Assessment instructions
Work your way through the following information to understand and achieve the requirements for this assessment.
Use an Excel spreadsheet to clearly display the formulas employed and a detailed, step-by-step solution. You are encouraged to utilise Excel functions to verify your solutions.Note: Solutions solely relying on Excel functions will not be accepted.
Important: Write clearly and concisely. Unnecessarily long, meandering answers will be marked down as they indicate a lack of understanding of the key issues involved in answering the questions.
Do not be overly concerned with visual presentation – a simple document will do. You are not preparing a report for the purpose of this assessment.
Question 1
(Total marks 5+5+5)
When you were born your parents set up a bank account in your name with an initial investment of $5,000. You are turning 21 in a few days and will have access to all your funds. The account was earning 7.3% for the first seven years, but then the rates went down to 5.5% for six years. The economy in the early 2000s and your account earned 8.2% three years in a row. Unfortunately, the next two years you earned only 4.6%. Finally, as the economy recovered, your return jumped to 7.6% for the last three years.
• How much money was in your account before the interest rates fell to 4.6%?
• How much money is in your account now?
• What would be the balance of your account now if your parents made another deposit of $1,200 at the end of year 13 to compensate you for the lower interest earned?
Question 2
(Total marks 2+4+4)
You are considering buying a Back Bay two-bedroom apartment for $800,000. You plan to make a $200,000 down payment and take a $600,000 30-year mortgage for the rest. The interest rate on the mortgage is 6% monthly APR. Payments are due at the end of every month.
• What is the effective annual rate?
• What is the monthly payment?
• Suppose that exactly five years have passed, interest rates are now 5% and you decided to re-finance your mortgage. You have to pay the remaining portion of the principal on the mortgage to the bank. Exactly how much do you owe to the bank at that point?
Question 3
(Total marks 3+3+4)
You currently have two personal loans which you wish to consolidate into just one loan. For the first loan you agreed to pay $500 per month for seven years at an interest rate of 10% per annum compounded monthly. While for the second loan you agreed to pay $400 per month for 10 years at an interest rate of 8% per annum compounded monthly.
You have been given the opportunity to consolidate the two loans into one, where the consolidated loan is for five years at an interest rate of 12% per annum compounded monthly. What is the monthly repayment on the consolidated loan?
Question 4
(Total marks 3+3+1+3)
You are given the following information about the possible returns from an investment.
Return (%) Probabilities
12% 0.15
9% 0.60
6% 0.25
Calculate the:
• expected return,
• variance of the return,
• standard deviation of the return, and
• probability that the return is less than or equal to 8%.