1. a. Name and describe an example of an annuity that that is commonly encountered by businesses in the Australian economy. (1 Mark)

b. Calculate the Present Value of the following Annuity Payment.

$12,000 paid in arrears for 25 years. Assume that the current yield curve shows a 25 year bond rate of 6% p.a. (1 Mark)

Tip: Look at Topic 3. Seminar 3 notes explain this and then use the spreadsheet called NPV to check your calculations.

2. It is common in Australian Finance for Annual Percentage Rates (APRs) to be quoted when discussing the level of interest.

a. Why would it be better for interest rates to be quoted as Effective Annual Rates (EAR) instead? (1 Mark)

b. Calculate the EAR in the following situation: APR 7%, Interest Calculated/Paid Monthly. (1 Mark)

3. What are the two components of Holding Period Return?

Calculate the HPR of the following share investment in NAB. Assume that the Share was held for exactly 3 months and one dividend was received with any attributable franking credit included in the total of the Dividend received. Purchase Price $23. Dividends received $2.50. Sale Price $26.50.

Show the total profit amount, and the HPR as a percentage gain on the investment. (2 Marks)

4. Calculate the Expected returns on the following investment.

In one year the probabilities of the following outcomes are as follows. A return of $25,000 is 30 % likely. A return of $50,000 is 40 % likely. A return of $100,000 is 20% likely. A return of $10,000 is 10% likely. (1 mark)