Reference no: EM133233577

QUESTION 1 PERSONAL INVESTMENT

You just graduated from university You plan to work for five years and then go backpacking through Asia. You figure that you can save $3,500 a year for the first three years and $5,000 a year for the next two years. These savings will start one year from now. In addition, your family gave you a $2,500 graduation gift. If you put the gift, and the future savings when they start, into an account that pays 7.75% compounded annually, what will your financial "stake" be when you leave for Asia five years from now? Round of to the nearest $1.

2. Commercial bank will loan you $7,500 for two years to buy a car. The loan must be repaid on a monthly basis at the end of each month over two years. The annual interest rate on the loan is 12% of the unpaid balance. What is the amount of the monthly payment?

3. You are considering the purchase of PBL Company's ordinary shares which will pay a $1.25 per share dividend one year from the date of purchase. The dividend is expected to grow at the rate of 4% per year. If the appropriate discount rate for this investment is 14%, what is the price of one share of PBL?

4. You are planning to purchase $1,000 Viti Bonds Issued by the government of Fiji that will mature in 10 years with a coupon rate of 5% per annum. You will receive interest payment on a quarterly basis and the required rate is 5% per annum. Calculate the intrinsic value of this Viti Bond.

5. You plan to buy a gaming system and can afford to set aside $2,150 towards the purchase today. If you can earn 8.0 % per annum, compounded semi-annually, how much can you spend in four years on the purchase?

QUESTION 2 RISK AND RETURNS

1. Differentiate between ex ante and ex post returns. Which periods are relevant In calculating each type of returns.

2. Differentiate between systematic and unsystematic risk. State examples of sources of both types of risk to illustrate your answer.

3. Two common measures of risk are standard deviation and beta. Differentate between these two measures of risk. When is standard deviation an appropriate measure of risk? When is beta an appropriate measure of risk?

4. In today's global marketplace, investors make use of portfolio theory as means to reduce risk on investments. Explain how portfolio theory can be used to reduce risk. Use examples to illustrate your answer.

5. You are planning to purchase share at AMDEX Ltd. You expect a return on the market of 8% and risk-free rate to be 4%. The beta for AMDEX shares is 1.25 and the forecast return for AMDEX share is 8.2%. Would you buy the shares? Explain your answer with relevant calculations.