You are about to make an offer to purchase a property in Surfers Paradise for $1.8 million. You will pay 50% of this purchase price from your personal deposit. You will cover the rest of the purchase price using a 25-year mortgage loan from a bank. You seek advice from a mortgage broker who suggests the following two loan choices:
|Bank Name||Interest Rate||Interest Compounded||Loan Application Fee|
|Bank A||3.67% p.a.||Fortnightly||$500|
|Bank B||3.67% p.a.||Monthly||$250|
The loan application fee will be added to the amount you borrow from the bank and the repayment will be based on the total amount borrowed (inclusive of loan application fee).
Your repayment frequency per year will be the same as the frequency of interest compounding per year. Thus, if you take the mortgage from Bank A, you will repay at the end of every fortnight. Whereas, if you take the mortgage from Bank B, you will repay at the end of every month.
Considering the above information, please answer the following:
- Determine the amount borrowed if you take the loan from:
- Bank A. [1 mark]
- Bank B. [1 mark]
- Determine the annual repayment if you borrow from:
- Bank A. [3 marks]
- Bank B. [3 marks]
- Prepare an amortization schedule for the loan that involves the lesser annual repayment. [7 marks]
Please note the closing prices of the shares for Telstra Ltd (code: TLS.AX), Commonwealth Bank of Australia (CBA.AX) and AGL Energy Limited (AGL.AX) on 3 January 2017 and 30 January 2018 from Yahoo! 7Finance. Please also note any dividends paid for these companies between these two dates. Please then answer the following.
- Suppose, an investor bought some shares of each of these companies on 3 January 2017 for the respective closing prices. The investor then sold these shares on 30 January 2018 for the respective closing prices. Assume that the investor received any dividends paid between these dates for each of the companies. What are the holding period returns for each of these companies considering the indicated purchase and sell prices and any dividends received? [3 Companies x 1.5 marks = 4.5 marks]
- Assume that the holding period returns for these companies’ shares, as determined in (a), are also the expected returns of these shares for foreseeable future. With such assumption, determine the expected return of a portfolio constituting respectively 40%, 20% and 40% of the investment in the shares of TLS.AX, CBA.AX and AGL.AX. [1.5 marks]
- If the beta of shares of TLS.AX, CBA.AX and AGL.AX are respectively 0.6916, 1.1038 and 0.6133, determine the beta of the portfolio mentioned in (b). [1.5 marks]
- Suppose the risk-free rate of return is 2.67%. Considering the expected return of the portfolio and beta of the portfolio determined respectively in (b) and (c), determine the market risk premium. [2.5 marks]
- You have $5,000 in a term deposit account that provides 2.8% p.a. interest compounded semi-annually. To what amount will your investment grow after 4 years? [2 marks]
- How many years will it take an investment of $10,000 to grow to $30,500 if the investment pays 2.8% p.a. compounded every two months? [2 marks]
- A zero-coupon bond matures in 30 years. The interest is compounded semi-annually and the face value of the bond is $1,000. The market interest rate for similar bonds is 3.99%. What is the value of this bond? How many of these bonds sold will raise $1m? [2.5 marks]
- For a rapidly growing British company, the growth rate forecast suggests an expected 27% per annum for the next two years and 15% for the subsequent year (i.e. 3 years from now). At the end of 3 years, the growth rate settles to an expected 8% per annum and remain so for the near future. The company expects to pay a dividend of £220 per share next year. Assume that the investors’ required rate of return for the company’s shares is 17%. Determine the value of this company’s share. Is the share a desirable purchase if its market price is £3,500 per share? [£ = Pound Sterling] [3.5 marks]
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