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Question 16  credit card, APR, effective rate

A credit card offers an interest rate of 18% pa, compounding monthly.

Find the effective monthly rate, effective annual rate and the effective daily rate. Assume that there are 365 days in a year.

All answers are given in the same order:

### r_\text{eff monthly} , r_\text{eff yearly} , r_\text{eff daily} ###



Question 65  annuity with growth, needs refinement

Which of the below formulas gives the present value of an annuity with growth?


Hint: The equation of a perpetuity without growth is: ###V_\text{0, perp without growth} = \frac{C_\text{1}}{r}###

The formula for the present value of an annuity without growth is derived from the formula for a perpetuity without growth.

The idea is than an annuity with T payments from t=1 to T inclusive is equivalent to a perpetuity starting at t=1 with fixed positive cash flows, plus a perpetuity starting T periods later (t=T+1) with fixed negative cash flows. The positive and negative cash flows after time period T cancel each other out, leaving the positive cash flows between t=1 to T, which is the annuity.

###\begin{aligned} V_\text{0, annuity} &= V_\text{0, perp without growth from t=1} - V_\text{0, perp without growth from t=T+1} \\ &= \dfrac{C_\text{1}}{r} - \dfrac{ \left( \dfrac{C_\text{T+1}}{r} \right) }{(1+r)^T} \\ &= \dfrac{C_\text{1}}{r} - \dfrac{ \left( \dfrac{C_\text{1}}{r} \right) }{(1+r)^T} \\ &= \dfrac{C_\text{1}}{r}\left(1 - \dfrac{1}{(1+r)^T}\right) \\ \end{aligned}###

The equation of a perpetuity with growth is:

###V_\text{0, perp with growth} = \dfrac{C_\text{1}}{r-g}###

Question 483  PE ratio

The below screenshot of Microsoft's (MSFT) details were taken from the Google Finance website on 28 Nov 2014. Some information has been deliberately blanked out.

Image of MSFT on Google finance on 28 Nov 2014

What was MSFT's backwards-looking price-earnings ratio?



Question 505  equivalent annual cash flow

A low-quality second-hand car can be bought now for $1,000 and will last for 1 year before it will be scrapped for nothing.

A high-quality second-hand car can be bought now for $4,900 and it will last for 5 years before it will be scrapped for nothing.

What is the equivalent annual cost of each car? Assume a discount rate of 10% pa, given as an effective annual rate.

The answer choices are given as the equivalent annual cost of the low-quality car and then the high quality car.



Question 510  bond pricing

Calculate the price of a newly issued ten year bond with a face value of $100, a yield of 8% pa and a fixed coupon rate of 6% pa, paid semi-annually. So there are two coupons per year, paid in arrears every six months.



Question 588  option

If trader A has sold the right that allows counterparty B to buy the underlying asset from him at maturity if counterparty B wants then trader A is:



Question 826  future, basis risk, hedging

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.



Question 944  stock split, bonus issue, stock dividend

A 2-for-1 stock split is equivalent to a 1-for-1 bonus issue or a 100% stock dividend. or ?


Question 951  option, in the money option

If a call option is in-the-money, then the spot price (##S_0##) is than, than or to the call option's strike price (##K_T##)?


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?