Assignment 2

Assignment code: Assignment 2

Assignment due date: 24 August 2017

Total: 80 marks

Note to student: Show all the formulae and steps of the calculations. When
using a calculator, show all the calculator inputs.

Question 1 (15 marks)

You are given the following information about a Treasury Bill (TB):

Nominal value : R3 000 000

Tenure (maturity) : 90 days
Discount rate : 8.50%
Number of days in a year : 360 days

NB: Show all your calculations. Please round-off the final answer only.

1.1 Calculate the discount amount. (2)

1.2 Calculate the consideration of the Treasury Bill. (2)

1.3 Calculate the price of the Treasury Bill. (2)

1.4 Calculate the yield of the above Treasury Bill. (2)

1.5 An investor invested R3 000 000 for 90 days in an NCD (interest-add-on

instrument) at 8.50% per annum. Calculate the amount he will receive
on maturity. Assume a 360-day year. (2)

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 1.6 An investor wants to have R3 000 000 in two years time from now.
Calculate the amount he must invest today at 12% per annum
compounded monthly. (Hint: calculate the present value.) (3)

1.7 You invested R3 000 000 for two years at 12% per annum compounded
monthly. Calculate the amount you will receive after two years. (Hint:
calculate the future value.) (2)

Question 2 (10 marks)

Read the scenario below and answer the questions that follow:

Assume the Reserve Bank issue a semi-annual bond with the following
features:

Principal amount R5 000 000

Coupon rate ?
Issue date 1 July 2012
Coupon payment dates 31 December/30 June
Register closing dates 30 November/31 May
Buying price R98.0015%
Maturity date 30 June 2017

2.1 Calculate the amount paid by an investor for this bond. (2)

2.2 Indicate whether the bond was issued at a par, premium or discount.
(1)

2.3 Calculate the annual coupon rate (as a percentage) if interest (coupon)
payable semi-annually amounts to R212 500. (2)

2.4 Calculate the running yield of the bond if it is currently selling at a price
of R99.3535%. (1)

2.5 Assume the bond has two years to its maturity date, and calculate the
price of the bond if the yield to maturity (current interest rate) is 8%.
(Note: this is a semi-annual coupon bond, therefore i = 4% while n =
4). (2)

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 2.6 Assume the bond has two years to its maturity date, and calculate the
price of the bond if the yield to maturity (current interest rate) is 10%.
(Note: this is a semi-annual coupon bond, therefore i = 5% while n =
4). (2)

Question 3 (15 marks)

Read the scenario below and answer the questions that follow:

Below is the financial information extracted from the books of a listed

company for the year ended 31 December 2016.

Statement of Financial Position

Authorised shares (number) 5 000 000 (R5 each)
Issue shares (number) 4 500 000
Current market price R132.65
Total assets R153 369 000
Total liabilities R62 500 000

Statement of Comprehensive Income

Gross R73 950 000
Taxation R29 150 000
Interest R11 300 000
Dividends paid R23 150 000
Retained ?

3.1 Calculate the following:

3.1.1 Net asset value per share (2)

3.1.2 Earnings per share (2)

3.1.3 Market capitalisation (1)

3.1.4 Price/earnings ratio (1)

3.1.5 Dividend per share (1)

3.1.6 Dividend yield (1)

3.1.7 Dividend cover ratio (1)

3.1.8 Retained earnings (1)

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3.2 Assume on a certain day, that the shares of the company are trading at
a high of R134.15 and a low of R130.65, and the closing price is R132.65.

3.2.1 Determine at what price a transaction is actually concluded? (1)

3.2.2 Assume a potential buyer is willing to pay R133 per share, but
the seller wants R134. What is this difference referred to? (1)

3.2.3 Assume the dividend growth rate of the company is 11%, and
that shareholders require a 14% return. Calculate the value of
the companys share. (Hint: first calculate the future expected
dividend) (3)

Question 4 (10 marks) Futures market

Read the following two scenarios and answer the questions that follow.

Scenario 1
4.1 An investor agrees to sell a security in one years time at R110.

Scenario 2
4.2 An investor agrees to buy a security in one years time at R200.

Scenario 1

4.1.1 Briefly explain what this futures contract implies. (3)

4.1.2 Assuming the price after a year is R75, indicate the profit or loss the
investor will make or incur. (1)

4.1.3 Assuming the price after a year is R150, indicate the profit or loss the
investor will make or incur. (1)

Scenario 2

4.2.1 Briefly explain what this futures contract implies. (3)

4.2.2 Assuming the price after a year is R180, indicate the profit or loss the
investor will make or incur. (1)

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 4.2.3 Assuming the price after a year is R260, indicate the profit or loss the
investor will make or incur. (1)

Question 5 (30 marks)

Read the case study below and answer the questions that follow.

An option confers on a buyer the right, but not obligation, to buy (call) or sell
(put) a specific quantity of a specific underlying asset or instrument at a fixed
price (strike) on or before a future date at an agreed price (premium).

Assume the underlying asset is a share, of which the strike price of the option
is R100, and the premium (option price) is R5.

Required:

5.1 An investor feels that because the company he has invested his fund in
is underperforming, his shareholding in the company may not do very
well (or will stay the same). Subsequently, he is only interested in
earning a premium.

5.1.1 Suggest a suitable product. (1)

5.1.2 State the maximum loss the seller stands to incur. Motivate your
answer. (2)

5.1.3 State the breakeven price. (1)

5.1.4 Draw a fully label a risk/return profile diagram (payoff diagram) and
clearly indicate the strike price, breakeven price and premium, and
label the X and Y axis. Ignore the payoff line. (4)

5.2 We have a buyer of a long-call option.

5.2.1 At what stage will the position of the buyer become profitable?
Motivate your answer. (2)

5.2.2 State the maximum loss the buyer can incur. (1)

5.2.3 State the maximum profit the buyer can make. (1)

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 5.2.4 Draw a fully labelled risk/return profile diagram (payoff diagram)
and clearly indicate the strike price, breakeven price and premium,
and label the x and y axes. Ignore the payoff line. (4)

5.3 Now we have a buyer of a long put option.

5.3.1 At what stage will the position of the buyer becomes profitable.
Motivate your answer. (2)

5.3.2 At what stage will the option not be exercised? (1)

5.3.3 When will the maximum profit be realised? (1)

5.3.4 Draw a fully labelled risk/return profile diagram (payoff diagram)

and clearly indicate the strike price, breakeven price and
premium, and label the X and Y axes. Ignore the payoff line. (4)

5.4 Lastly, we have a seller of a short-put option.

5.4.1 State the maximum profit (gain) to the seller. (1)

5.4.2 At what stage will the seller theoretically realise a maximum

loss? (1)

5.4.3 Draw a fully labelled risk/return profile diagram (payoff diagram)

and clearly indicate the strike price, breakeven price and
premium, and label the x and y axis. Ignore the payoff line. (4)

TOTAL MARKS: 80