Finance Assignment

Requirements:

In answering the following two questions, marks will be awarded for:

            (a)        Clarity of discussion and analysis;

            (b)        Correctness of content materials;

            (c)        Logical flow of the discussion involved;

            (d)        Quality of communication, e.g. correct spelling, grammar and sentence structure, proper page numbers and correct referencing used.

This assignment must be fully typed, one sided with double-line spacing using 12 font Arial.  Anyreferences and quotations taken from other authors must be properly acknowledged.

Total Word From question 1 to 3 (All answer include 1000-1200 words)

Question 1.

Stephen Rogers, a 25-year old graduate, wishes to retire at age 65. To supplement other source of retirement income, he can deposit$2000 each year into an individual retirement fund. The fund will be invested to earn an annual return of 10%, which is assumed to be attainable over the next 40 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)    If Stephen makes annual end-of-year $2000 deposits into the fund, how much will he have accumulated by the end of his 65^th year?

b)    If Stephen decides to wait until age 35 to begin making annual end-of-year $2000 deposit into the fund, how much will he have accumulated by the end of his 65^th year?                                                                             

c)    Using your findings in parts a) and b), discuss the impact of delaying making deposits into  the fund for 10 years ( age 25 to age 35) on amount accumulated by the end of Stephen’s 65^th  year.

d)    Rework parts a), b) and c), assuming that Stephen makes all deposits at the beginning, rather than the end, of each year. Discuss the effect of beginning-of-year deposit on the future value accumulated by the end of Stephen’s 65^th year.                                                                                  

Question 2.

Roger borrowed $15 000 at a 14% annual rate of interest to be repaid over 3 years. The loan is amortized into three equal annual end-of-year payments.

Note:

·         In answering the following questions you should show your workings and or the calculator key strokes used.

·         Unless otherwise instructed, calculations should be for the borrowed amount including and excluding the contingency reserve.

·         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)   Calculate the annual end-of-year loan payment                 

B)   Prepare a loan amortization schedule showing the interest and principal breakdown of each of the three loan payments.     

C)   Explain why the interest portion of each payment declines with the passage of time.                                                                      

Question 3

Answer the following questions

Required

a)    Differentiate between a nominal annual rate and an effective annual rate (EAR). Define annual percentage rate (APR) and annual percentage yield (APY).                                                                                          

b)    Financial ration analysis is often divided into five areas: liquidity, activity, debt, profitability and market ratios. Differentiate each of these areas of analysis from the others. Which is of the greatest concern to creditors?      

c) What relationship between the required return and coupon interest rate will cause a bond to sell at a discount? At a premium? At a discount?                                                                                                                

D) As a risk-average investor, would you prefer bonds with short or long periods until maturity? Why?