+) Present value of a lump sum: PV = FV (1+; Present value of an ordinary annuity: PVA = Ax Present value of an annuity due: PVA = A + A -mxn 1-(1+) () (1-(1+) m. Present value of a perpetuity: PV = m (mxn) -(mxn-1) mxn Future value of a lump sum: FV = PV (1 + ) *** Future value of an ordinary annuity: FVA = Ax ((1+m) m mxn Future value of an annuity due: FVAD = A (1 + 2/3) {[(1+%; Effective annual rate: EAR = (1+)-1 m mxn Price of a coupon bond Coupon x = {1-(1+-) -(mxn) + Face value (1+ -mxn Question 1. Distinguish between primary and secondary financial markets. Discuss the functions of dealers and brokers in those markets. Question 2. An investor is considering the purchase of a zero-coupon bond which has 5 years to maturity and a face value of $1000. The quoted interest rate or yield is 6.95% p.a. (a) If bond-pricing is based in half-yearly compounding, what would be a fair price to pay when buying the bond excluding any brokerage expenses? (a) Assumetheaboveinvestorgoesahead and purchasesthebondandthenholdsitforoneyear, re-selling it when the quoted interest rate is 7.00%. What price should the investor receive, again assuming the bonds is valued on a half-yearly compounding basis and no brokerage expenses are incurred? Question 3. Describe off-balance-sheet activities and financing in the context of commercial and investment banks. Why are such activities attractive to banks? Are such activities currently subject to reserve or capital requirements in Australia? Question 4. What factors enter into the choice between indexed and actively managed funds from the point of view of the investor Question 5. Discuss the how a low interest rate policy (currently in Australia) stimulates the economy to come out of a recession. Question 6. Explain Sharpe Index in context of measuring managed fund's performance. Consider the following two funds: Return % Standard Deviation Market 12.65 Risk-free return 4.14 Fund X 15.76 Fund Z 13.61 12.36 8.9 - Beta 1.25 0.66 Calculate the Sharpe Index of both the funds. Comment on their performance and recommend which fund to invest in. Question 7. The current bank spot rate is AUD/USD 0.63. An importer of machinery based in Australia is required to pay USD 4,000,000 to an American manufacturer in three months' time. Assume the importer's bank can today provide a 3-month forward rate of AUD/USD 0.6328 and obtains the importer's agreement to that rate. 1. (a) How many Australian dollars will be debited to the bank account of the importer in three months' time when the bank on behalf of the importer settles the American supplier with an amount of USD 4,000,000 assuming the spot rate has now moved to 0.645? 2. (b) In your view, why do you think that the importer locks in to this forward rate?