Fight Finance

Question 21  income and capital returns, bond pricing

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} ##.

(a) -0.0556, -0.0222, -0.0333

(b) 0.0222, -0.0111, 0.0333.

(c) 0.0333, 0.0556, 0.0222.

(d) 0.0556, 0.0222, 0.0333.

(e) 0.0556, 0.0333, 0.0222.

Question 296  CFFA, interest tax shield

Which one of the following will decrease net income (NI) but increase cash flow from assets (CFFA) in this year for a tax-paying firm, all else remaining constant?

Remember:

###NI=(Rev-COGS-FC-Depr-IntExp).(1-t_c )### ###CFFA=NI+Depr-CapEx - ΔNWC+IntExp###

(a) An increase in revenue (##Rev##).

(b) An decrease in revenue (##Rev##).

(c) An increase in rent expense (part of fixed costs, ##FC##).

(d) An increase in interest expense (##IntExp##).

(e) An increase in dividends.

Question 606  foreign exchange rate, American and European terms

Which of the following FX quotes (current in October 2015) is given in American terms?

(a) 1.55 USD per GBP

(b) 120.61 JPY per USD

(c) 6.32 RMB per USD

(d) 1 USD = 1.31 CAD

(e) 0.99 CHF = 1 USD

Question 703  utility, risk aversion, utility function, gamble

Mr Blue, Miss Red and Mrs Green are people with different utility functions.

Each person has $500 of initial wealth. A coin toss game is offered to each person at a casino where the player can win or lose $500. Each player can flip a coin and if they flip heads, they receive $500. If they flip tails then they will lose $500. Which of the following statements is NOT correct?

(a) All people prefer more rather than less wealth which is rational.

(b) Mr Blue is risk averse, Miss Red is risk neutral and Mrs Green is risk loving.

(c) Mr Blue's certainty equivalent of the gamble is $225. This is less than his current $500 which is why he would dislike the gamble.

(d) Miss Red's certainty equivalent of the gamble is $500. This is the same as her current $500 which is why she would be indifferent to gambling.

(e) Mrs Green's certainty equivalent of the gamble is $793.70. This is more than her current $500 which is why she would like the gamble.

Question 725  return distribution, mean and median returns

If a stock's future expected effective annual returns are log-normally distributed, what will be bigger, the stock's or effective annual return? Or would you expect them to be ?

Question 764  bond pricing, no explanation

A 4.5% fixed coupon Australian Government bond was issued at par in mid-April 2009. Coupons are paid semi-annually in arrears in mid-April and mid-October each year. The face value is $1,000. The bond will mature in mid-April 2020, so the bond had an original tenor of 11 years.

Today is mid-September 2015 and similar bonds now yield 1.9% pa.

What is the bond's new price? Note: there are 10 semi-annual coupon payments remaining from now (mid-September 2015) until maturity (mid-April 2020); both yields are given as APR's compounding semi-annually; assume that the yield curve was flat before the change in yields, and remained flat afterwards as well.

(a) $1,108.390216

(b) $1,114.640575

(c) $1,123.457853

(d) $1,127.892613

(e) $1,132.344879

Question 890  foreign exchange rate, monetary policy, no explanation

The market expects the Reserve Bank of Australia (RBA) to increase the policy rate by 25 basis points at their next meeting. The current exchange rate is 0.8 USD per AUD.

Then unexpectedly, the RBA announce that they will increase the policy rate by 50 basis points due to increased fears of inflation.

What do you expect to happen to Australia's exchange rate on the day when the surprise announcement is made? The Australian dollar is likely to suddenly:

(a) Remain at 0.8 USD per AUD.

(b) Appreciate against the USD to be, say, 0.81 USD per AUD.

(c) Appreciate against the USD to be, say, 0.79 USD per AUD.

(d) Depreciate against the USD to be, say, 0.81 USD per AUD.

(e) Depreciate against the USD to be, say, 0.79 USD per AUD.

Question 892  foreign exchange reserve, foreign exchange rate, no explanation

The Chinese central bank has the largest amount of foreign currency reserves.

What could the large amounts of foreign exchange reserves held by the Chinese government be used for in a currency crisis? China's currency is called the Renminbi (RMB) or Yuan (CNY). In a Chinese currency crisis the Chinese government is likely to use its FX reserves to:

(a) Buy RMB.

(b) Buy USD.

(c) Buy EUR.

(d) Buy JPY.

(e) Sell RMB.

Question 896  comparative advantage in trade, production possibilities curve, no explanation

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

Which of the following statements is NOT correct?

(a) Adam has the absolute advantage at picking coconuts.

(b) Adam has the absolute advantage at picking dates.

(c) Adam has the comparative advantage at picking coconuts.

(d) Bella has the comparative advantage at picking coconuts.

Question 918  duration, Macaulay duration, modified duration, bond convexity

A fixed coupon bond’s modified duration is 10 years, and yields are currently 5% pa compounded annually. Which of the following statements about the bond is NOT correct?

(a) The Macaulay duration of the bond is 10.5 years.

(b) If yields-to-maturity suddenly rose by 1 percentage point then bond prices would suddenly fall by 10% or less.

(c) If yields-to-maturity suddenly fell by 2 percentage points then bond prices would suddenly rise by 20% or less.

(d) If the bond is a zero-coupon bond then its maturity is 10.5 years.

(e) The duration-price-change formula assumes parallel shifts in the yield curve.