a.
To determine:
To develop an investment policy statement for a pension fund described as a mature defined benefit plan with the workforce having average age of 54 years, no unfunded pension liabilities and wage cost increase
Introduction:
An investment policy statement (IPS) is defined as a document drafted for a
a.
Answer to Problem 1PS
The objectives and constraints related to pension fund are mentioned.
Explanation of Solution
Given Information:
Given that a pension fund described as a mature defined benefit plan with the workforce having average age of 54 years, no unfunded pension liabilities and wage cost increase forecast at 5% annually.
In defined benefit plan, investor receives an assured pension amount irrespective of the return that is generated by the pension fund. In this kind of retirement plan, the total value of pension amount or the retirement benefit is recognized in advance.
The two major objectives of pension fund are to increase its return requirements and risk tolerance. If the pension fund's actual return exceeds the assumed actuarial return, the shareholders will reap profits. The risk tolerance level of the pension fund depends on proximity of payouts.
Constraints usually co-relate with investor circumstances. These circumstances include liquidity, investment horizon, regulations and tax consideration. For pension fund, if the pension fund is young, the liquidity should be low and vice versa. Investment horizon should be long and pension fund is not liable to any tax rates.
b.
To determine:
To develop an investment policy statement for a university endowment fund described as conservative, with investment return being utilized along with gifts and donations to help meet annual expenses. The spending rate is 5% per year and inflation in costs is expected at 3% annually.
Introduction:
An investment policy statement (IPS) is a document drafted for a portfolio manager by his client that outlines general rules for investment for the manager. This statement gives the broad investment objectives and constraints of a customer and illustrates the strategies to be formulated by the manager for meeting these objectives.
b.
Answer to Problem 1PS
The objectives and constraints related to university endowment fund are mentioned.
Explanation of Solution
Given Information:
Given that a university endowment fund described as conservative, with investment return being utilized along with gifts and donations to help meet annual expenses. The spending rate is 5% per year and inflation in costs is expected at 3% annually.
An endowment fund is usually created by a foundation. The foundation makes withdrawals from the capital invested in the endowment fund. Such capital is used by the University for its general or operating needs. They are normally funded by donations.
The two major objectives of endowment fund are to determine its return requirements and risk tolerance. The return requirement is henceforth determined by current income needs and need for assets growth to maintain the real value. As given in the question itself, risk tolerance is generally conservative.
Constraints usually co-relate with investor circumstances. These circumstances include liquidity, investment horizon, regulations and tax consideration. Endowment funds require low level of liquidity and long time horizon with no rate of tax applicable.
c.
To determine:
To develop an investment policy statement for a life insurance company described as specializing in
Introduction:
An investment policy statement (IPS) is a document drafted for a portfolio manager by his client that outlines general rules for investment for the manager. This statement gives the broad investment objectives and constraints of a customer and illustrates the strategies to be formulated by the manager for meeting these objectives.
c.
Answer to Problem 1PS
The objectives and constraints of a life insurance company described as specializing in
Explanation of Solution
Given Information:
Given that a life insurance company described as specializing in annuities, policy premium rates are based on a minimum annual accumulated rate of 7% in the first year of policy and a 4% minimum annual accumulation rate in the next five years.
A life insurance company invests to hedge their liabilities, which are defined by their own policy.
The two major objectives of insurance company are to determine its return requirements and risk tolerance. The return requirement should exceed new money rate by sufficient margin to meet the expenses and profits. Also for insurance company, actuarial rates are necessary to be determined. As given in the question itself, risk tolerance is generally conservative.
Constraints usually co-relate with investor circumstances. These circumstances include liquidity, investment horizon, regulations and tax consideration. Life insurance requires low level of liquidity and long time horizon with the rate of tax applicable.
Want to see more full solutions like this?
Chapter 22 Solutions
Essentials of Investments (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
- Problem Three (15 marks) You are an analyst in charge of valuing common stocks. You have been asked to value two stocks. The first stock NEWER Inc. just paid a dividend of $6.00. The dividend is expected to increase by 60%, 45%, 30% and 15% per year, respectively, in the next four years. Thereafter, the dividend will increase by 4% per year in perpetuity. Calculate NEWER’s expected dividend for t = 1, 2, 3, 4 and 5. The required rate of return for NEWER stock is 14% compounded annually. What is NEWER’s stock price? The second stock is OLDER Inc. OLDER Inc. will pay its first dividend of $10.00 three (3) years from today. The dividend will increase by 30% per year for the following four (4) years after its first dividend payment. Thereafter, the dividend will increase by 3% per year in perpetuity. Calculate OLDER’s expected dividend for t = 1, 2, 3, 4, 5, 6, 7 and 8. The required rate of return for OLDER stock is 16% compounded annually. What is OLDER’s stock price? Now assume that…arrow_forwardProblem Three (15 marks) You are an analyst in charge of valuing common stocks. You have been asked to value two stocks. The first stock NEWER Inc. just paid a dividend of $6.00. The dividend is expected to increase by 60%, 45%, 30% and 15% per year, respectively, in the next four years. Thereafter, the dividend will increase by 4% per year in perpetuity. Calculate NEWER’s expected dividend for t = 1, 2, 3, 4 and 5. The required rate of return for NEWER stock is 14% compounded annually. What is NEWER’s stock price? The second stock is OLDER Inc. OLDER Inc. will pay its first dividend of $10.00 three (3) years from today. The dividend will increase by 30% per year for the following four (4) years after its first dividend payment. Thereafter, the dividend will increase by 3% per year in perpetuity. Calculate OLDER’s expected dividend for t = 1, 2, 3, 4, 5, 6, 7 and 8. The required rate of return for OLDER stock is 16% compounded annually. What is OLDER’s stock price? Now…arrow_forwardYou are considering a 10-year, $1,000 par value bond. Its coupon rate is 11%, and interest is paid semiannually. Bond valuation Years to maturity 10 Par value of bond $1,000.00 Coupon rate 11.00% Frequency interest paid per year 2 Effective annual rate 8.78% Calculation of periodic rate: Formulas Nominal annual rate #N/A Periodic rate #N/A Calculation of bond price: Formulas Number of periods #N/A Interest rate per period 0.00% Coupon payment per period #N/A Par value of bond $1,000.00 Price of bond #N/Aarrow_forward
- How much do investor psychology and market sentiment play into stock price movements? Do these emotional reactions having a bigger impact on short-term swings, or do they also shape long-term trends in a meaningful way?arrow_forwardExplain The business of predatory tax return preparation, including: How they deceive the working poor,The marketing tactics the preparers use, and Other than paying high fees, what negative impact can the use of these unqualified and unregulated preparers have on the taxpayer?arrow_forwardExplain the changes in tax return preparation you would like to see in Alabama, based on what has been successful in other states.arrow_forward
- Explain the understanding (or misunderstanding) of the working poor with tax return preparation within one page report.arrow_forwardExplain the regulations or requirements for tax return preparers in Alabama.arrow_forwardquestion 1. Toodles Inc. had sales of $1,840,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $1,180,000, $185,000 and $365,000 respectively. In addition, the company had an interest expense of $280,000 and a tax rate of 35 percent. (Ignore any tax loss carry-back or carry-forward provisions.)Arrange the financial information for Toodles Inc. in an income statement and compute its OCF?Question 2 Anti-Pandemic Pharma Co. Ltd. reports the following information in its income statement: Sales = $5,250,000;Costs = $2, 173,000;Other expenses = $187,400; Depreciation expense = $79,000; Interest expense= $53,555; Taxes = $76,000; Dividends = $69,000. $136,700 worth of new shares were also issued during the year and long-term debt worth $65,300 was redeemed.a) Compute the cash flow from assetsb) Compute the net change in working capitalQuestion 3Footfall Manufacturing Ltd. reports the following financial information at the end of the current year:…arrow_forward
- Accrued Interest PayableCompute the interest for December accrued on each of the following notes payable owed by Riff-Raff'n Yell Inc., on December 31: Day of Calendar: 1 Lender: New Age Principal: $10,000 Interest Rate: 5% Term (Days) 120 Day of Calendar: 8 Lender: Wyvern Tavern Principal: $8,000 Interest Rate: 6% Term (Days) 90 Day of Calendar: 17 Lender: Cedar Tree Principal: $15,000 Interest Rate: 4% Term (Days) 90 Note: Use 360 days for calculations and round to the nearest dollar. Riff-Raff'n Yell, Inc. Lender (in alphabetical order) Accrued Interest Cedar Tree Answer 1 New Age Answer 2 Wyvern Tavern Answer 3arrow_forwardQuestion Footfall afacturing pers The following fancial information at the end of the current years Inventory turnover ratio Fixed accetturnover ratio bot to assets ratia set profit ang ross profit margin the given information to fill at the templates for income statement and balance sheet geb In Statement of Footfall Manufacturing Ltd. for the year ending RELEASED BY THE CL MOME2003, FEBRUARY 9, 3005 Sales December 31, 20 Cast of other expec Earnings befo Camings afterarrow_forwardTreasury securities are issued and backed by the U.S. government and, therefore, are considered to be the lowest-risk securities on the market. As an investor looking for protection against inflation, you are considering the purchase of inflation-adjusted bonds known as U.S. Treasury Inflation-Protected Securities (TIPS). With these securities, the face value (which is paid at maturity) and the bond interest rate (which is paid semiannually) is regularly adjusted to account for inflation. However, for this problem only, assume the semi-annual interest payment (called the bond dividend) remains the same. You purchased a 10-year $10,000 TIPS bond with dividend of 4% per year payable semiannually (i.e., $200 every 6 months). Assume there is no inflation adjustment for the first 5 years, but in years 6 through 10, the bond face value increases by $850 each year. You use an expected investment return of 11% per year compounded semiannually. NOTE: This is a multi-part question. Once an…arrow_forward
Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education