Finance Assignment


  1. How much will the ASFA comfortable annual retirement income be at the time Alice retires? (Assume it will rise at the same rate as average inflation.) (0.5 marks)
  1. What lump sum will Alice need in superannuation at retirement to receive the annual income (in nominal terms) calculated in part i)? (Assume an ordinary annuity.) (0.5 marks)
  • What amount will Alice need to put into superannuation at the end of each year until retirement in order to have the lump-sum calculated in ii)? (0.5 marks)
Age Amount Deposited Interest (12%) Cumulative Savings
30 £136,298.34 £136,298.34
31 £136,298.34 £16,355.80 £152,654.15
32 £152,654.15 £18,318.50 £170,972.64
33 £170,972.64 £20,516.72 £191,489.36
34 £191,489.36 £22,978.72 £214,468.08
Total Savings £865,882.57
  1. Now assume that Alice is 50, not 30, and has been working full-time for 20 years. She has lived a great lifestyle until now, spending all her disposal income after paying down a mortgage on her home. Recalculate iii) above assuming the same retirement income and lump-sum as calculated in parts i) and ii) but now 15 years to retirement. (0.5 marks)
  1. Comment on the difference in your results at part iii) and iv). (0.5 marks)

In part (iv), Alice pays less per month for a longer duration, 15 years to be precise. Because 15 years is exactly 3 times 5 years, one would expect her to pay 3 times less what she initially paying. However, the interest is also compounded annually and as such, the amount she pays for the 15 year period is significantly less.


  1. If this growth rate can be expected to continue beyond 2017, what is your prediction for the number of passengers flying domestic routes in China in 2020? (0.5 marks).
  1. What is the CAGR for a Chinese domestic airline that carried 20 million passengers in 2012 and 28 million passengers in 2014? If this CAGR is expected to continue, what market share do you predict for the airline in 2020? (1 mark)


  1. What is the effective annual rate on your loan? (0.5 marks)


  1. ii) Assume you can claim the interest on this loan as a tax deduction against the rental income you receive from the property. How much interest will you be able to claim as an annual tax deduction in the first financial year (1 July 2014 to 30 June 2015) and in the fifth financial year? (2 marks)

  2. Explain which component(s) of market interest rates account for high-yield bonds having
    such large spreads over the yield on a Treasury bond of equivalent maturity and why a
    ‘positive outlook for business activity’ would have an impact on those spreads. (1.5 marks)
  3. What would happen to the prices of high yield bonds if Lonski’s prediction is correct? Illustrate your answer with a numerical example for a high-yield bond with 10 years to maturity and 8% semi-annual coupon payments. Assume a 10 year Treasury bond yields
    14% p.a. (2 marks)

Dupont Chart

Date Adjusted Closing Prices Returns
Company Stock All Ordinaries Price Index Company Stock All Ordinaries Price Index
30/06/2014              3.39        5,382.00
01/07/2014              3.63        5,623.10 6.84% 4.38%
01/08/2014              3.75        5,624.60 3.25% 0.03%
01/09/2014              3.66        5,296.80 -2.43% -6.00%
01/10/2014              3.70        5,505.00 1.09% 3.86%
03/11/2014              3.81        5,298.10 2.93% -3.83%
01/12/2014              3.70        5,388.60 -2.93% 1.69%
01/01/2015              3.67        5,551.60 -0.81% 2.98%
02/02/2015              4.03        5,898.50 9.36% 6.06%
Average Returns 2.16% 1.15%
Average Returns Standard Deviation Beta Risk Free Rate Market Risk Premium
Company Stock 2.16% 0.0435 1.29 2.40% 6.40%
All Ords Price Index 1.15% 0.0419

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