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 49 inflation, real and nominal returns and cash flows, APR, effective rate
In Australia, nominal yields on semi-annual coupon paying Government Bonds with 2 years until maturity are currently 2.83% pa.
The inflation rate is currently 2.2% pa, given as an APR compounding per quarter. The inflation rate is not expected to change over the next 2 years.
What is the real yield on these bonds, given as an APR compounding every 6 months?
Question 108 bond pricing, zero coupon bond, term structure of interest rates, forward interest rate
An Australian company just issued two bonds:
- A 1 year zero coupon bond at a yield of 10% pa, and
- A 2 year zero coupon bond at a yield of 8% pa.
What is the forward rate on the company's debt from years 1 to 2? Give your answer as an APR compounding every 6 months, which is how the above bond yields are quoted.
You have just sold an 'in the money' 6 month European put option on the mining company BHP at an exercise price of $40 for a premium of $3.
Which of the following statements best describes your situation?
Question 155 inflation, real and nominal returns and cash flows, Loan, effective rate conversion
You are a banker about to grant a 2 year loan to a customer. The loan's principal and interest will be repaid in a single payment at maturity, sometimes called a zero-coupon loan, discount loan or bullet loan.
You require a real return of 6% pa over the two years, given as an effective annual rate. Inflation is expected to be 2% this year and 4% next year, both given as effective annual rates.
You judge that the customer can afford to pay back $1,000,000 in 2 years, given as a nominal cash flow. How much should you lend to her right now?
Question 338 market efficiency, CAPM, opportunity cost, technical analysis
A man inherits $500,000 worth of shares.
He believes that by learning the secrets of trading, keeping up with the financial news and doing complex trend analysis with charts that he can quit his job and become a self-employed day trader in the equities markets.
What is the expected gain from doing this over the first year? Measure the net gain in wealth received at the end of this first year due to the decision to become a day trader. Assume the following:
- He earns $60,000 pa in his current job, paid in a lump sum at the end of each year.
- He enjoys examining share price graphs and day trading just as much as he enjoys his current job.
- Stock markets are weak form and semi-strong form efficient.
- He has no inside information.
- He makes 1 trade every day and there are 250 trading days in the year. Trading costs are $20 per trade. His broker invoices him for the trading costs at the end of the year.
- The shares that he currently owns and the shares that he intends to trade have the same level of systematic risk as the market portfolio.
- The market portfolio's expected return is 10% pa.
Measure the net gain over the first year as an expected wealth increase at the end of the year.
Total cash flows can be broken into income and capital cash flows.
What is the name given to the cash flow generated from selling shares at a higher price than they were bought?
You have $100,000 in the bank. The bank pays interest at 10% pa, given as an effective annual rate.
You wish to consume half as much now (t=0) as in one year (t=1) and have nothing left in the bank at the end.
How much can you consume at time zero and one? The answer choices are given in the same order.
A firm wishes to raise $50 million now. They will issue 5% pa semi-annual coupon bonds that will mature in 10 years and have a face value of $100 each. Bond yields are 5% pa, given as an APR compounding every 6 months, and the yield curve is flat.
How many bonds should the firm issue?
Examine the graph of the AUD versus the USD, EUR and JPY. Note that RHS means right hand side and LHS left hand side which indicates which axis each line corresponds to. Assume inflation rates in each country were equal over the time period 1984 to 2018.
Which of the following statements is NOT correct?