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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:

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

You want to buy a house priced at $400,000. You have saved a deposit of$40,000. The bank has agreed to lend you $360,000 as a fully amortising loan with a term of 30 years. The interest rate is 8% pa payable monthly and is not expected to change. What will be your monthly payments? Three important classes of investable risky assets are: • Corporate debt which has low total risk, • Real estate which has medium total risk, • Equity which has high total risk. Assume that the correlation between total returns on: • Corporate debt and real estate is 0.1, • Corporate debt and equity is 0.1, • Real estate and equity is 0.5. You are considering investing all of your wealth in one or more of these asset classes. Which portfolio will give the lowest total risk? You are restricted from shorting any of these assets. Disregard returns and the risk-return trade-off, pretend that you are only concerned with minimising risk. Your poor friend asks to borrow some money from you. He would like$1,000 now (t=0) and every year for the next 5 years, so there will be 6 payments of $1,000 from t=0 to t=5 inclusive. In return he will pay you$10,000 in seven years from now (t=7).

What is the net present value (NPV) of lending to your friend?

Assume that your friend will definitely pay you back so the loan is risk-free, and that the yield on risk-free government debt is 10% pa, given as an effective annual rate.

Question 432  option, option intrinsic value, no explanation

An American call option with a strike price of $K$ dollars will mature in $T$ years. The underlying asset has a price of $S$ dollars.

What is an expression for the current intrinsic value in dollars from owning (being long) the American call option? Note that the intrinsic value of an option does not subtract the premium paid to buy the option.

Which of the following statements is NOT correct?

A stock is expected to pay a dividend of $5 per share in 1 month and$5 again in 7 months.

The stock price is $100, and the risk-free rate of interest is 10% per annum with continuous compounding. The yield curve is flat. Assume that investors are risk-neutral. An investor has just taken a short position in a one year forward contract on the stock. Find the forward price $(F_1)$ and value of the contract $(V_0)$ initially. Also find the value of the short futures contract in 6 months $(V_\text{0.5, SF})$ if the stock price fell to$90.

For an asset's price to quintuple every 5 years, what must be its effective annual capital return? Note that a stock's price quintuples when it increases from say $1 to$5.

Adam and Bella are the only people on a remote island. Their production possibility curves are shown in the graph.

Which of the following statements is NOT correct?