For a price of $100, Vera will sell you a 2 year bond paying semi-annual coupons of 10% pa. The face value of the bond is $100. Other bonds with similar risk, maturity and coupon characteristics trade at a yield of 8% pa.
Question 339 bond pricing, inflation, market efficiency, income and capital returns
Economic statistics released this morning were a surprise: they show a strong chance of consumer price inflation (CPI) reaching 5% pa over the next 2 years.
This is much higher than the previous forecast of 3% pa.
A vanilla fixed-coupon 2-year risk-free government bond was issued at par this morning, just before the economic news was released.
What is the expected change in bond price after the economic news this morning, and in the next 2 years? Assume that:
- Inflation remains at 5% over the next 2 years.
- Investors demand a constant real bond yield.
- The bond price falls by the (after-tax) value of the coupon the night before the ex-coupon date, as in real life.
In Australia in the 1980's, inflation was around 8% pa, and residential mortgage loan interest rates were around 14%.
In 2013, inflation was around 2.5% pa, and residential mortgage loan interest rates were around 4.5%.
If a person can afford constant mortgage loan payments of $2,000 per month, how much more can they borrow when interest rates are 4.5% pa compared with 14.0% pa?
Give your answer as a proportional increase over the amount you could borrow when interest rates were high ##(V_\text{high rates})##, so:
###\text{Proportional increase} = \dfrac{V_\text{low rates}-V_\text{high rates}}{V_\text{high rates}} ###
Assume that:
- Interest rates are expected to be constant over the life of the loan.
- Loans are interest-only and have a life of 30 years.
- Mortgage loan payments are made every month in arrears and all interest rates are given as annualised percentage rates (APR's) compounding per month.
Question 546 income and capital returns, interest only loan, no explanation
Which of the following statements about the capital and income returns of an interest-only loan is correct?
Assume that the yield curve (which shows total returns over different maturities) is flat and is not expected to change.
An interest-only loan's expected:
The current gold price is $700, gold storage costs are 2% pa and the risk free rate is 10% pa, both with continuous compounding.
What should be the 3 year gold futures price?
Which of the following interest rate quotes is NOT equivalent to a 10% effective annual rate of return? Assume that each year has 12 months, each month has 30 days, each day has 24 hours, each hour has 60 minutes and each minute has 60 seconds. APR stands for Annualised Percentage Rate.
Itau Unibanco is a major listed bank in Brazil with a market capitalisation of equity equal to BRL 85.744 billion, EPS of BRL 3.96 and 2.97 billion shares on issue.
Banco Bradesco is another major bank with total earnings of BRL 8.77 billion and 2.52 billion shares on issue.
Estimate Banco Bradesco's current share price using a price-earnings multiples approach assuming that Itau Unibanco is a comparable firm.
Note that BRL is the Brazilian Real, their currency. Figures sourced from Google Finance on the market close of the BVMF on 24 July 2015.
The market's expected total return is 10% pa and the risk free rate is 5% pa, both given as effective annual rates.
A stock has a beta of 0.5.
In the last 5 minutes, the federal government unexpectedly raised taxes. Over this time the share market fell by 3%. The risk free rate was unchanged.
What do you think was the stock's historical return over the last 5 minutes, given as an effective 5 minute rate?
Question 908 effective rate, return types, gross discrete return, return distribution, price gains and returns over time
For an asset's price to double from say $1 to $2 in one year, what must its gross discrete return (GDR) be? If the price now is ##P_0## and the price in one year is ##P_1## then the gross discrete return over the next year is:
###\text{GDR}_\text{annual} = \dfrac{P_1}{P_0}###