(a) Briefly analyse the effect of an increase in interest rates on the investment portfolio of a profit maximising holding company.
(b) The University is contemplating building a new squash court, adjacent to its new hall of residence. To secure local support for its planning application, the University has offered to open the court to local players at student rates for the first five years. After five years, the University can charge what it likes for the courts. Consequently, the University estimates that net revenue from the court will be \(\$1000\) for each of the first five years, rising by \(10 \%\) (compounded) in each of the sixth to tenth years. In the eleventh and twelfth years rising maintenance costs will completely offset rising fees so that net revenue stays at tenth year level. At the end of the twelfth year, the site is due for redevelopment.
The cost of building the squash court is estimated to be \(\$6000\). To finance the court, the University must draw from its reserves, currently earning \(12 \%\) in Local Authority Bonds. Selling sufficient bonds would involve legal and administrative costs of \(\$320\). Advise the University on the viability of the project. What other factors should the University take into account?