Finance Practice Test

SYDNEY INSTITUTE OF BUSINESS AND TECHNOLOGY ACST101 TECHNIQUES AND ELEMENTS OF FINANCE REVISION – LECTURES 1, 2 & 3 Sample Class Test 1 Instructions: For Questions 1, 2 and 4 write your answer in the space provided. For Question 3 all working must be shown. Total marks for the test = 10. Time: 50 minutes writing time (no reading time) Question 1 (2 Marks ) (i) Vincent invested a sum of $5,000 in a bank account earning 5? % p. a simple interest on 1 September 2003. On what date will Vincent’s bank account reach an accumulated balance of $5,039. 18? 23 October 2003 (ii)
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A 90-day note is to mature for $2,000 plus simple interest at 7% p. a. Calculate the maturity payment (correct to the nearest cent). $2,034. 52 Parts (iii) to (iv) are based on the following information: A 180-day promissory note will mature for $10,000. Sixty days after issue it was purchased by Quentin for $9,786. 30. (iii) Calculate (as a percentage, correct to 2 decimal places) the rate of simple discount p. a. used in calculating the purchase price paid by Quentin. 6. 50% p. a. (iv) Quentin held the note for 100 days and then sold it for a price of $9,930. 28.

Calculate the rate of simple interest p. a. (as a percentage, correct to 2 decimal places) earned by Quentin on his investment. 5. 37% p. a. 1 Question 2. (2 Marks) (i) If j1 = 6. 8%, calculate j4 (as a percentage, correct to 2 decimal places). j4 = 6. 63% (ii) How long (in years, correct to two decimal places) will it take for $10,000 to accumulate to $16,000 at j4 = 5. 6%. 8. 45 years (iii) If an investment of $1,000 grows by 50% in 5 years, what rate of interest, j2 , is earned (as a percentage, correct to two decimal places)? j2 = 8. 28% (iv) A sum of $2,000 is due in 10 years time.

Calculate the present value if interest is at j2 = 5% for the first 3 years and j4 = 4% thereafter. (Correct to the nearest cent). $1,305. 23 2 Question 3 (3 marks) (i) A promissory note is priced as follows: at $970. 41 when a discount rate of 6% p. a. is used, but at $964. 00 when a discount rate of 7. 3% p. a. is used. Use linear interpolation to estimate the discount rate if the price is $968. 00 (as a percentage, correct to 2 decimal places). [1 mark] at 6% at i% at 7. 3% RHS = 970. 41 RHS = 968. 00 RHS = 964. 00 i% = 0. 06 + 968. 00 – 970. 41 * (0. 073 – 0. 06) 964. 00 – 970. 1 i% = 6. 49% (ii) A savings account pays simple interest at 4% p. a. Calculate the interest earned on the following account for the period 1 October 2003 to 31 December 2003 (inclusive), using the daily balance method (correct to the nearest cent). Date Deposit Withdrawal Balance 25 / 10 / 2003 $450 $450 17 / 11 / 2003 $200 $250 23 / 12 / 2003 $400 $650 [1 mark] Interest from 25/10 to 16/11 = 450 * 0. 04 * 23/365 = 1. 1342 Interest from 17/11 to 22/12 = 250 * 0. 04 * 36/365 = 0. 9863 Interest from 23/12 to 31/12 = 650 * 0. 04 * 9/365 = 0. 64109 Total interest = 1. 1342 + 0. 863 + 0. 64109 = $2. 76 3 (iii) Sam purchases a television worth $3,000 on 1 October 2003 and arranges to pay the amount with the following three payments: Time of payment 1 October 2003 1 November 2003 1 December 2003 Size of payment $X $X + 500 $1,000 (a) Draw a time line, clearly showing the timing of the 3 repayments and the original debt. [? mark] Original Loan: Time: Replacement Payments: $3,000 Oct 03 $X Nov 03 $X + 500 Dec 03 $1,000 (b) Using a focal date of 1 October 2003 write an equation of value for the loan transaction, assuming compound interest is at i per month. ? mark] 3,000 = X +[( X + 500)* (1+i)-1 ] + 1,000(1+i)-2 (c) Solve the equation of value to find the size of X (correct to the nearest cent), if the rate of interest charged is j12 = 12%. [? mark] 3,000 = X +[( X + 500)* (1. 01)-1 ] + 1,000(1. 01)-2 3,000 = X + X*0. 990099009 + 495. 049505 + 980. 2960494 1,524. 6544 = X*1. 990099009 X = 766. 12 4 Question 4. (3 marks) (i) Answer the following questions. (a) [1/4 mark for each answer] A negotiable certificate of deposit is a short term debt instrument issued by a bank. What does the term “negotiable” mean in this context? ______able to be traded, can be sold to another person____ (b) A negotiable certificate of deposit has higher liquidity than a fixed term deposit. What does the term “liquidity” mean in this context? _______easily converted into cash _________________ (c) Derivatives, trade and performance related business, direct credit substitutes and commitments are all examples of what type of business for a bank? _______Off balance sheet ___________ Bank bills, Treasury Notes and other short term financial securities with a maturity date of less than 12 months are traded on what market? __money _____________________ (d) (ii) Multiple choice : circle the best answer [1/2 mark each] A. Which of the following statements regarding the Reserve Bank of Australia (RBA) is FALSE? (a) The RBA collects data about the Australian Financial System. (b) The RBA conducts Australia’s monetary policy. (c) The RBA is the banker to the Commonwealth Government and to other businesses. (d) Since deregulation, the RBA is no longer the prudential regulator of banks. (e) The RBA manages the issue of notes and coins. B.

Which of the following statements regarding the Risk Weighted Capital Requirement (RWCR) is FALSE ? (a) (b) (c) (d) Tier 1 capital includes deposits made by a bank’s customers. Loans to companies have the highest risk rating. The cash assets of a bank are included in the lowest risk weighting. The Risk Weighted Capital Requirement (RWCR) is designed to protect against credit, or default, risk. (e) If a bank does not have much capital available it would choose to make loans to lower risk borrowers, like the Commonwealth or State Governments. 5 (iii)

Answer the following questions by circling True or False [1/4 mark each] (a) The sale of new shares by Crane Ltd and the initial issue of Treasury Bonds by the Government are both examples of secondary market transactions. TRUE (b) FALSE One of the differences between debt and equity is that debt always has a maturity date. TRUE FALSE (c) In a direct financial flow, the surplus entity providing the funds will be repaid directly by the broker. TRUE FALSE (d) Two of the advantages of intermediated financial flows are increased liquidity for savers and asset transformation. TRUE FALSE 6