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Question 163 bond pricing, premium par and discount bonds

Bonds X and Y are issued by different companies, but they both pay a semi-annual coupon of 10% pa and they have the same face value ($100), maturity (3 years) and yield (10%) as each other.

Which of the following statements is true?

Question 211 equivalent annual cash flow

You're advising your superstar client 40-cent who is weighing up buying a private jet or a luxury yacht. 40-cent is just as happy with either, but he wants to go with the more cost-effective option. These are the cash flows of the two options:

The private jet can be bought for $6m now, which will cost $12,000 per month in fuel, piloting and airport costs, payable at the end of each month. The jet will last for 12 years.
Or the luxury yacht can be bought for $4m now, which will cost $20,000 per month in fuel, crew and berthing costs, payable at the end of each month. The yacht will last for 20 years.

What's unusual about 40-cent is that he is so famous that he will actually be able to sell his jet or yacht for the same price as it was bought since the next generation of superstar musicians will buy it from him as a status symbol.

Bank interest rates are 10% pa, given as an effective annual rate. You can assume that 40-cent will live for another 60 years and that when the jet or yacht's life is at an end, he will buy a new one with the same details as above.

Would you advise 40-cent to buy the or the ?

Note that the effective monthly rate is ##r_\text{eff monthly}=(1+0.1)^{1/12}-1=0.00797414##

Question 373 debt terminology

Which of the following statements is NOT correct? Lenders:

Question 405 DDM, income and capital returns, no explanation

The perpetuity with growth formula is:

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

Which of the following is NOT equal to the total required return (r)?

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 650 future, closing out future contract

In February a company sold one December 40,000 pound (about 18 metric tons) lean hog futures contract. It closed out its position in May.

The spot price was $0.68 per pound in February. The December futures price was $0.70 per pound when the trader entered into the contract in February, $0.60 when he closed out his position in May, and $0.55 when the contract matured in December.

What was the total profit?

Question 805 short selling

Short selling is a way to make money from falling prices. In what order must the following steps be completed to short-sell an asset? Let Tom, Dick and Harry be traders in the share market.

Step P: Purchase the asset from Harry.
Step G: Give the asset to Tom.
Step W: Wait and hope that the asset price falls.
Step B: Borrow the asset from Tom.
Step S: Sell the asset to Dick.

Select the statement with the correct order of steps.

Question 811 log-normal distribution, mean and median returns, return distribution, arithmetic and geometric averages

Which of the following statements about probability distributions is NOT correct?

Question 813 market efficiency

The famous investor Warren Buffett is one of few portfolio managers who appears to have consistently beaten the market. His company Berkshire Hathaway (BRK) appears to have outperformed the US S&P500 market index, shown in the graph below.

Read the below statements about Warren Buffett and the implications for the Efficient Markets Hypothesis (EMH) theory of Eugene Fama. Assume that the first sentence is true. Analyse the second sentence and select the answer option which is NOT correct. In other words, find the false statement in the second sentence.

(a) Buffett is clever and by reading the news and financial reports he is able to buy under-priced stocks and sell over-priced stocks. This provides evidence for rejecting the semi-strong and strong form EMH.

(b) Buffett was lucky, his strategy happened to be the right one, not due to its merits, just by chance. This provides no evidence for or against the weak, semi-strong or strong form EMH.

(c) Buffett’s investment strategy exposes investors to higher undiversifiable risk than the market and therefore deserves a higher return. This provides no evidence for or against the weak, semi-strong or strong form EMH.

(d) Buffett is an insider trader and is able to make money from his private information. This provides evidence for rejecting the semi-strong and strong form EMH. (Note: Warren Buffett is not an insider trader, he is an honest philanthropist, but assume the contrary in this answer option).

(e) Buffett may not have beaten the market because the graphs ignore dividends - the S&P500 is the price index rather than the accumulation index and BRK pays no dividends, so even though BRK has a higher capital return than the S&P500, the total returns could be equal. This provides no evidence for or against the weak, semi-strong or strong form EMH.

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.