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Question: You have just started a new job and your employer has enrolled you in KiwiSaver. This is the first time you have been enrolled in KiwiSaver and you decide not to “opt out”.

18 May 2023,8:29 AM


Question 1.

You have just started a new job and your employer has enrolled you in KiwiSaver. This is the first time you have been enrolled in KiwiSaver and you decide not to “opt out”. You are interested in estimating how much your KiwiSaver fund could be worth when you retire.

You make the following assumptions:

•    You are 25 years old now and will retire in exactly 35 years when you are 60.

•    Your salary is $60,000 this year and you expect this to increase by 3% every year.

•     Your employer must contribute 3% of your pay into your KiwiSaver fund each year. •    You will be entitled to the annual government contribution of $521.43 which will be

credited into your KiwiSaver fund every year. (

•    You will make no withdrawals or additional contributions (other than those mentioned above) to your fund until you retire in 35 years.

•    For simplicity, assume that all contributions to your KiwiSaver fund are made once per year, at the end of the year. The first lot of contributions will be made in one year from today.

•    Regardless of the return earned, the manager of your KiwiSaver fund will charge a management fee of 1.0% at the end of each year, based on the opening balance of your fund each year.

•    For simplicity, assume that your KiwiSaver fund’s annual rate of return will be fixed at a (random) rate ranging from 5% (min) to 10% (max) over the entire 35-year period - i.e., the same rate each year over the 35-year period.

•    You can choose to contribute either 3% or 10% of your salary.


You are trying to decide whether to contribute 3% or 10% of your salary and would like to see how much your KiwiSaver fund would be worth at retirement under the following 4 different scenarios listed in the table below.


Total value of KiwiSaver fund after 35 years Scenario analysis



Employee contribution rate



Annual return over the period

5% (min)



10% (max)




Calculate the total values under each scenario in the table. To support your answers, you must show your workings. Include detailed explanations of your calculation for ONE (instead all four) of the quadrants in the scenario analysis above.


(Total for Question: 15 marks)


Question 2.

Two friends, at different stages of their lives, have come to you for advice.

a) James has been working for the past four year since graduating from university and has managed to accumulate $20,000, in addition to his KiwiSaver, which he now wants to invest. He has decided the best way to increase his money over the next few years is to invest in shares. He has found two particular shares of interest.

The first company, Spark New Zealand, a utility company, has a P/E ratio of 9.06 and a dividend yield of 5.03%. The second is Ebos Group Limited, a pharmaceutical distributor, with a P/E ratio of 33.6 and a dividend yield of 2.31%.


You note that the two companies have quite different P/E ratios and dividend yields. Based on the definitions of the metrics, explain what these differences mean about the share prices of the two companies relative to each other. Also discuss some potential reasons why they are so different.

(4 marks)


b) Another of your friend, Sarah, is by nature ‘conservative’ and hence does not have a high tolerance for risk. She wants to be certain that her money is safe and that it will be available in three years’ time when she plans to start a business.

I want to get a better return than I can get on bank term deposits and, presently I am thinking about bonds,” she has told you.

You have a quick look on the NZDX website and find two 3% (coupon rate) 10-year (maturity) bonds – New Zealand Government bond with a yield to maturity of 4.12% and corporate bond issued by Spark New Zealand with a yield to maturity of 6.76%.


You note that the two bonds have quite different yields to maturity while their coupon rates and maturities are the same. Based on the definition of yield to maturity, explain what the difference means about the prices of the two bonds relative to each other. Also discuss some potential reasons why they are so different.

(4 marks)


c) Sarah (in part b. above) says “bonds are safe as long as the issuer doesn’t go bankrupt and I’m certain that neither of them will. So if I set aside enough money today and invest in either bond I will surely have enough money to start my business in three years”. Do you agree or disagree? Explain.

(3 marks)


d) List and explain four (among many) differences between an investment in Spark New Zealand shares and an investment in its bonds.

(2 marks)

e) Given your age and savings goal outlined in Question 1 above (not your real age and goals), discuss whether you think bonds would be a better investment than shares or not. There is no right or wrong answer for this question. Marks will be awarded for logical and well-grounded explanations.

(2 marks)


Note: While there is no hard limit for answer length, half a page or 250 words should be plenty to write a good answer for a part.


(Total for Question: 15 marks)

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