You have been employed to provide a comprehensive analysis and discussion on a number of investment scenarios provided by your client. As your client has little knowledge of finance it is your responsibility to provide both the theoretical and mathematical calculations for the investment(s) they provide and the theoretical questions they pose.
You have been employed to provide a comprehensive analysis
Firstly, you have been employed to provide a comprehensive analysis. Also, the discussion on a number of investment scenarios provided by your client. As your client has little knowledge of finance it is your responsibility to provide both the theoretical and mathematical calculations for the investment(s) they provide and the theoretical questions they pose.
Firstly, your client’s knowledge of financial theory and financial mathematics is almost non-existent, however has been looking for investments for both short-term and long-term returns.
Secondly, your client has complete some research and has found a number of investments that need to be assesse to identify whether they may be viable investment options.
Thirdly, your client has specific investment criteria, and has suggested investments based on this criterion, and therefore does not expect you to identify additional investment options.
Fourthly, as your client wishes to invest in securities for retirement, only the viability of the investment(s) should be considered in this report.
Lastly, while you expect that your client has a good base salary you have little knowledge of their assets or liabilities or overall financial position, hence it is impossible to know how many of these investments your client can purchase / invest.
Therefore, you are expect to provide advice on each investment in isolation from the other investments, i.e. not as a portfolio of investments.
Client’s Financial Questions:
1) The time value of money is a key theoretical concept in finance. Why is it so important in the field of finance?
How is this concept use d in a practical and everyday manner?
2) The finance industry (specifically banks, financial planning and superannuation) has recently been in the spotlight. In relation to ethics, through the Financial Services Royal Commission. Without making specific reference to any company or organisation, describe how corporations should act with respect to other stakeholders (shareholders, clients and other organisations) and the effect, on those stakeholders, when a corporation engages in unethical behaviour.
3) Detail the differences between an ordinary annuity and an annuity due. Additionally, describe how the present value and the future value of an annuity is calculated. (Use diagrams if it helps your discussion).
1) Your client has provided, for your evaluation, an investment which pays $20,000 in 12 months, $15,000 in 3 years, $10,000 in 4 years and a further $40,000 in 7 years. The interest rate over the period of the investment is a nominal rate of 18% p.a., compounded monthly. If your client can buy the investment today for $50,000 would you recommend that this is a good investment? Why or why not?
2) DIY Investments Ltd has proposed two investments to your client. However your client is unsure of their potential, with your task being to provide some advice on these investments. The first investment costs $60,000 today. It pays the following cash flows.
Years 1 to 6: Yr 1: $10,000, Yr 2: $15,000, Yr 3: $20,000, Yr 4: $25,000, Yr 5: $30,000 and Yr 6: $35,000.
The second investment option is a perpetuity which pays $6,000 a year. With the 1st cash flow occurring at the end of year Your client can buy the investment today for $40,000.
Your client indicates that he requires a rate of return of 12% p.a. which is on both of these investments.
Identify for him whether these investments are good (or not).
3) Two annuities, which your client has identified, are available for purchase. The first annuity pays $6,000 each three-month period over 4 years, at a nominal rate of 12% p.a. This annuity also has a lump sum payment at maturity (at the end of the 4th year) of $30,000. The second annuity pays $2,500 each month, again over 4 years, at a nominal rate of 11% p.a. This investment has an annual fee of $1,000, paid at the start of the year, starting immediately. If each of the annuities cost $100,000, identify which (if any) of the annuities you would recommend to your client.