FBIM 602: Investments

Tutorial 2 suggested solutions

Question 1
The creation, sale and transfer of financial instruments within the financial system
may be categorised as primary market or secondary market transactions. Primary
market transactions relate to the creation of new financial securities; that is, new
instruments issued by corporations, government or individuals to fund the purchase
of goods, services and assets, or to restructure existing liabilities. An issue of
ordinary shares by a company; or the issue of treasury bonds by the government,
are both examples of primary market issues as new funds are being raised by the
issuer (borrower). Secondary markets trade in existing financial securities at current
market prices. Secondary markets do not exist for all financial assets (e.g. bank
loans), however active secondary markets do exist in T-Bills, commercial paper,
government securities and shares. Secondary market transactions do not raise
additional funds for the initial issuer. There is simply a transfer of ownership from
one holder to another.

Question 2
2.1. D: Match amounts and maturity of investments with borrowers
2.2. B: Maturity Transformation
2.3. C: Short-term insurers
2.4. D: the capital market

Question 3
(5 × 40 ) +25
a) P X = =R 37.50
5+1
40−25
b) R= =R 2.50 OR R=40 – 37.50 = R2.50
6
Question 4
a) Days to maturity = 183
 April: 30
 May: 31
 June: 30
 July: 31
 August: 31
 September: 30

VM = NV [1+ (i/100 * d/365)] = 500000 [1+ 0.0555 * 183/365] = R513 913.01

b) C = VM/ [1 + (i/100 * d/365)] = 513913.01/ [1+ 0.0595 *68/365] =
R508 278.78

Question 5
a) VM = NV [1+ (i/100 * d/365)] = 1000000 [1+ 0.1155 * 182/365] =
R1 057 591.78

C = VM/ [1 + (i/100 * d/365)] = 1057591.78 / [1+ 0.1085 *152/365] =

R1 011 871.81
b) Total Income = 1011871.81 – 1000000 = R11 871.81

Accrued Interest = NV * t/365 * i/100 = 1000000 *30/365 * 0.1155 = R9

493.15
Capital Gain = 11871.81 - 9493.15 = R2 378.66

Question 6
a) IP = NV [1- (I/100 * d/365)] = 1000000 [1- 0.06 * 60/365] = R990 136.99
b) Y = (NV – IP)/IP * 100 * 365/t = (1000000 – 990136.99)/990136.99 *100
*365/60 = 6.06%
c) C = NV [1- (I/100 * d/365)] = 1000000 [1- 0.06 * 20/365] = R996 712.33
d) Y = (C – IP)/IP * 100 * 365/t = (996712.33 – 990136.99)/990136.99 *100
*365/40 = 6.06%
e) C = NV [1- (I/100 * d/365)] = 1000000 [1- 0.06125 * 20/365] = R996 643.84
f) C = NV [1- (I/100 * d/365)] = 1000000 [1- 0.05875 * 20/365] = R996 780.82
g) As the discount rate increases, the consideration falls, and when the discount
rate decreases, the consideration rises. Therefore there is an inverse
relationship between the discount rate and the consideration. In fact, this
relationship between the interest rate and the price of a debt instrument is
applicable to both short-term and long-term instruments.
h) % change = (996 643.84 - R996 712.33)/ R996 712.33 * 100 = -0.00687%
% change = (R996 780.82- R996 712.33)/ R996 712.33 * 100 = 0.00687%
The percentage changes are almost identical.