# Fight Finance

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Interest expense (IntExp) is an important part of a company's income statement (or 'profit and loss' or 'statement of financial performance').

How does an accountant calculate the annual interest expense of a fixed-coupon bond that has a liquid secondary market? Select the most correct answer:

Annual interest expense is equal to:

In Australia in the 1980's, inflation was around 8% pa, and residential mortgage loan interest rates were around 14%.

In 2013, inflation was around 2.5% pa, and residential mortgage loan interest rates were around 4.5%.

If a person can afford constant mortgage loan payments of $2,000 per month, how much more can they borrow when interest rates are 4.5% pa compared with 14.0% pa? Give your answer as a proportional increase over the amount you could borrow when interest rates were high $(V_\text{high rates})$, so: $$\text{Proportional increase} = \dfrac{V_\text{low rates}-V_\text{high rates}}{V_\text{high rates}}$$ Assume that: • Interest rates are expected to be constant over the life of the loan. • Loans are interest-only and have a life of 30 years. • Mortgage loan payments are made every month in arrears and all interest rates are given as annualised percentage rates (APR's) compounding per month. Apples and oranges currently cost$1 each. Inflation is 5% pa, and apples and oranges are equally affected by this inflation rate. Note that when payments are not specified as real, as in this question, they're conventionally assumed to be nominal.

Which of the following statements is NOT correct?

An economy has only two investable assets: stocks and cash.

Stocks had a historical nominal average total return of negative two percent per annum (-2% pa) over the last 20 years. Stocks are liquid and actively traded. Stock returns are variable, they have risk.

Cash is riskless and has a nominal constant return of zero percent per annum (0% pa), which it had in the past and will have in the future. Cash can be kept safely at zero cost. Cash can be converted into shares and vice versa at zero cost.

The nominal total return of the shares over the next year is expected to be:

Which of the below formulas gives the profit $(\pi)$ from being short a put option? Let the underlying asset price at maturity be $S_T$, the exercise price be $X_T$ and the option price be $f_{LP,0}$. Note that $S_T$, $X_T$ and $f_{LP,0}$ are all positive numbers.

Taking inflation into account when using the DDM can be hard. Which of the following formulas will NOT give a company's current stock price $(P_0)$? Assume that the annual dividend was just paid $(C_0)$, and the next dividend will be paid in one year $(C_1)$.

A graph of assets’ expected returns $(\mu)$ versus standard deviations $(\sigma)$ is given in the graph below. The CML is the capital market line.

Which of the following statements about this graph, Markowitz portfolio theory and the Capital Asset Pricing Model (CAPM) theory is NOT correct?

An Apple (NASDAQ:AAPL) stock was purchased by an investor for $120 and one year later was sold for$150. A dividend of \$4 was also collected at the end of the year just before the stock was sold.

Which of the following statements about the stock investment is NOT correct? Ignore taxes.

Over the year, the investor made a:

.

Adam and Bella are the only people on a remote island. Their production possibility curves are shown in the graph.

Assuming that Adam and Bella cooperate according to the principles of comparative advantage, what will be their combined production possibilities curve?

Below is a graph showing the spread or difference between government bond yields in different countries compared to the US. Assume that all governments have zero credit risk.

According to the principal of cross-currency interest rate parity, which country is likely to have the greatest expected currency appreciation against the USD over the next 2 years?