Revisions Questions – ACFI2005
Banks invest in financial securities that they hold in their securities portfolio. A proportion of these securities may be government securities. Government securities are regarded as essentially risk-free and therefore pay a low rate of return. Why then do banks invest in this type of security? • primary source of liquidity—government securities easily converted into cash • invest short-term surplus funds—securities provide a return, cash does not • augment investment earnings—another source of income
• use as collateral for future borrowings—security to support bank’s own borrowings • use for repurchase agreements to raise exchange settlement account funds—sell securities back to central bank and receive cleared funds • improve the quality of the overall balance sheet—lower risk government securities offset higher risk loans to customers • manage the maturity structure of the overall balance sheet—average maturity structure of government security portfolio will be less than the loan portfolio • manage the interest rate sensitivity of the overall balance sheet—purchase government securities with interest rate structures that offset interest rate risk within the overall loan portfolio
Scratchleys Ltd just paid a dividend of $1.20 per share. This dividend is expected to grow at a constant rate of 2 per cent per annum. An investor has determined that the required rate of return for this type of investment should be 8 per cent per annum. a)
Calculate the price that the investor would be willing to pay for this share. $20.40
b) Describe what is meant by the ex-dividend date of a share. What is the theoretical impact on share price when a share goes ex-dividend? The ex-div date is when the dividend becomes separated from the share. Theoretically, share price decreases by the value of the dividend.
c) Immediately following the ex-dividend date, the company announces a...
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