MAF101 Fundamentals of Finance

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You just started your internship at Burwood Value Asset Management. You were asked to write a report for a couple by the name of David and Beth.

David and Beth operate a small Italian restaurant on Burwood Highway. David is 45 and Beth is

  1. They seek professional advice on their investments leading up to retirement.

Your task is to write a report for David and Beth addressing their inquiries. You are requested to submit two files for his review: ONE written report containing key summary tables (detailed below) and ONE Excel file containing all calculations with embedded Excel functions.

Section 1 - Required Savings for Retirement (7 marks)

The Association of Super Funds Australia (ASFA) suggests that to achieve a modest retirement lifestyle, a couple would need $46,620 a year (based on 2023 price) assuming that they own their home outright and are relatively healthy. The budget for a comfortable lifestyle amounts to $71,724 a year (based on 2023 price).1 The current plan is for the couple to retire at the same time when David turns 63 and Beth turns 60 and they expect to have 25 years in retirement. Recall that David is 45 and Beth is 42.

  • Assuming that the ASFA adjusts the retirement living cost according to an inflation rate of 2% per annum, how much do David and Beth need a year for them to achieve a modest retirement lifestyle when they retire? How much do they need a year for a comfortable lifestyle, according to the estimate from ASFA?
  • If David and Beth aspire to have very comfortable retirement that allows them some luxuries such as overseas travel and fine dining, they want to budget for $80,000 at the beginning of each year during retirement, how much money do they need upfront when they retire to achieve that lifestyle?

Note: Include the following tables in your report and explain to the clients how these figures are calculated. Calculate the amount required for retirement in Table 1.2 for three different scenarios with the discount

1 https://www.superannuation.asn.au/resources/retirement-standard/

rates ranging from 4% per annum to 6% per annum for the 25-year retirement period.

Section 2 – Mortgage payments (9 marks)

The couple borrowed $600,000 from bank ABC two years ago to buy an apartment as an investment property near their restaurant. They have been paying monthly mortgage payments (principal and interest, equal amount at the end of each month) with an annual fixed interest rate of 4.8% for two years and the mortgage contract has eight years remaining. Since the inflation has reverted to the long-term target, the Reserve Bank of Australia (RBA) was contemplating to cut interest rate. As such, many commercial banks started to offer special deals to attract new customers. David and Beth have received an offer from bank ABA, which presented the below terms:

  • Loan amount: The remaining balance that David and Beth owed to bank ABC;
  • A 10-year mortgage with a fixed interest rate of 6% per annum;
  • The monthly mortgage repayments need to be made at the end of the month;
  • A bonus of $5,000 is offered to customers for transferring an existing mortgage from another bank and the bonus can be used to reduce the loan amount immediately.

However, having learned that David and Beth are entertaining the offer from bank ABA, the manager at bank ABC made a counteroffer with a fixed interest rate of 3.5% but WITHOUT the bonus. All other terms are the same as those from bank ABA.

2.1  David and Beth are seeking your advice whether to stay with bank ABC or switch to bank ABA. Include the following tables in your report and explain to the clients how these figures are calculated. Explain your recommendation to David and Beth.

Section 3 – Investments in bonds (10 marks)

Beth values diversity, equity, and sustainability. Through a financial broker, Beth learned about Australia’s first ever “Gender Equality” bonds issued by the National Australia Bank (NAB).2 This special bond highlights the role that bonds play in the commitment to supporting the development of socially responsible investment (SRI) in the Australian market.

The net proceeds from the NAB Social Bond were fully allocated at settlement. The net proceeds were earmarked for refinancing a portfolio of existing loans and assets for organizations that had been awarded the Employer of Choice for Gender Equality citation (EOCGE) by the Workplace Gender Equality Agency (WGEA).

The key terms of this bond are listed below3:

2 https://news.nab.com.au/news/investors-put-500-million-behind-worlds-first-social-bond-promoting-workplace-gender- equality/

3 The specific terms of this bond have been modified by Xiaoyang Li to suit the needs for the assignment of MAF 101.

  • On 24 March 2017, Beth invested $100,000 buying this bond at par value of $100. However, the RBA lowered the cash rate target significantly during COVID-19.4 As a result, on 25 September 2020, the prevailing market-wide discount rate was only 1%. Please calculate the bond’s market price on that day using Table 3.1. Beth was puzzled by the fact that the price of her bond was no longer $100. Please explain to her in general the relationship between bond prices and market-wide interest rates.
  • Now that NAB’s social bonds have matured in 2022. Beth wants to learn more about such “socially responsible” financial products (not necessarily bonds) in Australia. Please explain to her why these products have become popular in the past decade and briefly describe ONE socially responsible/ green/sustainable financial product based on your With an independent and objective mind, you want to provide a critical review of socially responsible/green/sustainable financial products (in general AND specifically about this product – either the NAB gender equality bond or the product you describe to Beth). Note: it is perfectly fine if the product is no longer available on the market. (6 marks)

Section 4 – Investments in shares (10 marks)

David is a risk lover, and he has made some investments in the Australian share market. He invested heavily in one stock, NAB. For instance, on 31 December 2021, he bought 3000 shares of NAB at the market close price. However, after two years, on 29 December 2023, he decided to sell all NAB shares at the market closing bell. David also recalls that he has received some notice about dividend payments.

  • Using data from Morningstar DatAnalysis Premium, please help David calculate the two-year performance from this investment, using Table 1. If you are making any assumptions when calculating the returns, please clearly specify and justify them.

4 https://www.rba.gov.au/statistics/cash-rate/

  • Based on your research, you recommend David to consider investing in Exchange traded funds (ETFs). David has never heard of ETFs before, and he asked you to provide more information on what an ETF is and the advantages and disadvantages of investing in an ETF. He also sought you recommendation for one ETF that covers the Australian share market. You should structure this section as follows: (3 marks)
    • What is an ETF?
    • The advantages and disadvantages of investing in
    • Recommended ETF (an ETF that tracks the Australian market). Ensure that you explain in detail what this ETF is tracking to David and Beth.

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