FM102: Personal Financial Planning

Faculty of Business and Economics / School of Accounting & Finance

Final Examination
Semester 2, 2017

Blended Mode

Duration of Exam: 3 hours + 10 minutes

Reading Time: 10 minutes

Writing Time: 3 hours

Instructions:

1. Read ALL instructions carefully before you begin. Note that this is a closed book
examination.

2. Candidates should answer ALL questions as follows:

Section A: Multiple Choice (20 Questions) 30 Marks (60 minutes)

Section B: Theoretical Questions (5 Questions) 20 Marks (30 minutes)

Section C: Calculations (5 Questions) 50 Marks (90 minutes)

3. IMPORTANT: For Section A, record all your answers on the separate Multiple Choice
Answer Sheet. Section B is to be answered on the Answer Sheets provided.

4. The minimum mark required to pass this exam is 40% (20/50).

5. Where applicable, show all calculations clearly.

6. Where applicable, begin answering each question on a fresh page.

7. You can use silent non-programmable calculator.

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Section A: Multiple Choice (30 Marks) Time allocated: 60 minutes

1. Reverse mortgages:
A. May be suitable for older people with a large amount of borrowings on their family home but
with little disposable income.
B. May be suitable for older people with a large amount of equity in their family home but with little
disposable income.
C. May be suitable for older people with a large amount of equity in their family home and surplus
disposable income.
D. None of the above.

2. Retirement planning includes consideration of:

A. Trade-offs between what is desirable and what is achievable.
B. Lifestyle issues.
C. Investment strategies.
D. All of the above.

3. Gambling from the gambler’s perspective is a good example of what type of risk?
A. Pure risk
B. Speculative risk
C. Arbitrage risk
D. Property risk

4. Life insurance products can:

A. Provide for insured amounts not necessarily related to the actual loss.
B. Be regarded as indemnity-type products.
C. Both A and B.
D. None of the above.

5. In the event of a claim, an indemnity value house and contents policy will:
A. Provide a pay-out equal to the market value of the loss incurred at the time of the loss.
B. Include the effects of depreciation in establishing a value for the items subject to the claim.
C. Both A and B.
D. Replace all items at their current replacement value.

6. Benefit payments from an income protection policy will generally be:

A. Reduced by any sick leave or compensation payments received by the insured during the claim
period.
B. Unaffected by any sick-leave or compensation payments received by the insured during the claim
period.
C. Increased by any investment income earned during the claim period.
D. None of the above.

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7. If an investor believes that the price of an asset is going to decrease in the future they would:
A. Prefer to currently own the asset and hold.
B. Prefer not to currently own the asset if they are long-term investor.
C. Prefer to sell the asset if currently held.
D. Both B and C.

8. Over time, an investor making principal and interest loan repayments on an investment using
borrowed funds which is increasing in value would expect their gearing ratio to:
A. increase
B. decrease
C. remain unchanged
D. all of the above

9. Where the value of secured assets falls below an agreed debt-to-asset ratio for a margin loan, what
action will be required to be taken?
A. The lender must meet a margin call on the loan.
B. The borrower must meet a margin call on the loan.
C. The lender will require the loan to be discharged in full.
D. None of the above.

10. The buyer of a futures contract will prefer prices of the underlying asset in the future to:
A. Remain constant
B. Fall
C. Rise
D. Fluctuate

11. An option is:

A. an agreement to trade something in the future, either to buy or to sell a specific amount of a
specific asset.
B. an agreement that gives the buyer (holder) of the option the right but not the obligation to buy or
sell something in the future at a fixed price.
C. an agreement that gives the holder the right to buy or sell the underlying asset, so, as with all
investment assets, the investor wishes to be long if they expect prices to rise and wishes to be
short if they expect them to fall.
D. None of the above.

12. Passive fund managers attempt to:

A. Outperform the market.
B. Time the market.
C. Replicate the performance of the benchmark.
D. All of the above.

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13. What is the valuation approach which is described as follows: “An estimated market value made by
comparing recent sales figures to provide a return required by investors based on the income stream
paid to investors less normal operating expenses”?
A. The cost approach.
B. The direct comparison approach.
C. The securitisation approach.
D. The capitalisation approach.

14. Increases in capital city house prices may be the result of:
A. The policy of state governments to limit the supply of land by means of zoning.
B. Lower levels of immigration.
C. The threat of a higher taxation policy on property investment.
D. A decrease in office jobs in city areas.

15. Consumer credit insurance policies will exclude claims by the insured in which of the following
circumstances?
A. The insured has a drug or alcohol addiction.
B. The death of the insured.
C. Sickness of the insured extending beyond a period of 12 months.
D. All of the above.

16. Market forces are the primary determinant of share prices in the secondary market with prices
increasing arising from:
A. Excess levels of buying pressure over selling pressure.
B. Excess levels of selling pressure over buying pressure.
C. Equilibrium levels of buying and selling pressure.
D. None of the above.

17. With regard to the benefits of diversification, nominate the incorrect statement:
A. The expected (mean) return for the portfolio lies between the highest return for all assets in the
portfolio and the lowest return for all assets in the portfolio.
B. The riskiness of a portfolio is simply a weighted average of the standard deviations of the
individual shares in the portfolio.
C. Portfolio risk can be reduced to close to zero when the returns of the shares contained in the
portfolio are perfectly negatively correlated, that is they have a correlation coefficient of –1.0.
D. A correlation coefficient of –1 would indicate that the two companies move counter-cyclically to
each other.

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18. Mr Rolf Weasley has recently purchased $12,000 worth of shares in Perloins Ltd. Given the relative
risk exposure of Perloins Ltd., Rolf expects an annual rate of return on the investment of 9% p.a.
compounded at regular intervals of 4 months. Approximately how much would Rolf expect to realise
from the sale of his investment in 5 years from now?
A. $13,911
B. $18,463
C. $18,696
D. $43,710

19. The principle of utmost good faith:

A. Holds only the insurer to a high standard of honesty in executing insurance policies.
B. Generally does not apply to health insurance.
C. Holds both the insured and insurer to a high standard of honesty throughout the duration of the
insurance policy.
D. Is a tool used to defraud policy holders.

20. Approximately how much would you need to accumulate in superannuation in order to fund a real
retirement income of $60,000 p.a. for 20 years if the real rate of return was 4%?
A. $1,786,685
B. $131,467
C. $1,200,000
D. $815,420

21. The superannuation fund trustee has discretion over the distribution of a deceased member’s account
balance unless there is a valid:
A. Binding death benefit nomination.
B. Non-binding death benefit nomination.
C. Will made by the deceased member.
D. Power of attorney made by the deceased member.

22. A person dying without a valid will is:

A. Not covered by any state laws and their estate will be distributed in accordance with the common
law.
B. Not covered by any state laws and their estate will be distributed in accordance with federal
legislation.
C. Said to have died intestate.
D. Both A and C.

23. A testamentary trust is a trust:

A. Established by a general power of attorney.
B. Established by living persons.
C. Established by a will.
D. Created by a settlor.

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24. Conditions of release include where the individual has:
A. Died.
B. Reached the retirement age.
C. Become unemployed before retirement.
D. Both A and B.

25. Compulsory third party (CTP) motor vehicle insurance covers:

A. The legal liability of the driver arising out of the use of the vehicle.
B. The damage to the vehicle, whether for repairs or if the vehicle is a total loss.
C. The insured or the driver (driving with the insured’s consent) for their legal liability in relation to
property damage as a result of an accident arising out of the use of the vehicle.
D. Both A and C.

26. The underlying value of units in an unlisted managed fund is based on the:
A. Net prevailing market value of the fund’s investment portfolio divided by the number of units
issued.
B. Supply and demand for those units.
C. Inflation- adjusted value of the fund’s net assets.
D. None of the above.

27. The Net Present Value (NPV) approach:

A. is a suitable form of analysis for property investments.
B. would include net rental income as cash outflows as part of NPV analysis.
C. results in a greater positive NPV / lower negative NPV when a relatively higher discount rate is
used.
D. Both A and B.

28. Establishing a market value for older buildings is more problematic using the:
A. Cost approach.
B. Direct comparison approach.
C. Capitalisation approach.
D. All of the above.

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29. Focusing an investment portfolio with ethical investments:
A. Allow investors to integrate personal values and social concerns with their investment objectives.
B. Potentially creates adverse diversification issues for the investor increasing their investment risk
exposure.
C. Both A and B.
D. Is not likely to be constrained by a lack of information available from many companies regarding
this issue.

30. In terms of loss aversion theory it is generally accepted that investors:

A. Consider losses far more undesirable than equivalent gains.
B. Have a degree of aversion to gains which is counter to efficient market theory.
C. Are more likely to sell losing stocks than winning stocks.
D. All of the above.

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Section B: Short Answers (20 Marks) Time allocated: 30 minutes

Question 31 (6.5m)
Risk management provides a systematic approach to the management of pure risk. This systematic
approach helps ensures that all risks are identified and addressed.
a. Explain what pure risk is and provide an example. (1.5m)
b. Briefly outline the five broad steps of risk management process. (5m)

Question 32 (4.5m)
After retirement, an individual might go through a number of phases. Briefly discuss the three
phases of retirement.

Question 33 (2m)
Explain the difference between a Will and a Power of Attorney in estate planning.

Question 34 (3m)

Assume that your father is a member of Fiji National Provident Fund. He will turn 55 next year,
which is the retirement age in Fiji. He is currently confused between the three retirement options
for withdrawal of superannuation funds from his FNPF account.

Briefly outline the three options available to your father.

Question 35 (4m)
List two advantages and two disadvantages of investing into managed funds.

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Section C: Calculations (50 Marks) Time allocated: 90 minutes
(Where applicable, round off all answers to 2dps)

Question 36: Nominal and Effective Interest Rates (10 marks)

a. You intend to apply for an unsecured personal loan of $2,000. You currently bank with
Westpac. Not limiting yourself to Westpac only for your loan application, you decided to
explore the market and obtained the following quotations. (5m)

Table 1
Bank Rate (p.a.) Compounding
Westpac 10.45% Monthly
BSP 10.60% Quarterly
ANZ 11.00% Annually

Which bank offers you the best loan deal?

b. You have been able to accumulate $10,000 in savings from your end-of-month salary and you
are seeking to invest this amount plus the regular monthly salary savings of $400 into a suitable
investment. Given your risk profile, you select Westpac bank from (a) above as the best
financial intermediary to place your funds in at the interest rate specified in Table 1 above. You
plan to keep your accumulated and ongoing savings in your Westpac account for the next 4
years.

Calculate the expected balance in your savings account at the end of the 4-year term? (5m)

Question 37: Insurance Claims (5 marks)

Ronaldo’s 4-year old property located in Nasese, Suva was recently severely affected by an
earthquake. The total replacement value of the property including contents at the time of the
earthquake was $400,000. Ronaldo currently has a home and contents insurance policy purchased
from Tower Insurance. The percentage of the property damaged by the earthquake was estimated
by Tower Insurance claims officer to be 60%. The property was originally built by Ronaldo at a
total cost including contents of $245,000. The specific information included in Ronaldo’s home and
contents insurance policy relating to claims made are as follows:

 Insurance is provided on a ‘new for old’ basis;

 Total sum insured is $280,000;
 A co-insurance clause operates which is set at 80% of the current replacement value of
the home and contents.

a. Calculate the dollar value of damage to Ronaldo’s property as estimated by the Tower
Insurance claims officer. (1m)

b. Based on his policy, how much will he be able to claim from Tower Insurance? (3m) Why? (1m)

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Question 38: Margin Lending (15 marks)
Your client, Pritesh, has just invested in the following portfolio at the South Pacific Stock Exchange
which he has financed through a $200,000 margin loan.

Share Market Value LVR

FMF 80,000 75%
FTV 80,000 70%
VIL 80,000 65%
FHL 80,000 75%

A year later, the stock market suffered considerable falls and Pritesh’s portfolio is now valued as
follows:
Share Market Value LVR
FMF 70,000 75%
FTV 65,000 70%
VIL 85,000 65%
FHL 50,000 75%

His lender, BSP, has made a margin call.

a. Differentiate between the two terms: (i) margin lending and a (ii) margin call. (2m)

b. Calculate Pritesh’s safety margin percentage before the stock market suffered the fall? (3m)

c. Calculate Pritesh’s new safety margin percentage, i.e. after the stock market suffered the fall?
(3m)

d. To satisfy BSP’s margin call, Pritesh decides to sell some existing shares and use the proceeds to
reduce the value of the loan. For each of the shares in his portfolio, calculate how much he
would need to sell to satisfy the margin call. (5m)

e. State two other ways through which Pritesh could have satisfied the margin call. (2m)

Question 39: Assessing a Financial Situation (10 marks)

Albie and Debra are a young married couple who have one child, Noah, aged 3 years. They have
plans to send Noah to a private secondary school when he is 12 years of age and have decided to
undertake an investment plan so they can pay for the fees from their investments rather than pay
the fees from their salaries at that time. They have not yet put into place any savings plans. Albie
and Debra are undecided about whether they should invest funds over the next 5 years and then let
the investments grow for the remaining 4 years or whether they should wait until Noah is in
primary school, when they may be able to afford more money to invest as their salaries should be
higher. They are conscious that Debra may not be able to work full-time again until Noah goes to
primary school so that is part of the reason why they may not save initially. Hence, they plan to
invest $200 per week from now for such a purpose. They know which school they would like to send
their children to and have been advised that the fees are $7,000 per annum per student. The bursar

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at the school also advised them that the fees may be expected to rise by 3% per year. Albie and
Debra expect to achieve a long-term rate of 6.5% p.a. on their choice of fund, one that is designed
for education funding, because of its tax-free status.

a. Calculate the end benefit if Albie and Debra start investing $200 per week for the next 5 years
(compounded weekly) and then leave the investment intact for the following 4 years (annual
compounding). (4m)
b. Calculate the alternative approach, which requires them to invest nothing for the next 5 years
but then $300 per week (weekly compounding) for the 4 years prior to Noah commencing
secondary school. (4m)

c. Compare the two alternatives, a & b above. Which option should Albie and Debra choose?
Why? (1m)
d. List 2 other issues you think they need to consider in their analysis? (1m)

Question 40: Analyzing Performance (10 marks)

Fund A
Unit price at start of year $3.40
Unit price at end of year $4.10
Standard deviation of the fund (σ) 0.76
Risk-free rate (Rf) 3.50% p.a.

Fund B
Market value at start of year $112 million
Market value at end of year $144 million
Distributions $5 million
Contributions received $21 million
Standard deviation of the fund (σ) 0.98
Risk-free rate (Rf) 3.50% p.a.

a. Calculate the annual returns for each fund. (5m)

b. Calculate the Sharpe Index for each fund. (3m)
c. As an aggressive investor, which fund would you invest in? Why? (2m)

THE END

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 𝑗 𝑚 𝑆𝑢𝑚 𝐼𝑛𝑠𝑢𝑟𝑒𝑑
𝑖 = (1 + 𝑚) − 1 𝐶𝑙𝑎𝑖𝑚𝑠 =
𝑇𝑜𝑡𝑎𝑙 𝑉𝑎𝑙𝑢𝑒∗𝑅𝑎𝑡𝑒
∗ 𝑇𝑜𝑡𝑎𝑙 𝐷𝑎𝑚𝑎𝑔𝑒𝑠

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