Question

17 marks QUESTION 1 a. Julie purchased a 180-day $100 000 bank bill 74 days ago for $98 300.00. She sold it to Tony today and received $99 000.00 (i) [2 marks] Draw a cash flow diagram that captures the details of Julie's transactions (ii [3 marks] Calculate the purchase yield (simple interest rate) and sale yield (simple interest rate) of this bill (as a percentage, rounded to 2 decimal places) (ii [2 marks] Without any further calculations, explain how the sell- ing price will change if Tony accepts a lower yield. (iv) 2 marks] Calculate capital gain or capital loss component of Julie's investment (in dollars and cents, to the nearest cent). (v) [4 marks] Assuming Julie borrowed to purchase the bond, what is the break-even rate of interest of borrowing (simple interest, as a percentage, rounded to 2 decimal places)? If the borrowing cost rate is 10 basis points higher than the break-even rate, explain whether Julie will end up with a cash surplus or cash deficit. b. Josh wants to raise funds by issuing eighty 180-day bank bills, each with a face value of $10000. The current yield on such bank bills is 5.4% p.a. Josh must pay $25 000 of fees and charges associated with this financing activity (i) [2 marks]Calculate the real cost of borrowing if fees and charges are paid on the date of issue. Express the cost as a rate of simple interest, as a percentage, rounded to 2 decimal places. Include a neatly drawn cash flow diagram that summarises Josh's transac- tion (ii [2 marks] Calculate the real cost of borrowing if fees and charges are paid on the maturity date. Express the cost a rate simple interest, as a percentage, rounded to 2 decimal places

Answer 1

Answer:

a. ( i )

180 days 100000 $98300 cashoutflow Purchaseof recevedat Maturity aftert4days Bank biu Valueof Inuestwant including Snterest Cran s38998.89 Sold Crain $110 $99000

a. ( ii )

Purchase Yield = ( $ 100,000 - $ 98,300 ) / $ 98300 x 365 / 180 days x 100 = 3.51%

Sale Yield = ( $ 99000 - 98300 ) / $ 98300 x 365 / 74 days x 100 = 3.51%

a. (iii) If Tony accepts Lower Yield then Selling price will be between $ 100,000 & $ 99,000 but more than $ 99,000 as on 74th day ( the day at which Tony purchased Bank bill from Julie )

a. (iv) Calculation of Capital Gain or Loss on Julie's Investment :

Particulars	$
Sale Value of Investment	99,000 .00
Less : Purchase Value of Investment	98,300 .00
Less: Interest for the period 74 days = $ 1700 x 74 /180 = $ 698.89	698.89
Gain on Investment	1.11

a.(v) If Assuming that Julie borrowed to Purchase the Bond then the break even rate of interest on borrowing is 3.51% .

If the Borrowing cost is higher than break even point on 10 basis points then Julie will end up with the Cash deficit of $ 80.27

( ( $ 100000 x 3.61% x 180 /365 ) - ( $ 100000 - $ 98300 )

b. ( i ) Real Cost of Borrowing if fees and charges are paid on date of issue :

= ( $ 10,000 - ( $ 10,000 x 5.4% x 180 /365 days ) ) + 25,000

= $ 9733.70 + $ 25000 = $ 34,733.70

Real cost of Borrowing = ( $ 10,000 x 5.4% x 180 /365 days ) / $ 34733.70 x 100 x 365 / 180 = 1.55 %

Cash 25000 $3433370 Fees $9733.t0 charges Received after 1Bodays $10,000

b. ( ii) Real cost of Borrowing if Fees and Charges paid at Maturity

= $ 9733.70 + $ 25000 - ($ 10,000 - $ 9733.70 ) = $ 34,467.40

Real cost of Borrowing = ( $ 10,000 x 5.4% x 180 /365 days ) / $ 34,467.40 x 100 x 365 / 180 = 1.57 %