Fin 535: Assignment #5: Short-Term Asset and Liability Management

Assignment #5: Short-Term Asset and Liability Management

Strayer University

Use information contained in the Integrative Problem after Chapter 21 on pages 623 - 624 of your text book and develop responses to questions 1 through 5. You have to prepare 2-3 page report excluding cover page on your findings. Show all relevant computations.

1. Determine the investment portfolio composition for Kent’s eastern branch that would maximize the expected effective yield while satisfying the restriction imposed by the parent.

Currency Expected Effective Yield on Investment

U.S Dollar (1 + .06) [1 + (0)] -1 = 1.06 -1 = .06 = 6%

Australian Dollar (1 + .11) [1+ (-4%)] -1= .0656 = 6.56%

Canadian Dollar (1 + .07) [1 + (-2%)] -1= .0486 = 4.86%

New Zealand Dollar (1 + .09) [1 + (3%)] -1 = .1227 = 12.27%

Japanese Yen (1+ .08) [1+ (0)] -1 = .08 = 8%

Due to the expected effective yields calculated above, the investment portfolio should be allocated as follows:

$5 million invested in New Zealand dollars.

$5 million invested in Japanese Yen

$5 million invested in Australian dollars

2. What is the expected effective yield of the investment portfolio?

With 33.3% allocated to each of the three currencies listed in question 1 (New Zealand dollar, Japanese Yen, Australian dollar), the portfolio’s expected effective yield is:

E (rf) = 33.3% (12.27%) + 33.3% (8%) + 33.3% (6.56%)

= 4.08591 + 2.664 + 2.18448

= 8.93439

= 8.93%

3. Based on the expected effective yield for the portfolio and the initial investment amount of $15 million, determine the annual interest to be earned on the portfolio.

To calculate the annual interest to be earned, multiply the portfolio’s expected effective yield by the initial investment:

$15,000,000 x 8.93% = $1,339,500

4. Determine the financial portfolio composition for Kent’s western branch that would minimize the expected effective financing rate while satisfying the restriction imposed by the parent....