Fight Finance

Question 13  bond pricing

For a price of $100, Rad will sell you a 5 year bond paying semi-annual coupons of 16% pa. The face value of the bond is $100. Other bonds with the same risk, maturity and coupon characteristics trade at a yield of 6% pa.

Would you like to the bond or politely ?

Question 653  future, continuously compounding rate

An equity index is currently at 4,800 points. The 1.5 year futures price is 5,100 points and the total required return is 6% pa with continuous compounding. Each index point is worth $25.

What is the implied dividend yield as a continuously compounded rate per annum?

(a) -0.0625% pa

(b) 1.9584% pa

(c) 3.0937% pa

(d) 4.0416% pa

(e) 6.0625% pa

Question 741  APR, effective rate

A home loan company advertises an interest rate of 4.5% pa, payable monthly. Which of the following statements about the interest rate is NOT correct?

(a) The APR compounding monthly is 4.5% pa.

(b) The effective monthly rate is 0.3675% pa.

(c) The effective annual rate is 4.594% pa.

(d) The effective 6 month rate is 2.2712% pa.

(e) The APR compounding semi-annually is 4.5424% pa.

Question 769  short selling, idiom, no explanation

"Buy low, sell high" is a well-known saying. It suggests that investors should buy low then sell high, in that order.

How would you re-phrase that saying to describe short selling?

(a) Buy high, then sell low.

(b) Buy low, then sell high.

(c) Sell high, then buy low.

(d) Sell low, then buy high.

(e) Sell high, then buy high.

Question 779  mean and median returns, return distribution, arithmetic and geometric averages, continuously compounding rate

Fred owns some BHP shares. He has calculated BHP’s monthly returns for each month in the past 30 years using this formula:

###r_\text{t monthly}=\ln⁡ \left( \dfrac{P_t}{P_{t-1}} \right)###

He then took the arithmetic average and found it to be 0.8% per month using this formula:

###\bar{r}_\text{monthly}= \dfrac{ \displaystyle\sum\limits_{t=1}^T{\left( r_\text{t monthly} \right)} }{T} =0.008=0.8\% \text{ per month}###

He also found the standard deviation of these monthly returns which was 15% per month:

###\sigma_\text{monthly} = \dfrac{ \displaystyle\sum\limits_{t=1}^T{\left( \left( r_\text{t monthly} - \bar{r}_\text{monthly} \right)^2 \right)} }{T} =0.15=15\%\text{ per month}###

Assume that the past historical average return is the true population average of future expected returns and the stock's returns calculated above ##(r_\text{t monthly})## are normally distributed. Which of the below statements about Fred’s BHP shares is NOT correct?

(a) The returns ##r_\text{t monthly}## are continuously compounded monthly returns.

(b) The mean, median and mode of the continuously compounded annual return is expected to equal 0.8% per month.

(c) The annualised average continuously compounded return is ##\bar{r}_\text{cc annual}=12×0.008=0.096=9.6\%\text{ pa}##. The annualised standard deviation is ##\sigma_\text{annual} = \sqrt{12}×0.15=0.519615242 = 52\%\text{ pa}##.

(d) If the current price of the BHP shares is $20, they're expected to have a median value of $52.2339 ##(= 20×e^{0.008×12×10})## in 10 years.

(e) If the current price of the BHP shares is $20, they're expected to have a mean value of $13.5411 ##(= 20×e^{(0.008 - 0.15^2/2)×12×10})## in 10 years.

Question 788  rights issue, capital raising

A firm wishes to raise $100 million now. The firm's current market value of equity is $300m and the market price per share is $5. They estimate that they'll be able to issue shares in a rights issue at a subscription price of $4. All answers are rounded to 6 decimal places. Ignore the time value of money and assume that all shareholders exercise their rights. Which of the following statements is NOT correct?

(a) The firm currently has 60m shares on issue and will need to sell 25m new shares in the rights issue.

(b) The company should do a 5-for-12 rights issue.

(c) After the rights issue the market share price will be $4.705882.

(d) The value of one right would be $0.705882.

(e) If you don't take part in the rights issue and it is non-renounceable, you will lose $0.705882 per share.

Question 855  cash cycle, accounting ratio

The below diagram shows a firm’s cash cycle.

Which of the following statements about companies’ cash cycle is NOT correct?

(a) The cash cycle is typically measured in days.

(b) The lower the cash cycle, the better.

(c) The cash cycle represents the time that money is invested or ‘tied up’ in inventory.

(d) Companies should avoid negative cash cycles.

(e) The cash cycle is the time between the inventory payment date to the supplier and cash receipt date from the customer.

Question 900  Basel accord

Which of the following statements about the Basel 3 minimum capital requirements is NOT correct? Common equity tier 1 (CET1) comprises the highest quality components of capital that fully satisfy all of the following characteristics:

(a) Provide a permanent and unrestricted commitment of funds;

(b) Are freely available to absorb losses;

(c) Impose unavoidable servicing charges against earnings;

(d) Rank behind the claims of depositors and other creditors in the event of winding-up of the issuer.

Question 936  CAPM, WACC, IRR

You work for XYZ company and you’ve been asked to evaluate a new project which has double the systematic risk of the company’s other projects.

You use the Capital Asset Pricing Model (CAPM) formula and input the treasury yield ##(r_f )##, market risk premium ##(r_m-r_f )## and the company’s asset beta risk factor ##(\beta_{XYZ} )## into the CAPM formula which outputs a return.

This return that you’ve just found is:

(a) The IRR of the company’s new project.

(b) The required return of the company’s new project.

(c) The IRR of the company’s assets.

(d) The required return of the company’s assets.

(e) The IRR of the company’s equity.

Question 966  foreign exchange rate, no explanation

A Malaysian man wishes to convert 1 million Malaysian Ringgit (MYR) into Indian Rupees (IND). The exchange rate is 4.2 MYR per USD and 71 IND per USD. How much is the MYR 1 million worth in IND?

(a) IND 3,353

(b) IND 59,155

(c) IND 62,508

(d) IND 16,904,762

(e) IND 298,200,000