Task 1: Financial institutions and the tax system
Sanjay currently earns $95,000 per annum and his total income has exceeded $90,000 for the past two years. He has inherited $50,000 and wants to place the money on term deposit for 12 months. He’s asked you for advice on the range of financial institutions that offer this product.
a) To illustrate the range of providers for Sanjay:
• Select three different types of financial institution currently operating in the New Zealand financial services industry that Sanjay can place his money on term deposit with.
• For each financial institution, state their name and type of financial institution, and provide a link to the page promoting term deposits.
• Discuss the similarities and differences between the three financial institutions you selected in terms of:
o their structure/ownership o how they’re regulated
o the services they provide.
b) You explain to Sanjay that with some providers, he has the option of placing his $50,000 on a term deposit or in a PIE Term Deposit Fund for 12 months. Both products currently offer interest at 4% per annum and there are no fees payable for either option.
Assume Sanjay invests for the next 12 months, and that his salary remains at $95,000. Also assume his income is derived only from his salary and this investment. Calculate his total after-tax income (salary + interest) for each investment option and clearly highlight which option provides him with the higher after-tax income. Show all your workings.
Task 2: The impact of natural disasters and changes in the OCR
Aroha runs a small business exporting cut flowers and foliage. A year ago, you helped Aroha purchase her first home using a revolving credit facility. The current balance outstanding on this facility is $451,250. She has sum insured home insurance cover with Aotearoa Insurance.
Aotearoa Insurance has a reinsurance treaty with Swiss Re. Aroha has seen the following two newspaper headlines:
• Headline 1: ‘Inflation is rising and is expected to reach 5–6% in the next eighteen months’
• Headline 2: ‘Hurricane Fred in the United States and the earthquake in Japan set to impact homeowners.
She seeks advice from you on how these factors will affect both her business and her personal financial situation.
a) Headline 1: Analyse the impact of rising inflation on Aroha.
You are required to:
• Predict the action the Reserve Bank of New Zealand will take in response to rising inflation.
• Analyse how and why the Reserve Bank of New Zealand’s action will impact Aroha’s personal financial situation in terms of her home loan.
• Analyse how and why the Reserve Bank of New Zealand’s action will impact Aroha’s business in terms of its export earnings.
b) Headline2:AnalysehowandwhytheseoverseasdisasterswillimpactSwiss Re, Aotearoa Insurance and Aroha, as the insured under a home insurance policy.
Task 3 Financial markets and the impact of the business cycle
Last year you helped Eliana choose the right KiwiSaver fund. She knew little about financial markets and you provided her with some background information on managed funds to help her make a decision about which fund to select. She chose the Aotearoa Investments Balanced KiwiSaver Scheme.
Last week she received the latest Aotearoa Investments Balanced KiwiSaver Scheme fund update. This has prompted her to ask you to help deepen her understanding about where her KiwiSaver funds are
invested. You decide to use Aotearoa Investments’ top 10 investments to illustrate the main markets her funds are invested in.
Here’s an extract from Aotearoa Investments Balanced KiwiSaver Scheme’s Top 10 investments:
0.75% Unlisted property
Percentage Type of fund net
Credit rating (if applicable)
1 New Zealand 1.25% New Zealand New AA+ Government Stock fixed interest Zealand
Spark New Zealand 1.05% Australasian New Ltd equities Zealand
3 Rabobank Certificate of Deposit
31/12/xxxx(assume current year)
0.80% Cash and New A1 cash Zealand
a) Investment 1 and Investment 2
Describe the markets in which Investments 1 and 2 are traded. You are required
(i) For Investment 1:
• Identify the market in which Investment 1 is traded, and the typical timeframe for investing in this market.
• Give one reason why the government issues this type of investment in this market.
(ii) For Investment 2:
• Identify the market in which Investment 2 is traded, and the typical timeframe for investing in this market.
• Give one reason why companies like Spark New Zealand Ltd issue this type of investment in this market.
(iii) Both markets consist of a primary market and a secondary market.
• Explain the difference between the primary market and the secondary market.
(iv) Aotearoa Investments may have invested in Investment 1 and Investment 2 through an exchange or over the counter (OTC).
• Explain two differences between the way an exchange and an OTC market operate.
• Identify the exchange where Aotearoa Investments can trade in Investment 1 and the exchange where Aotearoa Investments can trade in Investment 2.
(v) Explain the role of NZX in facilitating Aotearoa Investments’ trading in Investment 1 and Investment 2.
(vi) Explain the role of NZDM in the issue of Investment 1.
© The Open Polytechnic of New Zealand Ltd
(b) Investment 3
Describe the market in which Investment 3 is traded. You are required to:
(i) Identify the market in which Investment 3 is traded, and the typical timeframe for investing in this market.
(ii) Give one reason why banks such as Rabobank issue certificates of deposit into this market.
(iii) This market consists of a wholesale market and a retail market. Explain the difference between a wholesale market and a retail market and identify which one applies to Aotearoa Investments’ trading in Investment 3.
(iv) Identify whether this market operates as an exchange or OTC market.
(c) Investment 4
Describe the market in which Investment 4 is traded. You are required to:
(i) Identify the market in which Investment 4 is traded, and the typical timeframe for investing in this market.
(ii) Outline the key difference between a listed and unlisted property investment.
(iii) Identify and explain one way to invest in listed property and one way to invest in unlisted property.
(d) Using the investment clock concept, discuss how changes in the business cycle impact the four financial markets you identified in which investments 1-4 are traded.
For each phase in the business cycle you must:
• identify the most attractive market during that phase
• give two reasons why that market is the most attractive during that phase.
© The Open Polytechnic of New Zealand Ltd
Task 4: Regulators
You’ve been asked to write an article for an online magazine that focuses on the financial services industry. The article is called:
‘The Reserve Bank and the FMA – who regulates what in the financial services industry?’
Write the article, describing the four roles of the Reserve Bank of New Zealand and the four roles of the Financial Markets Authority in regulating the financial services industry.
In your article you are required to: • Focus on the following roles:
o Licensing and supervision.
o Financial market infrastructure oversight. o Crisis management.
o Conduct regulation.
• Where roles overlap between the two regulators, clearly highlight which responsibilities are shared and which responsibilities differ.