A firm wishes to raise $20 million now. They will issue 8% pa semi-annual coupon bonds that will mature in 5 years and have a face value of $100 each. Bond yields are 6% pa, given as an APR compounding every 6 months, and the yield curve is flat.
How many bonds should the firm issue?
You own a nice suit which you wear once per week on nights out. You bought it one year ago for $600. In your experience, suits used once per week last for 6 years. So you expect yours to last for another 5 years.
Your younger brother said that retro is back in style so he wants to wants to borrow your suit once a week when he goes out. With the increased use, your suit will only last for another 4 years rather than 5.
What is the present value of the cost of letting your brother use your current suit for the next 4 years?
Assume: that bank interest rates are 10% pa, given as an effective annual rate; you will buy a new suit when your current one wears out and your brother will not use the new one; your brother will only use your current suit so he will only use it for the next four years; and the price of a new suit never changes.
A managed fund charges fees based on the amount of money that you keep with them. The fee is 2% of the start-of-year amount, but it is paid at the end of every year.
This fee is charged regardless of whether the fund makes gains or losses on your money.
The fund offers to invest your money in shares which have an expected return of 10% pa before fees.
You are thinking of investing $100,000 in the fund and keeping it there for 40 years when you plan to retire.
What is the Net Present Value (NPV) of investing your money in the fund? Note that the question is not asking how much money you will have in 40 years, it is asking: what is the NPV of investing in the fund? Assume that:
- The fund has no private information.
- Markets are weak and semi-strong form efficient.
- The fund's transaction costs are negligible.
- The cost and trouble of investing your money in shares by yourself, without the managed fund, is negligible.
One of the reasons why firms may not begin projects with relatively small positive net present values (NPV's) is because they wish to maximise the value of their:
A mature firm has constant expected future earnings and dividends. Both amounts are equal. So earnings and dividends are expected to be equal and unchanging.
Which of the following statements is NOT correct?
You have $100,000 in the bank. The bank pays interest at 10% pa, given as an effective annual rate.
You wish to consume twice 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.
Question 536 idiom, bond pricing, capital structure, leverage
The expression 'my word is my bond' is often used in everyday language to make a serious promise.
Why do you think this expression uses the metaphor of a bond rather than a share?
Question 871 duration, Macaulay duration, modified duration, portfolio duration
Which of the following statements about Macaulay duration is NOT correct? The Macaulay duration:
A common phrase heard in financial markets is that ‘high risk investments deserve high returns’. To make this statement consistent with the Capital Asset Pricing Model (CAPM), a high amount of what specific type of risk deserves a high return?
Investors deserve high returns when they buy assets with high: