A three year corporate bond yields 12% pa with a coupon rate of 10% pa, paid semi-annually.

Find the effective six month yield, effective annual yield and the effective daily yield. Assume that each month has 30 days and that there are 360 days in a year.

All answers are given in the same order:

##r_\text{eff semi-annual}##, ##r_\text{eff yearly}##, ##r_\text{eff daily}##.

**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 319** foreign exchange rate, monetary policy, American and European terms

Investors expect the Reserve Bank of Australia (RBA) to keep the policy rate steady at their next meeting.

Then unexpectedly, the RBA announce that they will increase the policy rate by 25 basis points due to fears that the economy is growing too fast and that inflation will be above their target rate of 2 to 3 per cent.

What do you expect to happen to Australia's exchange rate in the short term? The Australian dollar is likely to:

**Question 320** foreign exchange rate, monetary policy, American and European terms

Investors expect the Reserve Bank of Australia (RBA) to decrease the overnight cash rate at their next meeting.

Then unexpectedly, the RBA announce that they will keep the policy rate unchanged.

What do you expect to happen to Australia's exchange rate in the short term? The Australian dollar is likely to:

A share currently worth $**100** is expected to pay a constant dividend of $**4** for the next **5** years with the first dividend in one year (t=1) and the last in 5 years (t=5).

The total required return is **10**% pa.

What do you expected the share price to be in **5** years, just **after** the dividend at that time has been paid?

**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 standard deviation and variance of a stock's annual returns are calculated over a number of years. The units of the returns are percent per annum ##(\% pa)##.

What are the units of the standard deviation ##(\sigma)## and variance ##(\sigma^2)## of returns respectively?

**Hint**: Visit Wikipedia to understand the difference between percentage points ##(\text{pp})## and percent ##(\%)##.

An equity index is currently at **5,200** points. The **6** month futures price is **5,300** 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?

**Question 759** time calculation, fully amortising loan, no explanation

**Five** years ago you entered into a **fully amortising** home loan with a principal of $**500,000**, an interest rate of **4.5**% pa compounding monthly with a term of **25** years.

Then interest rates suddenly fall to **3**% pa (t=0), but you continue to pay the same monthly home loan payments as you did before. How long will it now take to pay off your home loan? Measure the time taken to pay off the home loan from the current time which is 5 years after the home loan was first entered into.

Assume that the lower interest rate was given to you immediately after the loan repayment at the end of year 5, which was the 60th payment since the loan was granted. Also assume that rates were and are expected to remain constant.

On **1 February** 2016 you were told that your refinery company will need to purchase oil on **1 July** 2016. You were afraid of the oil price rising between now and then so you bought some **August** 2016 futures contracts on 1 February 2016 to hedge against changes in the oil price. On 1 February 2016 the oil price was $**40** and the August 2016 futures price was $**43**.

It's now **1 July** 2016 and oil price is $**45** and the August 2016 futures price is $**46**. You bought the spot oil and closed out your futures position on **1 July** 2016.

What was the effective price paid for the oil, taking into account basis risk? All spot and futures oil prices quoted above and below are per barrel.