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Question 105 NPV, risk, market efficiency

A person is thinking about borrowing $100 from the bank at 7% pa and investing it in shares with an expected return of 10% pa. One year later the person intends to sell the shares and pay back the loan in full. Both the loan and the shares are fairly priced.

What is the Net Present Value (NPV) of this one year investment? Note that you are asked to find the present value (##V_0##), not the value in one year (##V_1##).

Question 162 income and capital returns

A share was bought for $10 (at t=0) and paid its annual dividend of $0.50 one year later (at t=1). Just after the dividend was paid, the share price was $11 (at t=1).

What was the total return, capital return and income return? Calculate your answers as effective annual rates. The choices are given in the same order:

##r_\text{total}##, ##r_\text{capital}##, ##r_\text{dividend}##.

Question 207 income and capital returns, bond pricing, coupon rate, no explanation

For a bond that pays fixed semi-annual coupons, how is the annual coupon rate defined, and how is the bond's annual income yield from time 0 to 1 defined mathematically?

Let: ##P_0## be the bond price now,

##F_T## be the bond's face value,

##T## be the bond's maturity in years,

##r_\text{total}## be the bond's total yield,

##r_\text{income}## be the bond's income yield,

##r_\text{capital}## be the bond's capital yield, and

##C_t## be the bond's coupon at time t in years. So ##C_{0.5}## is the coupon in 6 months, ##C_1## is the coupon in 1 year, and so on.

Question 318 foreign exchange rate, American and European terms

Question 325 foreign exchange rate

In the 1997 Asian financial crisis many countries' exchange rates depreciated rapidly against the US dollar (USD). The Thai, Indonesian, Malaysian, Korean and Filipino currencies were severely affected. The below graph shows these Asian countries' currencies in USD per one unit of their currency, indexed to 100 in June 1997.

Image of Asian currencies in the 1997 Asian financial crisis, sourced from the RBA

Of the statements below, which is NOT correct? The Asian countries':

Question 433 Merton model of corporate debt, real option, option, no explanation

A risky firm will last for one period only (t=0 to 1), then it will be liquidated. So it's assets will be sold and the debt holders and equity holders will be paid out in that order. The firm has the following quantities:

##V## = Market value of assets.

##E## = Market value of (levered) equity.

##D## = Market value of zero coupon bonds.

##F_1## = Total face value of zero coupon bonds which is promised to be paid in one year.

What is the payoff to equity holders at maturity, assuming that they keep their shares until maturity?

Question 730 DDM, income and capital returns, no explanation

A stock’s current price is $1. Its expected total return is 10% pa and its long term expected capital return is 4% pa. It pays an annual dividend and the next one will be paid in one year. All rates are given as effective annual rates. The dividend discount model is thought to be a suitable model for the stock. Ignore taxes. Which of the following statements about the stock is NOT correct?

Question 799 LVR, leverage, accounting ratio

In the home loan market, the acronym LVR stands for Loan to Valuation Ratio. If you bought a house worth one million dollars, partly funded by an $800,000 home loan, then your LVR was 80%. The LVR is equivalent to which of the following ratios?

Question 801 negative gearing, leverage, capital structure, no explanation

The following steps set out the process of ‘negative gearing’ an investment property in Australia. Which of these steps or statements is NOT correct? To successfully achieve negative gearing on an investment property:

(a) Buy an investment property with low expected future capital gains and high rental income, funded using a low proportion of debt (mortgage loan);

(b) Rent the investment property to a tenant;

(c) Negative gearing is achieved when the property investment’s annual taxable profit is negative, due to the loan’s interest expense being greater than the net rent (rental revenue less the renting expenses such as maintenance);

(d) Deduct the property’s income loss from the investor’s separate personal wage from labour. This means that the investor will pay less personal income tax than if they didn’t make the levered property investment;

(e) The investment property will be a positive-NPV investment if the capital gains are greater than the income losses on an after-tax, risk-adjusted, present-value basis.

Question 833 option, delta, theta, standard deviation, no explanation

Which of the following statements about an option (either a call or put) and its underlying stock is NOT correct?

(a) The option’s expected future continuously compounded returns are always more than or equal to the underlying stock’s expected future continuously compounded returns.

(b) The option’s standard deviation of dollar price changes is always less than or equal to the underlying stock’s standard deviation of dollar price changes.

(c) The option’s standard deviation of continuously compounded returns are always less than or equal to the underlying stock’s standard deviation of continuously compounded returns.

(d) As time elapses and the maturity date of an option approaches, its price will fall, all other things remaining equal.

(e) If the underlying stock’s price rises by $0.01, the call option’s price will rise by less than $0.01 and the put option’s price will fall by less than $0.01.