Fight Finance

A stock is expected to pay the following dividends:

After year 4, the dividend will grow in perpetuity at 5% pa. The required return of the stock is 10% pa. Both the growth rate and required return are given as effective annual rates.

What is the current price of the stock?

You just signed up for a 30 year fully amortising mortgage loan with monthly payments of $1,500 per month. The interest rate is 9% pa which is not expected to change.

How much did you borrow? After 10 years, how much will be owing on the mortgage? The interest rate is still 9% and is not expected to change.

The first payment of a constant perpetual annual cash flow is received at time 5. Let this cash flow be ##C_5## and the required return be ##r##.

So there will be equal annual cash flows at time 5, 6, 7 and so on forever, and all of the cash flows will be equal so ##C_5 = C_6 = C_7 = ...##

When the perpetuity formula is used to value this stream of cash flows, it will give a value (V) at time:

The following cash flows are expected:

• 10 yearly payments of $80, with the first payment in 6.5 years from now (first payment at t=6.5).
• A single payment of $500 in 4 years and 3 months (t=4.25) from now.

What is the NPV of the cash flows if the discount rate is 10% given as an effective annual rate?

An investor bought a 10 year 2.5% pa fixed coupon government bond priced at par. The face value is $100. Coupons are paid semi-annually and the next one is in 6 months.

Six months later, just after the coupon at that time was paid, yields suddenly and unexpectedly fell to 2% pa. Note that all yields above are given as APR's compounding semi-annually.

What was the bond investors' historical total return over that first 6 month period, given as an effective semi-annual rate?

An investor wants to make a portfolio of two stocks A and B with a target expected portfolio return of 12% pa.

• Stock A has an expected return of 10% pa and a standard deviation of 20% pa.
• Stock B has an expected return of 15% pa and a standard deviation of 30% pa.

The correlation coefficient between stock A and B's expected returns is 70%.

What will be the annual standard deviation of the portfolio with this 12% pa target return?

After doing extensive fundamental analysis of a company, you believe that their shares are overpriced and will soon fall significantly. The market believes that there will be no such fall.

Which of the following strategies is NOT a good idea, assuming that your prediction is true?

Which of the following quantities from the Black-Scholes-Merton option pricing formula gives the risk-neutral probability that a European put option will be exercised?

Which class of derivatives market trader is NOT principally focused on ‘buying low and selling high’?

In the 1997 Asian currency crisis, the businesses most vulnerable to bankruptcy were those that: