Question 1

A-One Hundred-Thousand-dollar ($100,000) loan obtained today is to be repaid in equal annual amounts over the next five years starting at the end of this year. The annual interest rate is 8% compounded annually.

A. What is the annual payment that will completely amortize the loan? (4 marks)

B. Prepare the amortization schedule. (10 marks)

C. How much interest is paid over the life of the loan? (3 marks)

D. What percentage of the payment made at the end of year 4 is repayment of the loan? (3 marks)

Question 2

Lake Inc is faced with several investment opportunities. The projects are mutually exclusive, and he is faced with limited capital. Consider the following cash flows relating to the projects:

Year Machine A Machine B

0 $ (120 000) $ (105 000)

1 40 000 30 000

2 50 000 45 000

3 35 000 30 000

4 42 000 25 000

5 20 000 20 000

The projects cost of capital is 12%.

1. As a financial analyst you have been asked to perform the following task:

i. Calculate the projects payback period. (2 marks)

ii. Calculate the projects Net Present Value (NPV) (12 marks)

iii. Make a recommendation as to which project should be undertaken and why? (2 marks)

B. Briefly explain the following concepts:

i. independent projects

ii. mutually exclusive projects

iii. unlimited funds

iv. capital rationing (4 marks)

Question 3

A. DHEL Corporation issues a 7% coupon interest rate bond with a maturity of 20 years. The face value of the bond, payable at maturity is $1000. The required rate of return on Dhels bond is 8% with interest being paid semi-annually. (7 marks)

B. Gwenyth has just purchased a bond for $1250 that has a maturity of 10 years and a coupon rate of 8.5% paid annually. What is the YTM of the $1000 face value bond that she purchased? (7 marks)

C. i. Explain the relationship between the bonds Yield to Maturity and Bond Price (3 marks)

ii. Identify the THREE (3) features of a bond (3 marks)

Question 3

James Smith is a financial adviser at a reputable financial institution in Jamaica. He was the keynote speaker on financial management at a recent conference and was asked questions on the time value of money. James is asking you to provide the answers to the following questions asked by the attendees at the conference.

A. Sandra is currently saving $1,250 each month at 12% per annum. How much money will be in her account at the end of 5 years? (5 marks)

B. How much money should Anny invest today, so that she will have $10,500 in her bank account in four years time, assuming that the interest rate is 5% compounded annually? (4 marks)

C. A typical credit card agreement quotes an interest rate of 15% per annum. Monthly payments are required. Calculate the actual interest rate that will be paid on such a credit card (i.e. EAR)? (5 marks)

D. You are planning on buying a house in six years time. By that time, the house should cost $5,000,000. Given that the existing interest rate is 8%, how money should be invested at the beginning of each year to accomplish this goal at the end of six years? (6 marks)