Katya offers to pay you $10 at the end of every year for the next 5 years (t=1,2,3,4,5) if you pay her $50 now (t=0). You can borrow and lend from the bank at an interest rate of 10% pa, given as an effective annual rate. Ignore credit risk.
Bonds A and B are issued by the same company. They have the same face value, maturity, seniority and coupon payment frequency. The only difference is that bond A has a 5% coupon rate, while bond B has a 10% coupon rate. The yield curve is flat, which means that yields are expected to stay the same.
Which bond would have the higher current price?
A wholesale glass importer offers credit to its customers. Customers are given 30 days to pay for their goods, but if they pay within 5 days they will get a 1% discount.
What is the effective interest rate implicit in the discount being offered? Assume 365 days in a year and that all customers pay on either the 5th day or the 30th day. All rates given below are effective annual rates.
Question 50 DDM, stock pricing, inflation, real and nominal returns and cash flows
Most listed Australian companies pay dividends twice per year, the 'interim' and 'final' dividends, which are roughly 6 months apart.
You are an equities analyst trying to value the company BHP. You decide to use the Dividend Discount Model (DDM) as a starting point, so you study BHP's dividend history and you find that BHP tends to pay the same interim and final dividend each year, and that both grow by the same rate.
You expect BHP will pay a $0.55 interim dividend in six months and a $0.55 final dividend in one year. You expect each to grow by 4% next year and forever, so the interim and final dividends next year will be $0.572 each, and so on in perpetuity.
Assume BHP's cost of equity is 8% pa. All rates are quoted as nominal effective rates. The dividends are nominal cash flows and the inflation rate is 2.5% pa.
What is the current price of a BHP share?
Which one of the following bonds is trading at a premium?
A European put option will mature in ##T## years with a strike price of ##K## dollars. The underlying asset has a price of ##S## dollars.
What is an expression for the payoff at maturity ##(f_T)## in dollars from owning (being long) the put option?
The below screenshot of Microsoft's (MSFT) details were taken from the Google Finance website on 28 Nov 2014. Some information has been deliberately blanked out.
What was MSFT's market capitalisation of equity?
Question 691 continuously compounding rate, effective rate, continuously compounding rate conversion, no explanation
A bank quotes an interest rate of 6% pa with quarterly compounding. Note that another way of stating this rate is that it is an annual percentage rate (APR) compounding discretely every 3 months.
Which of the following statements about this rate is NOT correct? All percentages are given to 6 decimal places. The equivalent:
You bought a house, primarily funded using a home loan from a bank. Which of the following statements is NOT correct?
Find the Macaulay duration of a 2 year 5% pa semi-annual fixed coupon bond which has a $100 face value and currently has a yield to maturity of 8% pa. The Macaulay duration is: