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Question 134  fully amortising loan, APR

You want to buy an apartment worth $400,000. You have saved a deposit of $80,000. The bank has agreed to lend you the $320,000 as a fully amortising 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?



Question 239  income and capital returns, inflation, real and nominal returns and cash flows, interest only loan

A bank grants a borrower an interest-only residential mortgage loan with a very large 50% deposit and a nominal interest rate of 6% that is not expected to change. Assume that inflation is expected to be a constant 2% pa over the life of the loan. Ignore credit risk.

From the bank's point of view, what is the long term expected nominal capital return of the loan asset?



Question 248  CAPM, DDM, income and capital returns

The total return of any asset can be broken down in different ways. One possible way is to use the dividend discount model (or Gordon growth model):

###p_0 = \frac{c_1}{r_\text{total}-r_\text{capital}}###

Which, since ##c_1/p_0## is the income return (##r_\text{income}##), can be expressed as:

###r_\text{total}=r_\text{income}+r_\text{capital}###

So the total return of an asset is the income component plus the capital or price growth component.

Another way to break up total return is to use the Capital Asset Pricing Model:

###r_\text{total}=r_\text{f}+β(r_\text{m}- r_\text{f})###

###r_\text{total}=r_\text{time value}+r_\text{risk premium}###

So the risk free rate is the time value of money and the term ##β(r_\text{m}- r_\text{f})## is the compensation for taking on systematic risk.

Using the above theory and your general knowledge, which of the below equations, if any, are correct?

(I) ##r_\text{income}=r_\text{time value}##

(II) ##r_\text{income}=r_\text{risk premium}##

(III) ##r_\text{capital}=r_\text{time value}##

(IV) ##r_\text{capital}=r_\text{risk premium}##

(V) ##r_\text{income}+r_\text{capital}=r_\text{time value}+r_\text{risk premium}##

Which of the equations are correct?



Question 295  inflation, real and nominal returns and cash flows, NPV

When valuing assets using discounted cash flow (net present value) methods, it is important to consider inflation. To properly deal with inflation:

(I) Discount nominal cash flows by nominal discount rates.

(II) Discount nominal cash flows by real discount rates.

(III) Discount real cash flows by nominal discount rates.

(IV) Discount real cash flows by real discount rates.

Which of the above statements is or are correct?



Question 305  option, short selling, speculation

You believe that the price of a share will fall significantly very soon, but the rest of the market does not. The market thinks that the share price will remain the same. Assuming that your prediction will soon be true, which of the following trades is a bad idea? In other words, which trade will NOT make money or prevent losses?



Question 360  CFFA

Find Ching-A-Lings Corporation's Cash Flow From Assets (CFFA), also known as Free Cash Flow to the Firm (FCFF), over the year ending 30th June 2013.

Ching-A-Lings Corp
Income Statement for
year ending 30th June 2013
  $m
Sales 100
COGS 20
Depreciation 20
Rent expense 11
Interest expense 19
Taxable Income 30
Taxes at 30% 9
Net income 21
 
Ching-A-Lings Corp
Balance Sheet
as at 30th June 2013 2012
  $m $m
Inventory 49 38
Trade debtors 14 2
Rent paid in advance 5 5
PPE 400 400
Total assets 468 445
 
Trade creditors 4 10
Bond liabilities 200 190
Contributed equity 145 145
Retained profits 119 100
Total L and OE 468 445
 

 

Note: All figures are given in millions of dollars ($m).

The cash flow from assets was:



Question 540  APR, effective rate, no explanation

Which one of the below statements about effective rates and annualised percentage rates (APR's) is NOT correct?



Question 543  price gains and returns over time, IRR, NPV, income and capital returns, effective return

For an asset price to triple every 5 years, what must be the expected future capital return, given as an effective annual rate?



Question 722  mean and median returns, return distribution, arithmetic and geometric averages, continuously compounding rate

Here is a table of stock prices and returns. Which of the statements below the table is NOT correct?

Price and Return Population Statistics
Time Prices LGDR GDR NDR
0 100      
1 50 -0.6931 0.5 -0.5
2 100 0.6931 2 1
 
Arithmetic average 0 1.25 0.25
Arithmetic standard deviation 0.9802 1.0607 1.0607
 

 



Question 876  foreign exchange rate, forward foreign exchange rate, cross currency interest rate parity

Suppose the yield curve in the USA and Germany is flat and the:

  • USD federal funds rate at the Federal Reserve is 1% pa;
  • EUR deposit facility at the European Central Bank is -0.4% pa (note the negative sign);
  • Spot EUR exchange rate is 1 USD per EUR;
  • One year forward EUR exchange rate is 1.011 USD per EUR.

You suspect that there’s an arbitrage opportunity. Which one of the following statements about the potential arbitrage opportunity is NOT correct?