d. An investor currently holds a financial asset that has a maturity value of $125 000 in 125 days. The investor decides to sell the asset today at a current market yield of 9.45 per cent per annum. What is the present value of the asset? 121,081.44 e. A company issues a bank bill with a face value of $1 million and a term to maturity of 180 days at a yield of 8.25 per cent per annum. The company discounts the bill today. What amount will the company raise? $960,905.62 4 Yields: b. You are advised by a bank that a deposit of $5000, with a term to maturity of 180 days, will have a maturity value of $5215. What is the yield on the deposit?

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8.72% p.a. c. You have $3000 to invest in a term deposit and your selection of the term is totally dependent on the higher per cent per annum yield. Which of the following deposits would you select? Invest in option (ii) at a yield of 10.2949% per annum.

d. What is the yield on a discount security bought at $97.80 (per $100 face value) and held 65 days to maturity? 12.3539% p.a. 5 Holding period yield (HPY): b. A 90-day discount security with a face value of $500 000 is purchased to yield 8.23 per cent per annum. After 55 days it is sold at a yield of 8.45 per cent per annum. What is the HPY for the original purchaser? 8.02% p.a. c. An existing discount security, with a face value of $750 000 and with 60 days to maturity, was purchased at a yield of 8.15 per cent per annum. After 21 days it is sold at a yield of 8.50 per cent per annum. What is the rate of return earned over the 21-day holding period? 7.43% p.a. d. The new holder of the security in (c) above sells it into the money market after 7 days at the current yield of 7.90 per cent per annum. 1) What is the holding period yield received by the seller? 11.17% p.a.

FV=PV*(1+r)^T b. What is the accumulated value of a $3150 deposit made for four years with a yield of 5.25 per cent per annum, compounding annually? $3,865.44

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c. What is the future value of the deposit described in (b) if interest is compounded quarterly? $3,880.78 d. What is the maturity value of a $5000 deposit made for one year and 60 days with a yield of 7.45 per cent per annum, compounded annually? $5,436.34

PV=FV/(1+r)^T a. What is the present value of $5000 due in five years at an annually compounded rate of 6.33 per cent per annum? $3,678.67 b. Calculate the present value of $7000, due in three years at 5.40 per cent per annum compounded quarterly. $5,959.54 c. Calculate the present value of $7000, due in three years at 5.40 per cent per annum, compounded monthly. $5,955.25

b. What is the present value of an annuity of $2500 paid annually over four years, with the first payment to be received at the end of the first year, and with a yield currently of 6.30 per cent per annum, compounded annually? $8,603.59 c. What is the present value of an annuity of $1250 paid at the end of each half-year over four years, with yields currently of 6.30 per cent per annum, compounded half-yearly? $8,719.36

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e. What is the present value of an annuity of $1250 paid at the beginning of each halfyear over four years, with yields currently of 6.30 per cent per annum, compounded halfyearly? $8,994.02

CHAPTER 9 Short-term debt 2 A fencing contractor purchases a range of fencing materials from the local hardware store in order to build a number of paling fences for a housing project. The hardware store provides its standard trade finance facility to the fencing contractor. c. Calculate the opportunity cost of an invoice that specifies the following conditions: 1.25/10, n/30. 23.10% p.a. 7 A company issues a bank-accepted bill to fund a short-term business project. The bill is issued for 180 days, with a face value of $1 500 000 and a yield of 9.87 per cent per annum. What amount will the company raise to fund the project? $1,430,377.83

FV x 365/(365 + (yield(0.0...)/100 x days to ma) )

8 After 43 days, the bank bill in Question 7 is sold by the original discounter into the secondary market for $1 447 326.50. The purchaser holds the bill to maturity. What is the yield received by:

(sell - buy)/buy) x (36,500/after..days) a) the original discounter of the bill? 10.0579% b) the holder of the bill at the date of maturity? 9.6961%

(($1 500 000 – $1 447 326.50)/$1 447 326.50 137) x 36,500/(180-43) 10 Santos Limited issues 90-day P-notes (commercial paper) as part of a three-year underwritten facility established with an investment bank syndicate. The commercial paper has a face value of $29 million and is discounted at a yield of 9.20 per cent per annum.

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d. paper raise? $28,356,729.53

; that is, what amount will the sale of the commercial

face value x days in year days in year + (yield / 100 x days to maturity)

12 A customer of a bank has $500 000 in surplus funds that need to be invested for a short period of time. The bank offers to sell a 180-day negotiable certificate of deposit to the customer at a yield of 5.34 per cent per annum. Calculate the face value of the CD and advise the customer of the dollar return on the CD. ANSWER

 Face value: $513,167.00  The dollar return to the discounter, assuming the CD is held to maturity is $13 167.00.

In this question we know the price, yield and term to maturity of the discount security, but need todetermine the face value payable to the holder at maturity. The formula is:S = P(1+rt)S = 500,000 (1+0.0534 x 180/365)= $513 167.12

CHAPTER 10

The dollar return to the discounter, assuming the CD is held to maturity is $13 167.12.

Medium- to long-term debt

6 As the owner of a small architectural firm, you approach the Commonwealth Bank to obtain a term loan so that the firm can buy a new computer-aided drawing machine. The bank offers your company a loan of $28 500 over a three-year period at a rate of interest of 8.65 per cent per annum, payable at the end of each month. Calculate the monthly loan instalment. R = $901.65 per month 7 The architectural firm owner in Question 6 also approaches the National Australia Bank to obtain a quote on the loan facility. The competitor bank (NAB) also offers the company a fully drawn advance of $28 500 over a three-year period at a rate of interest of 8.65 per cent per annum, but payable in advance at the beginning of each month. Calculate the monthly loan instalment. Explain why the instalment payment is different from the instalment in Question 6. R = $895.20 9 After three years of excellent business growth, a local mattress manufacturer decides to expand and purchase new business premises costing $1 250 000. In addition,

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establishment expenses of 0.50 per cent of the purchase price, plus estimated legal expenses of $15 000 are payable. The total cost to purchase the property will be financed by $225 000 of the firm’s own funds plus a mortgage loan from ANZ Bank. The bank offers a mortgage loan at 8.15 per cent per annum. The loan will be amortised by monthly instalments over the next 12 years, payable at the end of each month. What is the amount of each monthly instalment? R = $11,411.39 13 Woodside Petroleum Limited has issued $100 million of debentures, with a fixedinterest coupon equal to current interest rates of 7.70 per cent per annum, coupons paid half-yearly and a maturity of 10 years. b. After three years, yields on identical types of securities have risen to 8.75 per cent per annum. The existing debentures now have exactly seven years to maturity. What is the value, or price, of the existing debentures in the secondary market? Present value of the face value: $54,909,711.40 Present value of coupon stream: $39,679,453.97 Price of the debenture: $94,589,165.37 14 On 1 January 2019 a company issued five-year fixed-interest bonds with a face value of $2 million to an institutional investor, paying half-yearly coupons at 8.36 per cent per annum. Coupons are payable on 30 June and 31 December each year until maturity. On 15 August 2020 the holder of the bonds sells at a current yield of 8.84 per cent per annum. Calculate the price at which the institutional investor sold the bonds. Present value of the face value: $1,477,556.76 Present value of coupon stream: $1,971,632.04 Price (adjusted for elapsed day): $1,993,066.50

CHAPTER 15 Foreign exchange: the structure and operation of the FX market 10 An FX dealer is quoting spot USD/SGD1.2750–56. b. transpose the quotation. SGD/USD0.7839–0.7843

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11 A men’s fashion label in the UK is exporting goods to Denmark. In order to ascertain the firm’s exposure to foreign exchange risk, the company needs to calculate the GBP/DKK cross-rate. An FX dealer quotes the following rates: USD/DKK

5.4031–37

USD/GBP

0.6063–69

Calculate the GBP/DKK cross-rate: GBP/DKK 8.9028-9126 12 A Swiss manufacturer generates receipts in USD from its exports of chocolate to America. At the same time, the company imports cocoa from Nigeria, incurring commitments in NGN (naira). Rates are quoted at: USD/NGN

162.2520–29

CHF/USD

1.1310–19

Calculate the CHF/NGN cross-rate. CHF/NGN 183.50-69 13 A German importer has entered into a contract under which it will require payment in GBP in one month. The company is concerned at its exposure to foreign exchange risk and decides to enter into a forward exchange contract with its bank. Given the following (simplified) data, calculate the forward rate offered by the bank. Both countries use a 365day year; assume 30-day contract. EUR/GBP (spot):

0.8260–67

One-month German interest rate:

4.75% p.a.

One-month UK interest rate:

3.25% p.a.

EUR/GBP 0.8250

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CHAPTER 18 An introduction to risk management and derivatives 11 An importer has entered into a USD contract that will require payment of USD10 million in one month. The importer wishes to lock in an exchange rate today in order to protect its future profit margins. An investment bank gives the following quote: AUD/USD0.7340–47 12:17. Calculate the importer’s one-month forward exchange rate. Forward rate AUD/USD0.7352-64 14 Iluka Resources has recently issued $15 million in floating rate notes in order to fund the next stage of an exploration project. The notes pay an annual coupon of BBSW plus 150 basis points. The company approaches Commonwealth Bank to establish an intermediated vanilla swap. The swap contract sets a fixed rate of 7.60 per cent per annum and a reference rate of the 12-month BBSW. b. At the first interest payment date, the BBSW is 7.85 per cent per annum. Draw and fully label a diagram showing all the applicable interest rates at that date.

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CHAPTER 19 Futures contracts and forward rate agreements 8 A business plans to borrow approximately $40 million in short-term funding through the issue of commercial paper in three months’ time. The business does not have a view on what is likely to happen to interest rates over the next three months, but it would be very satisfied if it could obtain its funding at the current yield. a. Using the following data, show how 90-day bank-accepted bills futures contracts can be used to hedge the interest rate risk to which the business is exposed. Show the calculation and timing of all transactions and cash flows (ignore transaction costs and margin requirements). Today’s data: i. current commercial paper yields 6.00 per cent per annum ii. 90-day bank-accepted bills futures contract 93.75. Data in three months: iii. commercial paper yields 7.00 per cent per annum iv. 90-day bank-accepted bills futures contract 93.25.

Cash or Physical Market

Futures Market

Today: The company expects to borrow $40 million in three months; it notes that current yields are 6.00%, but is exposed

Today: Sell 40 90-day bank accepted bills futures contracts at 93.75 (yield 6.25%) Use discount securities formula

if yields rise before the commercial paper is issued

P

=

=

365 × $40 million 365 + (0.0625 × 90) $39 392 917.37

pay initial margin

Three months time: Sell commercial paper with a face value of $40 million – yield 7.00%

Three months time: buy 40 contracts at 93.25

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P = $39 321 303.53

P = $39 345 145.86

Hedge outcome: cost of borrowing increased over threemonth period by $95 543.12 profit received from futures transactions is $47 771.51

profit received from the futures transactions is $47 771.51

borrower was not able to perfectly hedge risk because of initial and final basis risk

the profit is used to offset the additional cost of borrowing in the physical market when the company issues commercial paper

b. What is the effective cost of funds achieved with this hedging strategy? What would the cost of funds have been had the hedge not been put in place? Explain your answer, showing your calculations. 𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑓𝑢𝑛𝑑𝑠

= = =

=

𝑛𝑒𝑡 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑓𝑢𝑛𝑑𝑠 365 [ ]× 90 𝑡𝑜𝑡𝑎𝑙 𝑎𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑓𝑢𝑛𝑑 𝑎𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑏𝑖𝑙𝑙𝑠 − 𝑓𝑢𝑡𝑢𝑟𝑒𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 365 [ ]× 90 𝑎𝑚𝑜𝑢𝑛𝑡 𝑏𝑜𝑟𝑟𝑜𝑤𝑒𝑑 + 𝑓𝑢𝑡𝑢𝑟𝑒𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 $678,696.47 − $47,771.51 365 [ ]× 90 $39,321,303.53 + 47,771.51 6.49% 𝑝𝑒𝑟 𝑎𝑛𝑢𝑢𝑚

9 A funds manager forecasts that it will need to invest $100 million in approximately 90 days. The manager wishes to receive a return as close as possible to the medium-term interest rates currently available, but expects that rates will have fallen by the time the funds are available for investment. b. Calculate the price of a three-year Treasury bond futures contract quoted at 96.50. P = $107,061,247.00 10 A funds manager currently manages a diversified Australian share portfolio valued at $250 million. The manager decides to use the S&P/ASX 200 Index futures contract to

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manage an exposure to a forecast decline in share prices. The S&P/ASX 200 Index is currently at 5500. In three months’ time the S&P/ASX 200 is at 5150. a. Today: set up a hedging strategy to manage the risk exposure. 1. The price of the futures contract equals the S&P/ASX200 Index multiplied by $25 2. To establish the hedging strategy, the funds manager can sell 1800 S&P/ASX200 futures contracts 3. Value = 1800 x 5500 x $25

= $247 500 000

4. Note: the manager wishes to protect a selling position in the future so will sell futures contracts today 5. Pay initial margin. b. In three months’ time: close out the open position. 1. To close an open position, take opposite contracts 2. Buy 1800 S&P/ASX200 futures contracts 3. Receive return of margin payments and futures strategy ...