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 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.
Which of the following equations is NOT equal to the total return of an asset?
Let ##p_0## be the current price, ##p_1## the expected price in one year and ##c_1## the expected income in one year.
The expression 'you have to spend money to make money' relates to which business decision?
A company advertises an investment costing $1,000 which they say is underpriced. They say that it has an expected total return of 15% pa, but a required return of only 10% pa. Of the 15% pa total expected return, the dividend yield is expected to always be 7% pa and rest is the capital yield.
Assuming that the company's statements are correct, what is the NPV of buying the investment if the 15% total return lasts for the next 100 years (t=0 to 100), then reverts to 10% after that time? Also, what is the NPV of the investment if the 15% return lasts forever?
In both cases, assume that the required return of 10% remains constant, the dividends can only be re-invested at 10% pa and all returns are given as effective annual rates.
The answer choices below are given in the same order (15% for 100 years, and 15% forever):
A firm wishes to raise $50 million now. They will issue 5% pa semi-annual coupon bonds that will mature in 3 years and have a face value of $100 each. Bond yields are 6% pa, given as an APR compounding every 6 months, and the yield curve is flat.
How many bonds should the firm issue?
Question 920 SML, CAPM, Sharpe ratio, Treynor ratio, Jensens alpha, no explanation
Over-priced assets should NOT: