Fight Finance

(a) 0.21

(b) 0.105

(c) 0.1111

(d) 0.1

(e) 0

(a) 5%

(b) 7.5%

(c) 10%

(d) 15%

(e) 20%

After one year, would you be able to buy , exactly the as or than today with the money in this account?

(a) Diversifiable standard deviation of asset returns.

(b) Systematic standard deviation of asset returns.

(c) Proportion of debt and equity used to fund the assets.

(d) Cash flows from assets.

(e) Risk free rate.

(a) A bullet loan has no interest payments but it does have a face value. Therefore it's a discount loan.

(b) A fully amortising loan has interest payments but does not have a face value. Therefore it's a premium loan.

(c) An interest only loan has interest payments and its price and face value are equal. Therefore it's a par loan.

(d) A zero coupon bond has no coupon payments but it does have a face value. Therefore it's a premium bond.

(e) A balloon loan has interest payments and its face value is more than its price. Therefore it's a discount loan.

(a) -$21.4286

(b) -$7.563

(c) $15

(d) $21.4286

(e) $78.5714

(a) The geometric average of the gross discrete returns (GAGDR) equals 1.04075 which is 104.075%.

(b) ##\exp \left( \text{GAGDR} \right) = \text{AALGDR}##. The natural exponent of the GAGDR equals the arithmetic average of the logarithms of the gross discrete returns (AALGDR).

(c) ##\text{GAGDR}^T = \left( P_T/P_0 \right)##. The GAGDR raised to the power of the number of time period that it's measured over equals the ratio of the first and last prices.

(d) ##\text{GAGDR} = \exp \left( \text{AALGDR} \right)##. This is always true, regardless of the distribution of the prices or returns. The logarithm of the geometric average of the gross discrete returns (LGAGDR) is always equal to the arithmetic average of the logarithm of the gross discrete returns (AALGDR).

(e) ##\text{AAGDR} \approx \exp \left( \text{AALGDR} + \text{SDLGDR}^2/2 \right)##. This is only approximately true and depends on the distribution of the prices and returns. It's asymptotically true as the time period that the returns are measured over reaches infinity.

(a) The NPV is negative $1m.

(b) The IRR is 0% pa, less than the 10% cost of capital.

(c) The payback period is one year.

(d) The project should be rejected.

(e) If the project is accepted now then the market value of the firm's assets will fall by $11m.

(a) Negative gearing provides benefits by increasing the investor’s personal pre-tax income in the current year.

(b) Negative gearing works best when the investor has a high personal income so they're in a high personal marginal income tax bracket.

(c) Negative gearing works best when the asset makes large capital gains but has low income (such as rent).

(d) The more leverage, the bigger the interest tax shield benefit of negative gearing.

(e) Real estate and shares can be negatively geared.

(a) The 3-month government bill yield is likely to be given as a simple interest rate.

(b) The 10-year government bond yield is likely to be given as an annualised percentage rate compounding every six months since Japanese government bonds pay semi-annual coupons.

(c) As 10-year government bond yields fell over the last few years, bond investors would have made capital gains assuming that the bonds are fixed-coupon.

(d) The Japanese yield curve is ‘inverse’ at the latest time in mid-2017.

(e) The Japanese central bank has been maintaining expansionary monetary policy over the last few years.