Question 3 (15 marks, 5 marks for each part)
You have had your offer of $600,000 on a house accepted and have arranged with the bank for a 30 year mortgage equal to 90% of the sale price. The agreement calls for monthly repayments and the bank will charge a nominal annual interest rate of 7%.
- If the first payment is due one month after the loan is received, calculate the amount for the regular installments?
- After the 36th payment the interest rate increases to 10% p.a. Assume you have decided to maintain the monthly repayment. If you choose to pay out the mortgage after the 36th payment, what is the payout figure?
- If you choose not to pay out the mortgage after the 36th payment, how much longer will it take you to pay out the loan?
Question 4 (15 marks, 5 marks for each part)
The following table provides the share return forecasts and associated probabilities for Advanced Limited and Bright Limited. Answer parts a. to c. using the information provided. Detailed worked solutions must be presented in your answers, including formulae used, progressive and final answers to the questions.
Advanced Limited Bright Limited
Return (%) Probability (%) Return (%) Probability (%)
15.5 30 20.3 20
12.0 30 10.5 50
9.5 40 7.0 30
- Calculate the expected return on each share.
- Calculate the variance and standard deviation for each share.
- Suppose a portfolio comprised of 60% investment in Advanced Limited and 40% investment in Bright Limited can be constructed. An analyst has estimated that the correlation coefficient of the two-asset portfolio is -0.50, calculate the return and standard deviation of this portfolio. Compare your answer with those reported in parts a. and b. and draw your conclusion.
This task will assess your ability to be able to meet the following learning outcome:
- be able to employ analytical techniques, using contemporary electronic aids appropriate to financial decision making