Reference no: EM133517852 , Length: word count:2000

Fundamentals of Finance

Learning Outcome 1: Describe, analyse and apply key financial concepts, including the importance and functions of finance in business organization; time value of money; Australian monetary system; risk-return measurement and trade- off in terms of individual asset and portfolio; Australian financial system, as well as global financial markets.

Learning Outcome 2: Utilize tools and technology, such as basic algebra, Microsoft Office software and internet resources, to collect, evaluate and organize financial information.

Learning Outcome 3: Conduct academic and practical analysis on real- world financial issues and supply feasible solutions based onprocessed information.

Purpose: By completing this task, you will develop your skills in researching, understanding, applying, evaluating, and presenting information required of business professionals.

Context

The first task is about applying the discounted cash flow techniques learned in lecture 2 and 3 to make one of the most important financial decisions. That is buying a property. In this exercise, students will have to assess the impact of changing interest rates on the current loan arrangement and evaluate certain solutions.

In the second task, students use their knowledge of the valuation technique to explain a real-life event.

For the final task, students need to show their ability to download data, compute expected return and risk from the data and evaluate different investments based on their risk and return profile.

PART A

John borrowed $300,000 from a bank for buying an apartment three years ago. He has been paying the monthly mortgage repayments (at month end) with an annual fixed interest rate of 6% for three years, and the mortgage has seven years remaining term. Since the inflation has reverted back to the long-term target, the Reserve Bank decided to pause hiking the benchmark cash rate. As such, major commercial banks started to offer special deals to attract new customers. John is considering two deals listed below.

• Bank BNZ: a 10-year mortgage with a fixed interest rate of 5.4% p.a. The monthly mortgage repayments need to be made at the end of the month. A bonus of $5,000 is offered to customers for transferring an existing mortgage from another bank. (Hint: the bonus can be used to reduce the mortgage balance)
• Bank DBA: a 7-year mortgage with a fixed interest rate of 6.2% p.a. The quarterly mortgage repayments need to be made at the beginning of the quarter (the first repayment is due now). A bonus of $4,000 is offered to customers for transferring an existing mortgage from another bank.

Working as an independent financial planner, you are invited to provide advice about the mortgage decision. In particular, please advise the following

a) For the existing mortgage, what is the monthly mortgage payment? What's the remaining balance?

b) What will be the monthly mortgage repayment if John switches to Bank BNZ? Please construct a loan amortization table to demonstrate the mortgage account balance over the term of the mortgage.

c) What will be the quarterly mortgage repayment if John switches to Bank DBA? Please construct a loan amortization table to demonstrate the mortgage account balance over the term of the mortgage.

d) Please advise if should John stay with the current mortgage or switch to a new bank. If switching, which bank should John move to? Please justify the reasons. (Hint: considerations should include: total interest payments and impacts of mortgage repayment on living standard)

Part B

a) As most economies around the world are emerging from the height of the COVID pandemic in 2020, their stock markets have also largely recovered to their pre-pandemic levels. However, the recoveries vary across countries. For example, the Standard and Poor (S&P) 500 stock index, a broad measure for the US stock market, exhibits an increase from 3,380 in February 2020, before the start of the pandemic, to 4,450 by the end of June 2023. A return of 31.66% over the period. In contrast, the ASX 200, an Australian stock market index, shows a much smaller gain from 7,130 to 7,203, or a return of 1.02%, over the same period. Discuss factors in these two markets that might drive the differences in their performance. (Max 500 words)

b) Many economies are currently experiencing high inflation rates after recovering from the COVID pandemic in 2020. For example, the US records an annualized inflation rate of 9.1% during the June quarter of 2022, the highest in three decades. Similarly, Australia recently experiences a record-high inflation rate of 7.8% for the December quarter of 2022, and a slightly mild rate of 7% for the April quarter of 2023. There are several factors that contribute to the rise in inflation. They include stronger demands for goods and services after the recovery, increases in energy costs, geographical tensions and war, and bottlenecks in global supply chains. From an investor's perspective, discuss whether stocks and bonds are a good hedge against higher inflation. Among stocks, what characteristics (or types) of stocks are preferable in the presence of higher inflation? (Max 500 words, 8 marks)

Part C
Download the daily closing share price of General Motors (stock ticker: GM), Tesla (stock ticker: TSLA), and the S&P500 index (Ticker ^SPX) from Yahoo Finance for the period 1 July 2022 to 30 June 2023.
Using historical data,

a) Calculate the expected daily and annual return for General Motors, Tesla, and the S&P500 index. (4 marks)
• Use adjusted close price to calculate returns.

b) Calculate the daily return standard deviation for GM, Tesla, and S&P500. What is the annualized standard deviation? (4 marks)

c) Calculate the beta for GM and Tesla.

d) Over the past year, which one is a better investment? If you have a choice, would you use 24 or 12 months of returns to proxy for the expected return? Explain your reasons.