AQ004-3-2 FMTS Final Exam Page 1 of 3

ANSWER ALL QUESTIONS (TOTAL 100 MARKS)

QUESTION 1 (20 marks)

(a) Marty has been offered an injury settlement of RM10,000 payable in three years.
Calculate the present value of injury settlement is if the compound interest rate is 5%.
(3 marks)
(b) Finance company loans money at 20% interest p.a. Calculate the effective monthly
interest rate.
(3 marks)
(c) A man stipulates in his will that RM50,000 from his estate is to be placed in a fund
from which his three daughters are each to receive the same amount when aged 21.
When the man dies the girls are aged 19, 15 and 13. Find the amount each of them will
receive, if the fund earns interest at 12% compounded half yearly.
(7 marks)
(d) John is repaying a debt with payments of RM250 a month. If he misses his payments
for July, August, September, and October, determine the payment required in
November to put him back on schedule, given that the interest is at 14.4% compounded
monthly.
(7 marks)

QUESTION 2 (20 marks)

(a) Mrs Wong changes employers at age 46. She is given RM8500 as her vested benefits in
the company’s pension plans. She invests this money in a registered retirement savings
plan paying 8% annual interest and leaves it there until her ultimate retirement at age
60. She plans 25 annual withdrawals from this fund, the first on her 61st birthday. Find
the size of these withdrawals.
(4 marks)
(b) A parcel of land valued at RM35,000 is sold for a down payment of RM15,000. The
buyer agrees to pay the balance with interest rate of 12% compounded monthly by
paying RM500 per month, for as long as necessary. The first payment is due 2 years
from now. Find the number of payments needed to settle the borrowed amount and the
value of the final payment.
(7 marks)
(c) The Andersons borrow RM15,000 to buy a car. The loan will be repaid over three
years, with monthly payments at 6% interest compounded monthly. Find the total
interest paid in 12 months of the second year.
(9 marks)

QUESTION 3 (20 marks)

(a) A loan of RM10000 is to be settled in one lump sum at the end of year 5. Interest of
10% is to be paid to the finance company separately over the 5 years. Assume first
payment is going to start one period away, find the equal payments to the fund if the
sinking fund earns interest at 8%.
(4 marks)

Level 2 Asia Pacific University of Technology & Innovation YYYYMMDD

AQ004-3-2 FMTS Final Exam Page 2 of 3

(b) Assume that you have a thirty-year mortgage for $200,000 that carries an interest rate
of 9% per annum. The mortgage was taken three years ago. Since then, assume that
interest rate has fallen to 7.5% p.a. and you are thinking of refinancing. The cost of
refinancing is 2.5% of the loan outstanding, which will be inclusive of the loan amount.
Assume also that you can invest you funds at 6% p.a. compounded monthly
(i) Find the new monthly repayment if the loan is refinanced.
(11 marks)
(ii) If the savings made from the repayments every month is reinvested, what is the
present value of the investment?
(5 marks)

QUESTION 4 (20 marks)

(a) Dayang Inc is planning to make an investment of RM300,000 in one of the three
alternative shopping centers in Kedah. Each project's expected cash flows from the
investment are as follows (in RM):
Year Jaya Midi Teko
1 154,000 110,000 86,000
2 134,000 110,000 110,000
3 96,000 110,000 128,000
4 96,000 110,000 178,000
The company's cost of capital is 10% and these projects are mutually exclusive.
(i) Calculate the Net Present Value for the three projects and decide on the best
project.
(6 marks)
(ii) Find the internal rate of return for the best project.
(6 marks)
(b) The one-year forward rate of interest at time t = 1 year is 5% per annum effective. The
gross redemption yield of a two-year fixed interest stock issued at time t = 0, which
pays coupons of 3% per annum annually in arrear and redeemed at 102 is, 5.5% per
annum effective. The issue price at time t = 0 of a three-year fixed interest stock
bearing coupons of 10% per annum payable annually in arrear and redeemed at par is
RM108.9 per RM100 nominal.
(i) Calculate the one-year spot rate per annum effective at time t = 0.
(6 marks)
(ii) Calculate the one-year forward rate per annum effective at time t = 2 years.
(4 marks)

Level 2 Asia Pacific University of Technology & Innovation YYYYMMDD

AQ004-3-2 FMTS Final Exam Page 3 of 3

QUESTION 5 (20 marks)

You are considering the purchase of a 6-year bond, with a coupon rate of 8.5% per annum and
a par value of $1,000.00. The yield curve is flat at 10% per annum. The purchase price of the
bond is $934.67.
(a) Calculate the modified duration of the bond.
(6 marks)
(b) Calculate the approximate convexity of the bond.
(9 marks)
(c) Using the results in (a) and (b) calculate the change in bond price for a 2% increase in
yield.
(5 marks)

Financial Mathematics Formulae

1 Simple Interest 2 Compound Interest

FV = PV (1 + in ) FV = PV (1 + i )
n

FV FV
PV = PV = = FVv n
(1 + in) (1 + i ) n

3 Annuities (P = 1 p.a.) 4 Arithmetic Annuities (P = Q = 1 p.a.)

sn | =
(1 + i )n − 1 an | =
1− vn an − nv n sn − n
( Ia ) n = ( Is ) n =
i i i i

sn | = (1 + i ) sn |i an | = (1 + i )an | n − an

( Da ) n =
i
=
(1 + i )n − 1 1− vn n (1 + i ) n − sn
s n( m| ) (m ) an( m| ) = (m )
i i ( Ds ) n =
i

Level 2 Asia Pacific University of Technology & Innovation YYYYMMDD