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 will 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##).

A **10** year Australian government bond was just issued at **par** with a yield of **3.9**% pa. The fixed coupon payments are **semi-annual**. The bond has a face value of $**1,000**.

**Six months** later, just **after** the first coupon is paid, the yield of the bond decreases to **3.65**% pa. What is the bond's **new price**?

**Question 335** foreign exchange rate, American and European terms

Investors expect Australia's central bank, the RBA, to reduce the policy rate at their next meeting due to fears that the economy is slowing. Then unexpectedly, the policy rate is actually kept unchanged.

What do you expect to happen to Australia's exchange rate?

Three years ago Frederika bought a house for $**400,000**.

Now it's worth $**600,000**, based on recent similar sales in the area.

Frederika's residential property has an expected **total** return of **7**% pa.

She rents her house out for $**2,500** per month, paid in advance. Every 12 months she plans to increase the rental payments.

The present value of 12 months of rental payments is $**29,089.48**.

The future value of 12 months of rental payments one year ahead is $**31,125.74**.

What is the expected annual **capital** yield of the property?

The CAPM can be used to find a business's expected opportunity cost of capital:

###r_i=r_f+β_i (r_m-r_f)###

What should be used as the risk free rate ##r_f##?

A European put option will mature in ##T## years with a strike price of ##K## dollars. The underlying asset has a price of ##S## dollars.

What is an expression for the payoff at maturity ##(f_T)## in dollars from having written (being **short**) the put option?

A young lady is trying to decide if she should attend university or not.

The young lady's parents say that she must attend university because otherwise all of her hard work studying and attending school during her childhood was a waste.

What's the correct way to classify this item from a capital budgeting perspective when trying to decide whether to attend university?

The hard work studying at school in her childhood should be classified as:

A firm is considering a business project which costs $**11**m now and is expected to pay a constant $**1**m at the end of every year forever.

Assume that the initial $**11**m cost is funded using the firm's **existing cash** so no new equity or debt will be raised. The cost of capital is **10**% pa.

Which of the following statements about net present value (NPV), internal rate of return (IRR) and payback period is **NOT** correct?

**Question 664** real and nominal returns and cash flows, inflation, no explanation

What is the present value of **real** payments of $100 every year forever, with the first payment in one year? The **nominal** discount rate is 7% pa and the inflation rate is 4% pa.

**Question 711** continuously compounding rate, continuously compounding rate conversion

A continuously compounded **semi-annual** return of **5**% ##(r_\text{cc 6mth})## is equivalent to a continuously compounded **annual** return ##(r_\text{cc annual})## of: