- Information
- AI Chat
FM 102 Tutorial 4 Solutions
Personal Finance (FM102)
The University of the South Pacific
Recommended for you
Preview text
Tutorial 4 (Week 5)
Ch
PROFESSIONAL APPLICATION QUESTIONS:
5 What does it mean if a company’s share has a beta of: 0; 1 and 1?
The market average beta is 1 and beta measures the level of sensitivity to systematic risk factors. Therefore, if an individual company has a beta of 1 then it is equally as sensitive to market risk factors as the average company in the market. If a company has a beta of 0 then it has ‘80%’ of the average sensitivity to systematic risk factors. Finally, if a company has a beta of 1 then it has ‘150%’of the average sensitivity to systematic risk factors.
PROFESSIONAL APPLICATION EXERCISES:
5 Real gain from a term deposit * Assume that you invest $75 000 in a 1-year term deposit at 6%. How much is repaid to you at maturity? If inflation is 2%, what is your real gain in today’s prices?
$75,000 x 0 = $4,875 interest plus the $75,000 principal = total repayment of $79 875 in 1 years’ time But, when inflation is factored in: 1 + real = 1 + r nominal/1 + Inflation rate = 1 + 0/1 + 0 = 1. The real rate of return is then 3% or $2,
5 Calculating the price of a 90-day bond * A 90-day $100 000 BAB (Commercial Bill) security yields 6%. Calculate its price.
Price = (100000365) / ((365+(090))) = $98,398.
5 Calculating the price of a 180-day bond * A 180-day $100 000 BAB (Commercial Bill) security is sold for $98 120. Calculate its yield.
Yield = ((100000-98120)/98120) * ((365*100)/180) = 3%
5 Choosing a share to invest in * Fiona is considering investing in either Share Apple or Share Pear. She has the following information.
Economy Share Apple Share Pear Probability Slowing 7% 8%. Steady 19% 17%. Expanding 27% 28%.
What is the expected return on each share?
Economy Share Apple Share Pear Probability Apple x Prob. Pear x Prob. Slowing 0 0 0 0 0. Steady 0 0 0 0 0. Expanding 0 0 0 0 0. Expected Return 0 or 17% 0 or 16%
5 Does the price of a bond change? ** A 6%, 10-year bond pays a coupon once a year and yields 5% per annum. If the yield remains unchanged, what will be its price in 1 year? Assume FV = $100.
One year has lapsed so 9 years remain; n = 9 In one year’s time the PV of the remaining stream of coupon payments is $42 and the PV of the $100 = $64. Thus the PV of the bond after one year is $107. 11
6 * [1 – (1^-9)] / 0 = 42 -------- PV of coupons; C = 6% x 100 = $ 100 * (1^-9) = 64 -------- PV pf FV 107.
5 Expected return ** Camel shares have a beta of 0 and Lion shares have a beta of 1. The risk-free rate is 5% and the equity risk premium is 4%. What is the expected return of each share?
Camel (E)R = .05 + 0(.04) = 8% Lion (E)R = .05 + 1(.04) = 10%
5 Growth and dividends ** A company reports the following data:
Year Payout rate (%)
Return on equity (%) 1 50 11 2 55 16 3 60 15 4 85 9 5 80 12 6 45 18
FM 102 Tutorial 4 Solutions
Course: Personal Finance (FM102)
University: The University of the South Pacific
