Accounting hw

	Arab Open University
	Faculty of Business Studies
	BE220 – Money and Banking
	TMA - 2nd Semester 2014

Please read these instructions carefully. However, contact your tutor in case any difficulties with the instructions.

Cut-off Date:	30 April 2014
Word Limit:	1500 Words for all of the TMA ≈ 5 pages
Citation:	Harvard Referencing Style
Paper Size:	A4, 80g*m² For Printed Hard Copy.
Font:	Times new roman
Point:	12
Margins:	1 Inch for each side
Space between lines	Double space
Cover page:	PT3 Form (the attached form)

Your name, personal identifier, course and assignment numbers must appear at the top of each sheet. Start each question in the assignment on a new page. Any extended text should ideally be word-processed, but, diagrams and accompanying notes may be hand drawn and you can use large sheets of paper.

COMPLETING AND SENDING YOUR ASSIGNMENTS:

When you have completed each of your TMA, fill in an assignment form (PT3), taking care to enter correctly your personal identifier course and assignment numbers. Each TMA and its PT3 form should be sent to your tutor with your name, address and personal identifier written on it. Keep a copy of your TMA for security. The copy that is eventually returned to you after the assessment process will have comments written on it. All assignments are treated in strict confidence. It is very important that you ensure that your tutor receives each assignment by the cut-off date given. If you feel that you are unable to meet the cut-off date for any of the TMA, please contact your tutor as soon as possible to discuss your situation.

REFERENCING:

It is imperative that each student cites their references in their TMAs properly. To do so, each student ought to use the Harvard Referencing Style. Students who fail to comply with this rule will be penalized by point deduction. Also, student should try to use recent references instead of old ones.

PLAGIARISM:

If you submit an assignment that contains work that is not your own, without indicating this to the marker (acknowledging your sources), you are committing ‘plagiarism’. This might occur in an assignment when:

-Copying word-for-word directly from a text.

-Using text downloaded from the Internet.

-Copying or downloading figures, photographs, pictures or diagrams without acknowledging your sources.

-Copying from the notes or essays of a fellow student.

-Copying from your own notes, on a text, tutorial, video or lectures that contain direct quotations.

Plagiarism may occur inadvertently due to inexperience. So read carefully all the course-specific study advice that you receive in your mailings, especially statements concerning plagiarism and how to reference your sources.

You can score very well on this assignment using the materials provided as part of the course. However, if you have access to other sources of information such as reference books or the Internet, you may find it interesting to look there for additional relevant information. Very short extract from published sources may be included in context but you should avoid copying significant amounts of text from other authors. You should note that whilst the internet can provide lots of information much of it is not refereed and should be treated with caution.

If you take material from the course or elsewhere and incorporate it in your answer word-for-word, you must indicate where you have taken it from. Not to do so it termed ‘plagiarism’ and is regarded as an infringement of copyright. To attempt to pass off such work as your own is cheating. You must therefore acknowledge all your sources of information. Plagiarism will lead to a loss of marks and extensive plagiarism could mean that you fail this TMA. For more information about what constitutes plagiarism or cheating you should refer to the current assessment handbook.

Plagiarism rate and marks deduction: Based on the real plagiarism rate shown by TurnItIn® plagiarism system, tutor will deduct these rates of marks:

Note: Consider the possibility of exaggerated total plagiarism rate as a result of: 1- PT3 form similarity. (Roughly 20%) 2- Case study & its questions similarity. (Roughly 25% ) 3- Student’s submission the same TMA twice. (Roughly 100%)	Plagiarism Rate	Marks Deduction
	1 - 20 %	0 %
	21 - 50 %	10 %
	51 - 75 %	45 %
	76 - 85 %	65 %
	86 - 100 %	100%

National Lottery

In 2014 Joseph won the lottery ticket prize with the amount of USD 1million, finally the long sweet dream become reality. It is possible now for Joseph to be free of debts, he can payback (North Bank) his loan by which he bought the first “pledged” house; it was (including interests) USD 40000, 20 years, 5% annual interest rate, only 5 years pass away. He can purchase a new car after sad grief days with his old one. Joseph was cashier in local company, with annual salary was USD 24000 in 2013; this means that he must pay 10% of his income to the Tax Department.

Just a few days after euphoria of winning, Joseph began wise thinking, in a way to decide what he can do with $1million he just received. Fortunately, he still keep good relation with Mary, his friend, she is working as financial consultant in Palm City Inc., immediately he called her and arrange meeting with promise of complex calculations. Mary prepared summary list reflects some of financial facts, hoped to help in any investment decision Joseph may take. Three hours later, after long in-depth discussion regarding the numbers and percentages mentioned in the list, she asked him to study the provided data well and to call her later to analyze critically any resulted decisions he may take. The list that delivered to Joseph was this table:

Description	Value	Dividends	Risk Rating
Rubber Co.	Stock price	$ 8	$ 0.16 per share	AAA
Stainless Co.	Stock price	$ 4	$ 0.08 per share	BB-
Real-estate. Co.	Stock price	$2	Initial issuing / Underwriting
Lawyer fees / Per hour	$ 100
Lawyer fees / Per contract	$ 1000
Inflation rate	Year 2014	10 %
Government bond	Default free	5%		AAA+
Global Corp.	Commercial bond	15%		CCC+
Palm City Inc.	Annual Return	12%		A+

Questions:

1. Which company you advise Joseph to invest in: Rubber Co. or Stainless Co.? Justify why? (10 marks)

2. What is the value of real interest rate in each last three investment opportunities? Can we consider any of them as loss? (10 marks)

3. Once Joseph starts his investment activities, he may experience potential risks, shall he inform his bank (North Bank) about? Why? If he did not, what this situation called? (20 marks)

4. What is better for Joseph, to payback his house bank loan (remaining $30000)? Or invest this money? Justify why? (20 marks)

5. Suppose that Joseph invested his $1million in the commercial bond of the Global Corp., they promised to pay him 230000 dollars annually for 5 years, calculate the present value (PV) for this investment? (20 marks)

6. What are the advantages and disadvantages of investing in stock market? (20 marks)

The End of the TMA

PT3 Form	Arab Open University Tutor Marked Assignment (TMA)
Academic Year : 2013-2014	Semester: Spring, the 2nd
Branch: Kuwait	Program: Business
Course Title: Money and Banking	Course Code: BE220
Student Name:	Student ID:
Section Number: 1	Tutor Name: Jarrah Almansour

-

Awarded Mark:
Mark details
Allocated Marks	Questions No.	Q1	Q2	Q3	Q4	Q5	Q6	Total
	Weight	10	10	20	20	20	20	100%
	Marks
Deducted Mark:
Allocated Marks	Criteria	Presentation	Sources	Citation	Word Count	Total
	Weight	5	5	5	5	20%
	Marks	-	-	-	-	-
Student’s Total Mark 100%
Real Plagiarism rate (% )	Penalty /Marks Deduction (% )	-
Student’s Net Mark =

Declaration: I hereby declare that the submitted TMA is my own work and I have not copied any other person’s work or plagiarized in any other form as AOU instructions specify.

	Student Signature ………………………..
Tutor Name: Jarrah Almansour	Tutor Signature:	Date returned: / /2014
Tutor’s Feedback

Mohammed Monther Alayoub

112016

Be220 assignment

Section 101

Question (1)

· I advise Joseph to invest in Rubber Co. and I will explain my answer in the coming paragraph

Rubber Co: 0.8/4=2%

Stainless Co: 0.16/8=2%

So the return are equal both stocks, so now we have to see the risk rating and compare as we have given in the table we can observe that the Rubber Co. get AAA although Stainless Co. take BB- .

Therefor and due to the receipt of the same dividend return percentage I will chose Rubber Co. for the better risk rating.

Mohammed Monther Alayoub

112016

Be220 assignment

Section 101

Question (2)

The Value of the real interest rate is the following :

Government bond 5% - 10% = -5% loss

Global corp. 15% - 10% =5% gain

Palm city 12% - 10% =2% gain

So the higher value is the Global corp.

In the following we will calculate the tax return

-5% x (1-0.1) = 4.5% - 10% = -5.5%

15%x(1-.01) -10% = 3.5%

12% x (1-0.1) = 10.8 – 10% = 0.8%

Mohammed Monther Alayoub

Mohammed Monther Alayoub

112016

Be220 assignment

Section 101

Question (3)

Joseph have to inform the bank and he may face interest rate risk when investing in bonds and the meaning of interest rate risk is risk that arises for bond owners from fluctuating interest rates. How much interest rate risk a bond has depends on how sensitive its price is to interest rate changes in the market. The sensitivity depends on two things, the bond's time to maturity, and the coupon rate of the bond , and market risk is the risk of losses in positions arising from movements in market prices, although he should inform his bank due to increase in credit risk and its mean risk that a borrower will default on any type of debt by failing to make required payments.[1] The risk is primarily that of the lender and includes lost principal and interest, disruption to cash flows, and increased collection costs. The loss may be complete or partial and can arise in a number of circumstances.[2] For example:

· A consumer may fail to make a payment due on a mortgage loan, credit card, line of credit, or other loan

· A company is unable to repay asset-secured fixed or floating charge debt

· A business or consumer does not pay a trade invoice when due

· A business does not pay an employee's earned wages when due

· A business or government bond issuer does not make a payment on a coupon or principal payment when due

· An insolvent insurance company does not pay a policy obligation

· An insolvent bank won't return funds to a depositor

· A government grants bankruptcy protection to an insolvent consumer or business

To reduce the lender's credit risk, the lender may perform a credit check on the prospective borrower, may require the borrower to take out appropriate insurance, such as mortgage insurance or seek security or guarantees of third parties. In general, the higher the risk, the higher will be the interest rate that the debtor will be asked to pay on the debt.

Mohammed Monther Alayoub

112016

Be220 assignment

Section 101

Question (4)

Joseph should invest the remaining amount that he have so he can pay out his debt by profit and gain from the investment, the ability to grow an investment by reinvesting the earnings - was referred to by Albert Einstein as "the eighth wonder of the world." The magic of compounding allows investors to generate wealth over time, and requires only two things: the reinvestment of earnings and time. For example a single $10,000 investment at age 20 would grow to over $70,000 by the time the investor was 60 years old (based on a 5% interest rate). That same $10,000 investment made at age 30 would yield about $43,000 by age 60, and made at age 40 would yield only $26,000. The longer money is put to work, the more wealth it can generate in the future.

Mohammed Monther Alayoub

112016

Be220 assignment

Section 101

Question (5)

Pmt = 230,000

I/Y = 15%

N 5 years

Present value = 77996

Mohammed Monther Alayoub

112016

Be220 assignment

Section 101

Question (6)

a. The advantage of investing in stock markets is the following

· There are five main benefits of stock investing.

· Take advantage of a growing economy - As the economy grows, so do corporate earnings. That's because a economic growth creates more income, which boosts consumer demand, which drives more revenues into companies' cash registers.

· Best way to stay ahead of inflation - Historically, stocks have averaged an annual return of 10%, which is higher than the average annual inflation rate of 3.2%. (Source: CNN,Investing Basics. Compare stocks, inflation and gold prices in Gold Price History.

· Easy to buy - You can purchase stocks through a broker, a financial planner and even online. For more, see How Does the Stock Market Work?

· Can make money in two ways - First, most investors intend to buy low and then sell high. This is especially attractive to both day traders, who hope to take advantage of short-term trends, and buy-and-hold investors, who expect to see the company's earnings and stock price grow over time. Second, many investors prefer a regular stream of cash while the stock prices rises moderately. Many companies, which aren't growing as fast but are still profitable, pay dividends.

· Easy to sell - If you need your cash in a hurry, you can sell your stock at any time. However, because prices are so volatile, you might be forced to take a loss.

b. Also there is disadvantage of investing in stock markets is the following

· Could lose much or all of your investment - If a company does poorly, investors will sell, sending the stock price plummeting. When you sell, you will lose your initial investment. The only consolation is that your will get an income tax break if you lose money. Unfortunately, you also have to pay taxes if you make money. See capital gains tax.)

· Paid last if company goes broke - Preferred stockholders and bondholders get paid first.

c. Requires a lot of time - You've got to research each and every company to determine how profitable you think it will be before you buy stock. You've got to learn how to read financial statements and annual reports, and follow your company's developments in the news. You've also got to follow the stock market itself, as even the best company's price will fall in a market correction, market crash or bear market.

d. Emotional rollercoaster - Stock prices rise and fall every second. Individuals have the tendency to buy high, out of greed, and sell low, out of fear.

e. Competing against professionals - Institutional investors and traders have more time and knowledge to invest. Find out how to gain an advantage as an Individual Investor.