CENTENNIAL COLLEGE

INSTRUCTOR:

Rudy Ramdayal

COURSE TITLE:

Financial Management - ACCT 702

Assignment #2
Instructions for assignment:
ALL STUDENTS MUST COMPLY WITH
CENTENNIAL COLLEGE ACADEMIC
HONESTY AND PLAGIARISM PROCEDURES

Refer to policy number AC101 - 07

Read and answer all questions carefully.
All questions must be numbered
Assignments must be typed, double space and
print on one side of the page
Font: Times New Roman, 12 point for text, 14
point for headings
Assignment worth 3% towards final mark for
this course.
Submission deadline hard copy: June 15, 2016 at
12:30 p.m. Must hand in by the student. Late
assignments will not be accepted
Assignment must include your own title page i.e.
created by you
This is an individual assignment.
Total marks: 52

Financial Management
ACCT 702

Section 1

[22] Marks for this

Section

Question #1
EAR and Annuities
You are helping your friend plan for her retirement. Your friends company has a new
pension plan that will deposit $100 at the end of each month into her retirement fund
(the first deposit will be made one month from today). She plans to retire exactly 25
years from today, and estimates that she will need $3,000 per month withdrawn at the
beginning of each month for 20 years. If interest rates are 12 percent per year,
compounded quarterly, how much must she deposit into her retirement fund at the end of
each month (in equal amounts per month) over the next 25 years, in addition to the $100
deposited by the company, in order to meet her object? [12 Marks].

Question #2
Interest Rate Risk
Bond J is a 5 percent coupon bond. Bond S is a 11 percent coupon bond. Both bonds
have eight years to maturity, make semi-annual payments, and have a YTM of 7 percent.
If interest rates suddenly rise by 2 percent, what is the percentage price change of these

CENTENNIAL COLLEGE

Financial Management
ACCT 702
bonds? What if rates suddenly fall by 2 percent instead? What does this problem tell you
about the interest rate risk of lower-coupon bonds? [10 Marks].

Section 2

[30] Marks for this

Section

Question #1
a. What is the relationship between the price of a bond and its YTM? [2 Marks].
b. Explain why some bonds sell at a premium over par value while other bonds sell
at a discount. What do you know about the relationship between the coupon rate
and the YTM for premium bonds? What about for discount bonds? For bonds
selling at par value? [6 Marks].
c. What is the relationship between the current yield and YTM for premium bonds?
For discount bonds? For bonds selling at par value? [4 Marks].

Question #2
You are about to purchase a new home for $150,000. You plan on making a down
payment of 10 percent of the value of the house and taking out a mortgage for the
remaining balance. A bank has offered you a traditional 25-year mortgage at 6.95
percent APP. [18 Marks].
a. How much is your monthly payment? [6 Marks].

CENTENNIAL COLLEGE

Financial Management
ACCT 702
b. Prepare an amortization schedule for the first four months. [8 Marks].
c. How much will you still owe on your mortgage after ten years? [4 Marks].

CENTENNIAL COLLEGE