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# Financial Analysis: Saving For A House Deposit And Investing In Australian Government Bonds (Essay).

7 Pages / 1,700 Words Published On: 18-12-2020

## Part A: Saving for a House Deposit

Your answers to Question 1 below should show ALL relevant workings including the formulas used and the values of the variables that will be inputted into the formulas. Final answers should be correct to two decimal places. A word version of the Formula Sheet is available on the Moodle site to assist with presentation.Christine has just completed her degree at Deakin University and is now working for the ANZ Bank.She expects her average salary to be \$91,000 per annum for the next 5 years. After 5 years, Christine can apply for a promotion to the next level where her average salary would be \$145,000 per annum for the remainder of her working life at the bank.Christine wants to buy a 2 bedroom house and plans to save for a deposit over the next 5 years. In order to borrow money from the bank Christine needs to have 20% of the purchase price of the house as a deposit.

Currently, the cost of a 2 bedroom house in an area that Christine likes is \$700,000. Based on recent market performance in the area, the price of a 2 bedroom house is expected to increase at the rate of 6% per annum.
For simplicity, assume there is no stamp duty or any other buying costs associated with the house.

Required:
(a) Christine plans to use 40% of her average salary as savings for the deposit on the house. She plans to contribute to her existing bank account at the end of every month for the next five years. Her bank account earns 2% p.a. interest compounding monthly.
(i) How much will Christine have saved after 5 years?
(ii) Does the amount saved in part (i) meet the 20% requirement from the bank as a deposit at the end of year 5?
(iii) How much does she need to borrow from the bank at the end of year 5 to buy the house?

(b) Assume the bank lends Christine the money at 5.5% p.a. interest and that she wants to pay off the loan in 30 years by making monthly instalments.
(i) Calculate the monthly instalment amount. Is Christine able to make this payment assuming she still plans to contribute no more than 40% of her average salary towards the loan? (Also assume Christine receives her promotion after 5 years).
(ii) What is the total repayment Christine must make to the bank over the 30 years and how much interest is paid?

(c) Christine is also considering paying off the loan in 15 years after which she will sell the house and upgrade to a larger property as she hopes to have a family by then.

(i) What would Christine’s monthly repayment be to the bank if she decides to pay off the loan in 15 years?
(ii) What is the total repayment Christine must make to the bank over the 15 years and how much interest is paid?
(iii) If she still plans to contribute 40% of her average salary (after her promotion) towards the loan, will she be able to make the monthly repayments?

(d) In order to pay off the house in 15 years Christine is considering the following option:
At the end of year 5, after she borrows from the bank to buy the house, she plans to rent it to tenants for \$2,200 per month and move back home to live with her parents. Her parents have asked her to contribute \$1,000 per month towards living expenses, payable at the end of each month.
(i) Will this option enable her to meet the monthly loan amount from question c part (i) above?
(ii) Based on your answers above, advise Christine if she should accept the offer from her parents.

## Part B: Investing in Australian Government Bonds

You work as an analyst in the bond research department of a wealth management firm. As a researcher, it is your job to analyse interest rates and bond prices issued by the Australian Government. Based upon your analysis, you then make recommendations to the portfolio management team on what are the best bonds to buy given their value and associated risks.A current belief amongst analysts is that global equity markets are currently overvalued.Consequently, the team is looking to take on less risk by investing in Australian government debt.A number of bonds have been selected for closer scrutiny and analysis. The table below provides an overview of each bond’s main characteristics:
Table 1: Australian 10 year Treasury bond data Face Value Maturity Coupon Coupon Frequency Yield.
Bond A \$100 5 years 2.75%p.a. Semi-annual 2.33%p.a.
Bond B \$100 7 years 3.25%pa Semi-annual 2.38%p.a.
Bond C \$100 10 years 3.25%p.a. Semi-annual 2.58%p.a.
Bond D \$100 20 years 2.75%p.a. Semi-annual 2.88%p.a.

The investment managers are unsure as to the best bonds to buy. To guide your analysis and make recommendations, you answer a series of questions.
(a) Without any calculations, state which bonds are trading at a discount, par, or at a premium to the face value. In your answer, show the relationship between coupon and yield.

(b) Calculate the current value of each bond utilising the data provided in Table 1. Show all workings.
(c) Assume that market interest rates increase across all bonds by 1%. What is the value of the bonds now? Show all workings.
(d) Now assume, for all bonds listed in Table 1, the market yields decrease by 1%. What is the value of the bonds now?

As the analyst, you expect that yields will fall by 2% per annum. Showing all workings, which bond would recommend as a purchase? Support your answer by calculating the return on the bond (Hint: (P1/P0) -1 )
(f) Define what is meant by risk free and why government debt is considered to be risk free.

You are the manager of Platinum Managed Funds. Your company offers, at the moment, a highly aggressive managed fund where 100% of wealth is allocated to stocks only. This has caused substantial concern amongst the fund’s investors due to the exposure to excess stock market volatility.

The portfolio management team has requested that you create a new portfolio that reduces risk without a major impact upon returns.As a first step, management has stated that 70% of the funds under management must be
allocated to stocks. The remainder, 30%, is to be invested in either AAA rated corporate bonds, gold or property.
In summary, the three proposed portfolios are:
? Portfolio A: 30% Gold and 70% Stocks
? Portfolio B: 30% Bonds and 70% Stocks
? Portfolio C: 30% Property and 70% Stocks

(a) By using the information in TABLE 2 (page 9) calculate the expected (average) returndenoted by E(R), and the risk (standard deviation), for each of the four assets as well as the three portfolios in Table 2.Include your answers in a copy of TABLE 2. The completed table should be submitted with your assignment. An Excel version of Table 2 is available on the Moodle site.
(b) Explain the meaning of correlation and how the correlation coefficient impacts on the risk of a portfolio. Include in your answer the meaning of the correlation coefficients of +1 and -1. What effect has the correlation coefficient had on the risk of the three portfolios above? Your answer should not exceed 500 words.
(c) Discuss the meaning of diversification in finance. What impact does diversification have on the expected return and risk for the four portfolios in Table 2? Your answer should not exceed 500 words.

Management has assumed that your investors are risk averse. Explain what is meant by risk aversion as it relates to finance. Your answer should not exceed 300 words.
(e) Of the three portfolios, which portfolio do you recommend be used by the portfolio manager. In your answer, you may utilise any calculation that is relevant. Answer should not exceed 200 words.

Cite This Work

My Assignment Help. (2020). Financial Analysis: Saving For A House Deposit And Investing In Australian Government Bonds (Essay).. Retrieved from https://myassignmenthelp.com/free-samples/maf101-fundamentals-of-finance/price-of-house.html.

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My Assignment Help (2020) Financial Analysis: Saving For A House Deposit And Investing In Australian Government Bonds (Essay). [Online]. Available from: https://myassignmenthelp.com/free-samples/maf101-fundamentals-of-finance/price-of-house.html
[Accessed 21 September 2023].

My Assignment Help. 'Financial Analysis: Saving For A House Deposit And Investing In Australian Government Bonds (Essay).' (My Assignment Help, 2020) <https://myassignmenthelp.com/free-samples/maf101-fundamentals-of-finance/price-of-house.html> accessed 21 September 2023.

My Assignment Help. Financial Analysis: Saving For A House Deposit And Investing In Australian Government Bonds (Essay). [Internet]. My Assignment Help. 2020 [cited 21 September 2023]. Available from: https://myassignmenthelp.com/free-samples/maf101-fundamentals-of-finance/price-of-house.html.

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