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Question 17  bond pricing

A three year bond has a face value of $100, a yield of 10% and a fixed coupon rate of 5%, paid semi-annually. What is its price?

Question 190  pay back period

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.

Question 341  Multiples valuation, PE ratio

Estimate Microsoft's (MSFT) share price using a price earnings (PE) multiples approach with the following assumptions and figures only:

  • Apple, Google and Microsoft are comparable companies,
  • Apple's (AAPL) share price is $526.24 and historical EPS is $40.32.
  • Google's (GOOG) share price is $1,215.65 and historical EPS is $36.23.
  • Micrsoft's (MSFT) historical earnings per share (EPS) is $2.71.

Source: Google Finance 28 Feb 2014.

Question 518  DDM

A stock just paid a dividend of $1. Future annual dividends are expected to grow by 2% pa. The next dividend of $1.02 (=1*(1+0.02)^1) will be in one year, and the year after that the dividend will be $1.0404 (=1*(1+0.02)^2), and so on forever.

Its required total return is 10% pa. The total required return and growth rate of dividends are given as effective annual rates.

Calculate the current stock price.

Question 528  DDM, income and capital returns

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.


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?

Saw tooth graph of stock price path

Question 560  standard deviation, variance, needs refinement

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 ##(\%)##.

Question 599  bond pricing

On 22-Mar-2013 the Australian Government issued series TB139 treasury bonds with a combined face value $23.4m, listed on the ASX with ticker code GSBG25.

The bonds mature on 21-Apr-2025, the fixed coupon rate is 3.25% pa and coupons are paid semi-annually on the 21st of April and October of each year. Each bond's face value is $1,000.

At market close on Friday 11-Sep-2015 the bonds' yield was 2.736% pa.

At market close on Monday 14-Sep-2015 the bonds' yield was 2.701% pa. Both yields are given as annualised percentage rates (APR's) compounding every 6 months. For convenience, assume 183 days in 6 months and 366 days in a year.

What was the historical total return over those 3 calendar days between Friday 11-Sep-2015 and Monday 14-Sep-2015?

There are 183 calendar days from market close on the last coupon 21-Apr-2015 to the market close of the next coupon date on 21-Oct-2015.

Between the market close times from 21-Apr-2015 to 11-Sep-2015 there are 143 calendar days. From 21-Apr-2015 to 14-Sep-2015 there are 146 calendar days.

From 14-Sep-2015 there were 20 coupons remaining to be paid including the next one on 21-Oct-2015.

All of the below answers are given as effective 3 day rates.

Question 681  no explanation

A trader sells one crude oil European style put option contract on the CME expiring in one year with an exercise price of $44 per barrel for a price of $6.64. The crude oil spot price is $40.33. If the trader doesn’t close out her contract before maturity, then at maturity she will have the:

Question 709  continuously compounding rate, APR

Which of the following interest rate quotes is NOT equivalent to a 10% effective annual rate of return? Assume that each year has 12 months, each month has 30 days, each day has 24 hours, each hour has 60 minutes and each minute has 60 seconds. APR stands for Annualised Percentage Rate.

Question 806  stock split, no explanation

A firm conducts a two-for-one stock split. Which of the following consequences would NOT be expected?