Tutorial 1-3

Department of Finance
FNCE10002 Principles of Finance

Semester 2, 2023
Introduction to Principles of Finance and

Introduction to Financial Mathematics I
Tutorial Questions for Lecture 1
Priority questions this week:
A1, B1, C1 and C3
A. Short Answer Questions
Provide brief responses to the following questions.
A1. Outline the differences between the primary and secondary markets and the main functions
that they perform.
A2. Explain how the future value of a cash flow will change if each of the following factors
changes as indicated, assuming other factors are unchanged.
a) The time horizon increases.
b) The interest rate decreases.
c) The interest compounding frequency increases. (That is, m in the effective interest
rate expression becomes larger.)
A3. Explain how the present value of a cash flow will change if each of the following factors
changes as indicated, assuming other factors are unchanged.
a) The time horizon decreases.
b) The interest rate increases.
c) The interest compounding frequency decreases. (That is, m in the effective interest
rate expression becomes smaller.)
B. Multiple Choice Questions
Suggested Answers to Tutorial Questions for Topic 1 1

For each question pick the most reasonable response based on the information provided.
B1. If you invest $50,000 in a savings account paying 6% p.a., the lump sum amount you will
have accumulated after five years is closest to:
a) $50,250.
b) $63,124.
c) $66,911.
d) $67,443.
B2. BOA bank’s quoted interest rate has interest compounded on a daily basis. The effective
annual interest rate that BOA Bank is charging on its home loans is 8.33% p.a.. Based on
this information, the stated (or quoted) interest rate is closest to: (hint – you have the
effective rate but want to calculate the stated/quoted rate!)
a) 7.80%.
b) 8.00%.
c) 8.33%.
d) 8.67%.
C. Problems
C1. Your computer manufacturing firm must purchase 20,000 mouses from a supplier. One
supplier requires a payment of $20,000 today plus $1 per mouse payable at the end of
year 1. Another supplier will charge $2.10 per mouse, also payable at the end of year 1.
The appropriate interest rate is 6% p.a.. What is the difference in their offers in terms of
dollars today (that is, present value at time 0)? Which offer should your firm take?
Explain.
C2. A state savings bond from New South Wales can be converted to $100 at maturity six
years from purchase. If the state bonds provide a return of 8% p.a. (compounded
annually), at what price must the state sell its bonds today? Assume no cash payments on
savings bonds before maturity. [note – this is an example of what is referred to as a zero-
coupon bond. The only cash flows that occur are at the start – when the purchaser pays
the issuer the price of the bond, and then at the end, when the issuer pays the face value
of the bond ($100) to the purchaser]
C3. You have a trust fund that will pay you $1 million exactly 10 years from today. You want
cash now, so you are considering an opportunity to sell the right to the trust fund to an
investor.
a. What is the least you will sell your claim for if you could earn the following rates of return
on similar-risk investments during the 10-year period?
1. 6 % p.a.
2. 9 % p.a.
3. 12 % p.a.
b. Rework part (a) under the assumption that the $1 million payment will be received in 15
rather than 10 years.
c. Based on your findings in parts (a) and (b), discuss the effect of both the size of the rate
of return and the time until receipt of payment on the present value of a future sum.

D. Completing the loop with Desmos graphs
Throughout this semester we are going to be using Desmos interactive graphs to

develop our intuitive understanding of the principles and concepts we cover in class.
While I encourage you to open your own free Desmos account at www.desmos.com,
you don’t need to do so to interact with the examples I provide.
This week – we are going to check the answer for multiple choice question B1 by
accessing an interactive graph at the following address:
https://go.unimelb.edu.au/7shs
On the left hand side you will see a description of what the graph is doing as well as
how to interact with the graph.
Check your answer to the multiple choice question B1 above by using the slider and
changing the value of the variable c to 5. Do you get a FV consistent with your answer
to B1 above?
Spend some time playing with this graph, changing the initial amount invested and or
the rate at which it is invested and see what happens to the FV of the cash flow.

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Department of Finance

FNCE10002 Principles of Finance

Introduction to Principles of Finance and

Priority questions this week:

A1, B1, C1 and C3

A. Short Answer Questions

Provide brief responses to the following questions.

a) The time horizon increases.

b) The interest rate decreases.

a) The time horizon decreases.

b) The interest rate increases.

B. Multiple Choice Questions

Suggested Answers to Tutorial Questions for Topic 1 1

Suggested Answers to Tutorial Questions for Topic 1 2

Throughout this semester we are going to be using Desmos interactive graphs to

Suggested Answers to Tutorial Questions for Topic 1 3

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