**Question 154** implicit interest rate in wholesale credit, no explanation

A wholesale vitamin supplements store offers credit to its customers. Customers are given 30 days to pay for their goods, but if they pay within 5 days they will get a 1% discount.

What is the effective interest rate implicit in the discount being offered? Assume 365 days in a year and that all customers pay on either the 5th day or the 30th day. All of the below answer choices are given as effective annual interest rates.

A project has the following cash flows:

Project Cash Flows | |

Time (yrs) | Cash flow ($) |

0 | -400 |

1 | 0 |

2 | 500 |

What is the payback period of the project in years?

Normally cash flows are assumed to happen at the given time. But here, assume that the cash flows are received smoothly over the year. So the $500 at time 2 is actually earned smoothly from t=1 to t=2.

A European put option will mature in ##T## years with a strike price of ##K## dollars. The underlying asset has a price of ##S## dollars.

What is an expression for the payoff at maturity ##(f_T)## in dollars from owning (being long) the put option?

In Australia in the 1980's, inflation was around 8% pa, and residential mortgage loan interest rates were around 14%.

In 2013, inflation was around 2.5% pa, and residential mortgage loan interest rates were around 4.5%.

If a person can afford constant mortgage loan payments of $**2,000** per month, how much more can they borrow when interest rates are **4.5**% pa compared with **14.0**% pa?

Give your answer as a proportional increase over the amount you could borrow when interest rates were high ##(V_\text{high rates})##, so:

###\text{Proportional increase} = \dfrac{V_\text{low rates}-V_\text{high rates}}{V_\text{high rates}} ###

Assume that:

- Interest rates are expected to be constant over the life of the loan.
- Loans are
**interest-only**and have a life of**30**years. - Mortgage loan payments are made every month in arrears and all interest rates are given as annualised percentage rates (
**APR**'s) compounding per**month**.

The perpetuity with growth formula, also known as the dividend discount model (DDM) or Gordon growth model, is appropriate for valuing a company's shares. ##P_0## is the current share price, ##C_1## is next year's expected dividend, ##r## is the total required return and ##g## is the expected growth rate of the dividend.

###P_0=\dfrac{C_1}{r-g}###

The below graph shows the expected future price path of the company's shares. Which of the following statements about the graph is **NOT** correct?

An Indonesian lady wishes to convert 1 million Indonesian rupiah (IDR) to Australian dollars (AUD). Exchange rates are 13,125 IDR per USD and 0.79 USD per AUD. How many AUD is the IDR 1 million worth?

The 'time value of money' is most closely related to which of the following concepts?

Mr Blue, Miss Red and Mrs Green are people with different utility functions. Which of the statements about the 3 utility functions is **NOT** correct?

You deposit money into a bank. Which of the following statements is **NOT** correct? You:

A stock is expected to pay its semi-annual dividend of $1 per share for the foreseeable future. The current stock price is $**40** and the continuously compounded risk free rate is **3**% pa for all maturities. An investor has just taken a **long** position in a **12**-month futures contract on the stock. The last dividend payment was exactly 4 months ago. Therefore the next $**1** dividend is in **2** months, and the $**1** dividend after is **8** months from now. Which of the following statements about this scenario is **NOT** correct?