Question 1

Outline the general characteristics of the Securities Market Line (SML).

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Question 2

At the commencement of the current financial year Rene Silverwater invested $70,000 in a 2-year 'snowball' fixed deposit providing an interest rate of 5% p.a. with interest paid half-yearly. The interest paid is reinvested back into the fixed deposit which is the basis for the 'snowball' description. On maturity, the investment provides a bonus interest amount of $500 for all investments that have a balance at maturity that exceeds their initial investment by more than 10%. Rene is subject to a 40% marginal tax rate for interest income derived in the first year and 30% for the second year.
Rene has sought your assistance in determining whether he would be eligible for the interest bonus and also to calculate his total after-tax net income from the investment.

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Question 3

Briefly explain how lenders use the cash rate when setting interest rates.

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Question 4

Mickey Ronaldo purchased a 180 day Commonwealth Treasury Note (T-note) having a face value of $100,000 on 15 April 2014. The purchase price of the T-note was $96,730.
a) Calculate Mickey's annualised nominal rate of return based on the face value of the T-note.
b) Calculate Mickey's annualised nominal rate of return based on the purchase price of the T-note.
c) Which of the above annualised nominal rates of return is more representative of Mickey's actual rate of investment return?

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Question 5

Explain the relationship between the cash rate and the real cash rate. Illustrate your discussion by calculating the real rate of return for a 1-year term deposit that provides for the following 3-monthly interest rates over its term: 1 to 3 months - 5% p.a., 4 to 6 months - 7% p.a., 7 to 9 months - 6% p.a. and 10 to 12 months - 7% p.a. Inflation rates over this period are as follows: 1 to 3 months - 2% p.a., 4 to 6 months - 3% p.a., 7 to 9 months - 4% p.a. and 10 to 12 months - 5% p.a.

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Question 6

Outline the primary differences between ordinary and preference shares.

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Question 7

Who are the primary regulators of the Australian financial system?

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Question 8

What characteristics are typically associated with ethical investments?

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Question 9

You have assessed the following information for Kid's Apparel Ltd. based on your expectations of the company over the next financial year:
Operating profit (before-tax) $13.8 million
Taxable income $10 million
Company tax rate 30%
Authorised share capital 10 million
Issued share capital 7.5 million
Current share price $21.60
Based on the information provided, calculate the company's price/earnings (P/E) ratio and comment on the company's growth prospects given that the industry average P/E ratio is 12 times.

Accepted Answer

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Quiz 5: Direct Investment Fixed Interest and Shares

Outline the general characteristics of the Securities Market Line (SML).

Briefly explain how lenders use the cash rate when setting interest rates.

Outline the primary differences between ordinary and preference shares.

Who are the primary regulators of the Australian financial system?

What characteristics are typically associated with ethical investments?