Reference no: EM13696931

Question 1:

Assume today is 3 December 2009. Helen is 30 years old and has a Bachelor of Business. She is currently employed as a personal banker for ANZ banking group in Sydney and earns $38000 a year that she anticipates will grow at 3% per year. Helen hopes to retire at age 65 and has just begun to think about her future.

Helen has $75000 that she recently inherited form her Uncle John. She invested this money in a five year term deposit with her bank. She is considering whether she should further her education and would use her inheritance to pay for it.

Helen has investigated a couple of options in this regards, and is asking for your help as a financial planner. She has already been accepted to both of these programs and could start either one soon.

The first option that Helen is considering is attaining a certification in IT. The certificate would automatically promote her to a personal manager in ANZ. The base salary for personal manager is $10 000 more than what she currently earns and she anticipates that this salary differential will grow at a rate of 3% a year as long as she keeps working. The certificatein IT program requires the completion of 20 online courses including a score of 80% or better in the exam at the end of each course. She has learned that the average length of time required to finish the program is one year. The total cost of the program is $5000, with payment due when she enrols in the program. Because she will do all the work for the certification in her own time, Helen does not expect to lose any income during the period of study.

The second option is going back to University to study for a Mater of Professional Accountant (MPA). With an MPA degree, Helen expects to be promoted to managerial position. The managerial position pays $20 000 a year more than her current position. She expects that this salary differential will also grow at a rate of 3% a year for as long as she keeps workings.

The evening program will take three years to complete, costs $25 000 per year, with payment due at the beginning of each of the 3 years she is at the university. Because she will attend classes in the evening, Helen doesnot expect to lose any income while she is studying for her MPA.

Note:
• In answering the following questions you should show your workings and or the calculator key strokes used.
• Round your answers to two decimal places
• You are permitted to make assumptions in arriving at your answer provided that you do not assume away details that have been provided as part of the question

Requires:

1, Determine the interest rate Helen is currently earning on her inheritance by going to the Reserve Bank of Australia ( www.rba.gov.au) and click on the Cash Rate link in the key information section. Choose the market rate at 3 December 2009. Use this interest rate as the discount rate for the remainder of the problem

2. Create a timeline of expected cash flow for the following 3 scenarios in Excel for Helen's current situation, as well as the certificate program and MPA degree option , using the following assumptions:

a) Salaries for the year are paid only once, at the end of the year.

b). The Salary increase becomes effective immediately upon graduating from the MPA or being certified. However although the increases become effective immediately, the salaries are paid at the end of the year, the first salary increase will be paid exactly one year after graduation or certification.

3. Calculate the Present Value of salary differential for completing the certification program. Subtract thecost of the program to get the NPV ( net present value) of undertaking the certification program.

4, Calculate the present value of the salary differential for completing the MPA. Calculate the present value of the cost of the MPA. Based on your calculations, determine the NPV of undertaking the MPA.

5, Base on your answer to question 3 and 4, what advice would you give to Helen? What if the two program are mutually exclusive? If Helen undertakes one of the programs, there is no further benefit to undertaking the other program. Would your advice change?

Question 2:

Emily Jill Rogers is planning to buy a house but needs assistance as to how she will finance the purchase. She has supplied you with some information and asked you to help her with several calculations.

• Price of house $550,000
• Emily's personal savings $150,000
• Her annual salary $96,000
• Bank rates of interest
o 7% p.a. floating
o 7.5% p.a. fixed for 3 years

Note:

• In answering the following questions you should show your workings and or the calculator key strokes used.
• Round your answers to two decimal places
• You are permitted to make assumptions in arriving at your answer provided that you do not assume away details that have been provided as part of the question

Required:

a) How much will Emily need to pay per month if she borrows the $300,000 needed to buy the house assuming a 20 year mortgage at the floating rate? (assume a table mortgage with principal and interest being repaid throughout the term of the loan)

b) How much will her monthly instalments be if she opted for the fixed term rate instead?

c) Explain to Emily the implications of the two options calculated in questions 2a and 2b.

d) Assuming that Emily is only able to afford monthly repayments of $2,100, what is the maximum amount that she will be able to borrow? (assume a 20 year term using the fixed rate)

e) Assuming Emily chooses the option calculated in question 2b, what will she need to do at the end of year three and what will her principal outstanding balance be at that time?

f) Explain to Emily the difference between effective annual percentage rate and annual percentage rate. Which one is more important and why?

Question 3:

a) How is a bond like a loan?

b) How does an investor receive a return from buying a bond?

c) Does a bond's yield to maturity determine its price, or does the price determine the yield to maturity? Explain it.

d) Why the longer-term bonds more sensitive to changes in interest rates than short-term bonds?