X15_wk02

# X15_wk02 - MACQUARIE UNIVERSITY Faculty of Business and...

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© 2015 Dept of Applied Finance and Actuarial Studies, Macquarie University (All rights reserved) Week 2 1 MACQUARIE UNIVERSITY Faculty of Business and Economics ACST201: Financial Modelling WORKSHOP PROBLEMS (Week 2) PRICES & YIELDS: SHORT TERM FINANCIAL INSTRUMENTS 1. A company borrows funds for 15 days at 8% pa to buy a 180-day bank bill at a yield of 14.1% pa. At what yield must the bank bill be sold after 15 days for the company to break even on the 15-day investment? 2. XYZ Pty wishes to raise funds by issuing \$500,000 in bank bills for 180 days. The current yield on 180-day bills is 12.5% pa. Calculate the real cost to XYZ (expressed as a rate of simple interest pa) of raising the funds if XYZ has to pay fees and charges of \$6,815.75 on the issue date. 3. An arrangement has been made for a 270-day investment involving three consecutive 90-day \$500,000 bank bills. The maturity proceeds of the first bill will be rolled over into the second bill, and the maturity proceeds of the second bill will be rolled over into the third bill. The purchase yields for the three 90-day bills will be 12.1%, 12.3% and 12.5% respectively. What will be the annualised (simple interest) yield on the 270-day investment? Assume that any surplus cash after 90 and 180 days can be invested (for 180 or 90 days respectively) to earn 10% pa simple interest. COMPOUND INTEREST: REVISION OF PRESENT VALUE & BOND PRICES 1. Find the present value, at 11.5% pa effective (compound interest), of a payment of \$100,000 due in eighteen (18) months’ time. 2. Find the present value, at 6.5% pa effective (compound interest), of an annuity of \$200 payable at the end of each quarter for 4 ½ years. 3. Find the price of a 12% 10-year Treasury bond to yield 11% p.a. 4. Find the price on 11 August 2008 of a 12.5% 15 September 2015 Treasury bond to yield 13%. 5. Find the price on 10 March 2008 of an 8% 15 March 2012 Treasury bond to yield 11.3%.

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© 2015 Dept of Applied Finance and Actuarial Studies, Macquarie University (All rights reserved) Week 2 2 MACQUARIE UNIVERSITY Faculty of Business and Economics ACST201: Financial Modelling SAMPLE SOLUTION: Workshop Problems (Week 2) PRICES & YIELDS: SHORT TERM FINANCIAL INSTRUMENTS 1. Borrow & buy Sell & repay |_________________________________________| ←ίίίίίίίίίί 15 days ίίίίίίίίίίί→ Comment: Today the company borrows (for 15 days) the purchase price (P 1 ) of the 180-day bank bill, and immediately uses the borrowed funds to buy the bill. So the company’s net cash flow today is zero (receive P 1 and pay out P 1 ). After 15 days, the company will sell the bill for the sale price (P 2 ), and will then repay the loan (P 1 + interest). The company will “break even” on this investment if the sale proceeds (P 2 ) equals the amount to be repaid on the loan (P 1 + interest). Assume the bank bill has face value \$100. Let purchase price be \$P 1 , and sale price \$P 2 .
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• Finance, Macquarie University

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