Fight Finance

Question 107  interest only loan

You want to buy an apartment worth $300,000. You have saved a deposit of $60,000.

The bank has agreed to lend you $240,000 as an interest only mortgage loan with a term of 30 years. The interest rate is 6% pa and is not expected to change. What will be your monthly payments?

(a) 17,435.74

(b) 1,438.92

(c) 1,414.49

(d) 1,200.00

(e) 666.67

Question 125  option, speculation, market efficiency

Suppose that the US government recently announced that subsidies for fresh milk producers will be gradually phased out over the next year. Newspapers say that there are expectations of a 40% increase in the spot price of fresh milk over the next year.

Option prices on fresh milk trading on the Chicago Mercantile Exchange (CME) reflect expectations of this 40% increase in spot prices over the next year. Similarly to the rest of the market, you believe that prices will rise by 40% over the next year.

What option trades are likely to be profitable, or to be more specific, result in a positive Net Present Value (NPV)?

Assume that:

• Only the spot price is expected to increase and there is no change in expected volatility or other variables that affect option prices.
• No taxes, transaction costs, information asymmetry, bid-ask spreads or other market frictions.

(a) Buy one year call options on fresh milk.

(b) Buy one year put options on fresh milk.

(c) Sell one year call options on fresh milk.

(d) All of the above option trades are likely to have a positive NPV.

(e) None of the above option trades are likely to have a positive NPV.

Question 167  NPV, IRR

A project's net present value (NPV) is negative. Select the most correct statement.

(a) The project should be accepted.

(b) The project's IRR is less than its required return.

(c) The project's IRR is more than its required return.

(d) The project's IRR is equal to its required return.

(e) The project is under-priced.

Question 285  covariance, portfolio risk

Two risky stocks A and B comprise an equal-weighted portfolio. The correlation between the stocks' returns is 70%.

If the variance of stock A's returns increases but the:

• Prices and expected returns of each stock stays the same,
• Variance of stock B's returns stays the same,
• Correlation of returns between the stocks stays the same.

Which of the following statements is NOT correct?

(a) The variance of the portfolio returns will increase.

(b) The standard deviation of the portfolio returns will increase.

(c) The covariance of returns between stocks A and B will stay the same.

(d) The portfolio expected return will stay the same.

(e) The portfolio value will stay the same.

Question 359  CFFA

Which one of the following will have no effect on net income (NI) but decrease cash flow from assets (CFFA or FFCF) in this year for a tax-paying firm, all else remaining constant?

Remember:

###NI=(Rev-COGS-FC-Depr-IntExp).(1-t_c )### ###CFFA=NI+Depr-CapEx - ΔNWC+IntExp###

(a) An increase in revenue (Rev).

(b) An increase in rent expense (a type of recurring fixed cost, FC).

(c) An increase in depreciation expense (Depr).

(d) An increase in inventories (a current asset).

(e) An decrease in interest expense (IntExp).

Question 564  covariance

What is the covariance of a variable X with a constant C?

The cov(X, C) or ##\sigma_{X,C}## equals:

(a) var(X) or ##\sigma_X^2##

(b) sd(X) or ##\sigma_X##

(c) 1

(d) 0

(e) Mathematically undefined

Question 655  capital budgeting, opportunity cost, sunk cost

The 'time value of money' is most closely related to which of the following concepts?

(a) Competition: Firms in competitive markets earn zero economic profit.

(b) Opportunity cost: The cost of the next best alternative foregone should be subtracted.

(c) Separation of the investment and financing decisions.

(d) Diversification: Risks can often be reduced by pooling them together.

(e) Sunk costs: Costs that cannot be recouped should be ignored.

Question 844  gross domestic product deflator, consumer price index, inflation, no explanation

An Australian-owned company produces milk in New Zealand and exports all of it to China. If the price of the milk increases, which of the following would increase?

(a) Australia’s GDP deflator.

(b) Australia’s CPI.

(c) New Zealand’s CPI.

(d) China’s GDP deflator.

(e) China’s CPI.

Question 889  cross currency interest rate parity, no explanation

Judging by the graph, in 2018 the USD short term interest rate set by the US Federal Reserve is higher than the JPY short term interest rate set by the Bank of Japan, which is higher than the EUR short term interest rate set by the European central bank.

At the latest date shown in 2018: ##r_{USD}>r_{JPY}>r_{EUR}##

Assume that each currency’s yield curve is flat at the latest date shown in 2018, so interest rates are expected to remain at their current level into the future.

Which of the following statements is NOT correct?

Over time you would expect the:

(a) USD to appreciate against the JPY.

(b) USD to depreciate against the EUR.

(c) JPY to appreciate against the USD.

(d) JPY to depreciate against the EUR.

(e) EUR to appreciate against the JPY.

Question 898  comparative advantage in trade, production possibilities curve, no explanation

Adam and Bella are the only people on a remote island. Their production possibility curves are shown in the graph.

Assuming that Adam and Bella cooperate according to the principles of comparative advantage, what will be their combined production possibilities curve?

(a) a

(b) b

(c) c

(d) d

(e) e