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Question 103  option

Below are 4 option graphs. Note that the y-axis is payoff at maturity (T). What options do they depict? List them in the order that they are numbered.

Image of option graphs



Question 129  debt terminology

An 'interest rate' is the same thing as a 'coupon rate'. or ?


Question 156  APR, effective rate

A 2 year government bond yields 5% pa with a coupon rate of 6% pa, paid semi-annually.

Find the effective six month rate, effective annual rate and the effective daily rate. Assume that each month has 30 days and that there are 360 days in a year.

All answers are given in the same order:

##r_\text{eff semi-annual}##, ##r_\text{eff yrly}##, ##r_\text{eff daily}##.



Question 239  income and capital returns, inflation, real and nominal returns and cash flows, interest only loan

A bank grants a borrower an interest-only residential mortgage loan with a very large 50% deposit and a nominal interest rate of 6% that is not expected to change. Assume that inflation is expected to be a constant 2% pa over the life of the loan. Ignore credit risk.

From the bank's point of view, what is the long term expected nominal capital return of the loan asset?



Question 419  capital budgeting, NPV, interest tax shield, WACC, CFFA, CAPM, no explanation

Project Data
Project life 1 year
Initial investment in equipment $6m
Depreciation of equipment per year $6m
Expected sale price of equipment at end of project 0
Unit sales per year 9m
Sale price per unit $8
Variable cost per unit $6
Fixed costs per year, paid at the end of each year $1m
Interest expense in first year (at t=1) $0.53m
Tax rate 30%
Government treasury bond yield 5%
Bank loan debt yield 6%
Market portfolio return 10%
Covariance of levered equity returns with market 0.08
Variance of market portfolio returns 0.16
Firm's and project's debt-to-assets ratio 50%
 

Notes

  1. Due to the project, current assets will increase by $5m now (t=0) and fall by $5m at the end (t=1). Current liabilities will not be affected.

Assumptions

  • The debt-to-assets ratio will be kept constant throughout the life of the project. The amount of interest expense at the end of each period has been correctly calculated to maintain this constant debt-to-equity ratio.
  • Millions are represented by 'm'.
  • All cash flows occur at the start or end of the year as appropriate, not in the middle or throughout the year.
  • All rates and cash flows are real. The inflation rate is 2% pa.
  • All rates are given as effective annual rates.
  • The 50% capital gains tax discount is not available since the project is undertaken by a firm, not an individual.

What is the net present value (NPV) of the project?



Question 507  leverage, accounting ratio

A firm has a debt-to-equity ratio of 60%. What is its debt-to-assets ratio?



Question 514  corporate financial decision theory, idiom

The expression 'cash is king' emphasizes the importance of having enough cash to pay your short term debts to avoid bankruptcy. Which business decision is this expression most closely related to?



Question 693  boot strapping zero coupon yield, forward interest rate, term structure of interest rates

Information about three risk free Government bonds is given in the table below.

Federal Treasury Bond Data
Maturity Yield to maturity Coupon rate Face value Price
(years) (pa, compounding semi-annually) (pa, paid semi-annually) ($) ($)
0.5 3% 4% 100 100.4926
1 4% 4% 100 100.0000
1.5 5% 4% 100 98.5720
 

 

Based on the above government bonds' yields to maturity, which of the below statements about the spot zero rates and forward zero rates is NOT correct?



Question 775  utility, utility function

Below is a graph of 3 peoples’ utility functions, Mr Blue (U=W^(1/2) ), Miss Red (U=W/10) and Mrs Green (U=W^2/1000). Assume that each of them currently have $50 of wealth.

Utility curves

Which of the following statements about them is NOT correct?

(a) Mr Blue would prefer to invest his wealth in a well diversified portfolio of stocks rather than a single stock, assuming that all stocks had the same total risk and return.



Question 873  Sharpe ratio, Treynor ratio, Jensens alpha, SML, CAPM

Which of the following statements is NOT correct? Fairly-priced assets should:




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