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Question 171  DDM, income and capital returns

The following is the Dividend Discount Model used to price stocks:

### p_0=\frac{d_1}{r-g} ###

Which of the following statements about the Dividend Discount Model is NOT correct?

Question 189  IRR

A project has the following cash flows:

Project Cash Flows
Time (yrs) Cash flow ($)
0 -400
1 0
2 500

The required return on the project is 10%, given as an effective annual rate.

What is the Internal Rate of Return (IRR) of this project? The following choices are effective annual rates. Assume that the cash flows shown in the table are paid all at once at the given point in time.

Question 551  fully amortising loan, time calculation, APR

You just entered into a fully amortising home loan with a principal of $600,000, a variable interest rate of 4.25% pa and a term of 25 years.

Immediately after settling the loan, the variable interest rate suddenly falls to 4% pa! You can't believe your luck. Despite this, you plan to continue paying the same home loan payments as you did before. How long will it now take to pay off your home loan?

Assume that the lower interest rate was granted immediately and that rates were and are now again expected to remain constant. Round your answer up to the nearest whole month.

Question 594  future, continuously compounding rate

The current gold price is $700, gold storage costs are 2% pa and the risk free rate is 10% pa, both with continuous compounding.

What should be the 3 year gold futures price?

Question 637  option, option payoff at maturity, no explanation

Which of the below formulas gives the payoff ##(f)## at maturity ##(T)## from being short a call option? Let the underlying asset price at maturity be ##S_T## and the exercise price be ##X_T##.

Question 659  APR, effective rate, effective rate conversion, no explanation

A home loan company advertises an interest rate of 9% pa, payable monthly. Which of the following statements about the interest rate is NOT correct? All rates are given with an accuracy of 4 decimal places.

Question 749  Multiples valuation, PE ratio, NPV

A real estate agent says that the price of a house in Sydney Australia is approximately equal to the gross weekly rent times 1000.

What type of valuation method is the real estate agent using?

Question 887  foreign exchange rate, no explanation

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.

Image of USD vs JPY and EUR graph

Which of the following statements is NOT correct?

Question 904  option, Black-Scholes-Merton option pricing, option on future on stock index

A six month European-style call option on six month S&P500 index futures has a strike price of 2800 points.

The six month futures price on the S&P500 index is currently at 2740.805274 points. The futures underlie the call option.

The S&P500 stock index currently trades at 2700 points. The stock index underlies the futures. The stock index's standard deviation of continuously compounded returns is 25% pa.

The risk-free interest rate is 5% pa continuously compounded.

Use the Black-Scholes-Merton formula to calculate the option price. The call option price now is:

Question 928  mean and median returns, mode return, return distribution, arithmetic and geometric averages, continuously compounding rate, no explanation

The arithmetic average continuously compounded or log gross discrete return (AALGDR) on the ASX200 accumulation index over the 24 years from 31 Dec 1992 to 31 Dec 2016 is 9.49% pa.

The arithmetic standard deviation (SDLGDR) is 16.92 percentage points pa.

Assume that the log gross discrete returns are normally distributed and that the above estimates are true population statistics, not sample statistics, so there is no standard error in the sample mean or standard deviation estimates. Also assume that the standardised normal Z-statistic corresponding to a one-tail probability of 2.5% is exactly -1.96.

If you had a $1 million fund that replicated the ASX200 accumulation index, in how many years would the mode dollar value of your fund first be expected to lie outside the 95% confidence interval forecast?

Note that the mode of a log-normally distributed future price is: ##P_{T \text{ mode}} = P_0.e^{(\text{AALGDR} - \text{SDLGDR}^2 ).T} ##

Copyright © 2014 Keith Woodward