Question 1

a) Given the annual percentage yield (APR) is 12.5%, calculate the effective annual rate (EAR) for each of the case below:-

i) Compounded monthly,

ii) Compounded daily, and

iii) Comment on your answer. (6 marks)

b) Kelvin is planning to save for retirement over the 28 years. To achieve this, he will begin saving $450 at the end of each month in a stock account and $270 a month in a bond account. Assume the expected return of the stock account is 9.4% per annum while the bond account is 4.8% per annum. When he retires, Kevin will combine the money into an investment instrument with 5.7% rate of return. Calculate how much can he withdraw each month after he retires, assuming he has a lifespan of 35 years after retire. (8 marks)

c) John borrowed money from a bank to finance a house. The bank's term allowed him to defer payments (including interest) on the loan for four months and to make 36 equal end-of-month payments thereafter. The original loan was $216,000, with an interest rate of 12% compounded monthly. After 21 monthly payments, John found himself in a financial bind and went to a loan company for assistance in lowering his monthly payments. Fortunately, the loan company offered to pay his debts in one lump sum if he would pay the company $7,285 per month for the next 36 months. What monthly interest rate is the loan company charging on this transaction? (6 marks)

d) Do you think the goal of maximizing the value of stock (maximizing shareholders' wealth) conflict with other corporation's goals, like avoiding unethical or illegal behavior? In particular, do you think issues like customer and employee safety, the environment, and the general good of society fit in the framework of maximizing the shareholders' wealth, or are they essentially ignored? You may use some specific scenarios to illustrate your answer. (5 marks)