The following equation is the Dividend Discount Model, also known as the 'Gordon Growth Model' or the 'Perpetuity with growth' equation.
### p_{0} = \frac{c_1}{r_{\text{eff}} - g_{\text{eff}}} ###
What is the discount rate '## r_\text{eff} ##' in this equation?
A 180-day Bank Accepted Bill has a face value of $1,000,000. The interest rate is 8% pa and there are 365 days in the year. What is its price now?
Question 35 bond pricing, zero coupon bond, term structure of interest rates, forward interest rate
A European company just issued two bonds, a
- 1 year zero coupon bond at a yield of 8% pa, and a
- 2 year zero coupon bond at a yield of 10% pa.
What is the company's forward rate over the second year (from t=1 to t=2)? Give your answer as an effective annual rate, which is how the above bond yields are quoted.
Government bonds currently have a return of 5% pa. A stock has an expected return of 6% pa and the market return is 7% pa. What is the beta of the stock?
The Chinese government attempts to fix its exchange rate against the US dollar and at the same time use monetary policy to fix its interest rate at a set level.
To be able to fix its exchange rate and interest rate in this way, what does the Chinese government actually do?
- Adopts capital controls to prevent financial arbitrage by private firms and individuals.
- Adopts the same interest rate (monetary policy) as the United States.
- Fixes inflation so that the domestic real interest rate is equal to the United States' real interest rate.
Which of the above statements is or are true?
Your friend is trying to find the net present value of an investment which:
- Costs $1 million initially (t=0); and
- Pays a single positive cash flow of $1.1 million in one year (t=1).
The investment has a total required return of 10% pa due to its moderate level of undiversifiable risk.
Your friend is aware of the importance of opportunity costs and the time value of money, but he is unsure of how to find the NPV of the project.
He knows that the opportunity cost of investing the $1m in the project is the expected gain from investing the money in shares instead. Like the project, shares also have an expected return of 10% since they have moderate undiversifiable risk. This opportunity cost is $0.1m ##(=1m \times 10\%)## which occurs in one year (t=1).
He knows that the time value of money should be accounted for, and this can be done by finding the present value of the cash flows in one year.
Your friend has listed a few different ways to find the NPV which are written down below.
Method 1: ##-1m + \dfrac{1.1m}{(1+0.1)^1} ##
Method 2: ##-1m + 1.1m - 1m \times 0.1 ##
Method 3: ##-1m + \dfrac{1.1m}{(1+0.1)^1} - 1m \times 0.1 ##
Which of the above calculations give the correct NPV? Select the most correct answer.
Below is a graph of the USD against the JPY and EUR from 1980 to 2015, compiled by the RBA. Select the correct statement about what occurred between 1980 and 2015. Note that in 1980 the euro was around 1.3 USD per EUR and the Yen was around 250 JPY per USD.
How much more can you borrow using an interest-only loan compared to a 25-year fully amortising loan if interest rates are 6% pa compounding per month and are not expected to change? If it makes it easier, assume that you can afford to pay $2,000 per month on either loan. Express your answer as a proportional increase using the following formula:
###\text{Proportional Increase} = \dfrac{V_\text{0,interest only}}{V_\text{0,fully amortising}} - 1###Question 795 option, Black-Scholes-Merton option pricing, option delta, no explanation
Which of the following quantities from the Black-Scholes-Merton option pricing formula gives the Delta of a European put option?
Question 984 principal agent problem, moral hazard, asymmetric information, no explanation
When does the ‘principal-agent problem’ occur? Is it when:
I. The principal has conflicting incentives (moral hazard);
II. The agent has conflicting incentives (moral hazard);
III. The principal has incomplete information about the agent (asymmetric information); or
IV. The agent has incomplete information about the principal (asymmetric information)?
The principal-agent problem occurs when statements: