# Fight Finance

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A fixed coupon bond was bought for $90 and paid its annual coupon of$3 one year later (at t=1 year). Just after the coupon was paid, the bond price was $92 (at t=1 year). What was the total return, capital return and income return? Calculate your answers as effective annual rates. The choices are given in the same order: $r_\text{total},r_\text{capital},r_\text{income}$. You want to buy an apartment worth$300,000. You have saved a deposit of $60,000. The bank has agreed to lend you$240,000 as an interest only mortgage loan with a term of 30 years. The interest rate is 6% pa and is not expected to change. What will be your monthly payments?

A stock is expected to pay the following dividends:

 Cash Flows of a Stock Time (yrs) 0 1 2 3 4 ... Dividend ($) 0 6 12 18 20 ... 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. If all of the dividends since time period zero were deposited into a bank account yielding 8% pa as an effective annual rate, how much money will be in the bank account in 2.5 years (in other words, at t=2.5)? Your friend overheard that you need some cash and asks if you would like to borrow some money. She can lend you$5,000 now (t=0), and in return she wants you to pay her back $1,000 in two years (t=2) and every year after that for the next 5 years, so there will be 6 payments of$1,000 from t=2 to t=7 inclusive.

What is the net present value (NPV) of borrowing from your friend?

Assume that banks loan funds at interest rates of 10% pa, given as an effective annual rate.

Three years ago Frederika bought a house for $400,000. Now it's worth$600,000, based on recent similar sales in the area.

Frederika's residential property has an expected total return of 7% pa.

She rents her house out for $2,500 per month, paid in advance. Every 12 months she plans to increase the rental payments. The present value of 12 months of rental payments is$29,089.48.

The future value of 12 months of rental payments one year ahead is $31,125.74. What is the expected annual capital yield of the property? The accounting identity states that the book value of a company's assets (A) equals its liabilities (L) plus owners equity (OE), so A = L + OE. The finance version states that the market value of a company's assets (V) equals the market value of its debt (D) plus equity (E), so V = D + E. Therefore a business's assets can be seen as a portfolio of the debt and equity that fund the assets. Let $\sigma_\text{V total}^2$ be the total variance of returns on assets, $\sigma_\text{V syst}^2$ be the systematic variance of returns on assets, and $\sigma_\text{V idio}^2$ be the idiosyncratic variance of returns on assets, and $\rho_\text{D idio, E idio}$ be the correlation between the idiosyncratic returns on debt and equity. Which of the following equations is NOT correct? A pig farmer in the US is worried about the price of hogs falling and wants to lock in a price now. In one year the pig farmer intends to sell 1,000,000 pounds of hogs. Luckily, one year CME lean hog futures expire on the exact day that he wishes to sell his pigs. The futures have a notional principal of 40,000 pounds (about 18 metric tons) and currently trade at a price of 63.85 cents per pound. The underlying lean hogs spot price is 77.15 cents per pound. The correlation between the futures price and the underlying hogs price is one and the standard deviations are both 4 cents per pound. The initial margin is USD1,500 and the maintenance margin is USD1,200 per futures contract. Which of the below statements is NOT correct? If the nominal gold price is expected to increase at the same rate as inflation which is 3% pa, which of the following statements is NOT correct? Last year, two friends Lev and Nolev each bought similar investment properties for$1 million. Both earned net rents of $30,000 pa over the past year. They funded their purchases in different ways: • Lev used$200,000 of his own money and borrowed $800,000 from the bank in the form of an interest-only loan with an interest rate of 5% pa. • Nolev used$1,000,000 of his own money, he has no mortgage loan on his property.

Both Lev and Nolev also work in high-paying jobs and are subject personal marginal tax rates of 45%.

Which of the below statements about the past year is NOT correct?

Observe the below graph of the US current account surplus as a proportion of GDP.

Define lending as buying (or saving or investing in) debt and equity assets.

The sum of US ‘net private saving’ plus ‘net general government lending’ equals the US: