Fight Finance

Question 23  bond pricing, premium par and discount bonds

Bonds X and Y are issued by the same US company. Both bonds yield 10% pa, and they have the same face value ($100), maturity, seniority, and payment frequency.

The only difference is that bond X and Y's coupon rates are 8 and 12% pa respectively. Which of the following statements is true?

(a) Bonds X and Y are premium bonds.

(b) Bonds X and Y are discount bonds.

(c) Bond X is a discount bond but bond Y is a premium bond.

(d) Bond X is a premium bond but bond Y is a discount bond.

(e) Bonds X and Y are par bonds.

Question 112  CAPM, risk

According to the theory of the Capital Asset Pricing Model (CAPM), total risk can be broken into two components, systematic risk and idiosyncratic risk. Which of the following events would be considered a systematic, undiversifiable event according to the theory of the CAPM?

(a) A decrease in house prices in one city.

(b) An increase in mining industry tax rates.

(c) An increase in corporate tax rates.

(d) A case of fraud at a major retailer.

(e) A poor earnings announcement from a major firm.

Question 201  DDM, income and capital returns

The following is the Dividend Discount Model (DDM) used to price stocks:

###P_0=\dfrac{C_1}{r-g}###

If the assumptions of the DDM hold and the stock is fairly priced, which one of the following statements is NOT correct? The long term expected:

(a) Dividend growth rate is equal to the long term expected growth rate of the stock price.

(b) Dividend growth rate is equal to the long term expected capital return of the stock.

(c) Dividend growth rate is equal to the long term expected dividend yield.

(d) Total return of the stock is equal to its long term required return.

(e) Total return of the stock is equal to the company's long term cost of equity.

Question 266  bond pricing, premium par and discount bonds

Bonds X and Y are issued by the same company. Both bonds yield 10% pa, and they have the same face value ($100), maturity, seniority, and payment frequency.

The only difference is that bond X pays coupons of 6% pa and bond Y pays coupons of 8% pa. Which of the following statements is true?

(a) Bonds X and Y are premium bonds.

(b) Bonds X and Y are discount bonds.

(c) Bond X is a discount bond but bond Y is a premium bond.

(d) Bond X is a premium bond but bond Y is a discount bond.

(e) Bonds X and Y are par bonds.

Question 539  debt terminology, fully amortising loan, bond pricing

A 'fully amortising' loan can also be called a:

(a) Discount loan

(b) Par loan

(c) Premium loan

(d) Deferred repayment loan

(e) Interest only loan

Question 660  fully amortising loan, interest only loan, APR

How much more can you borrow using an interest-only loan compared to a 25-year fully amortising loan if interest rates are 6% pa compounding per month and are not expected to change? If it makes it easier, assume that you can afford to pay $2,000 per month on either loan. Express your answer as a proportional increase using the following formula:

###\text{Proportional Increase} = \dfrac{V_\text{0,interest only}}{V_\text{0,fully amortising}} - 1###

(a) 77.6034%

(b) 30.3779%

(c) 28.8603%

(d) 22.3966%

(e) 7.5304%

Question 686  future

Which of the following statements about futures is NOT correct?

(a) Buyers of futures are required to pay an initial margin at the start.

(b) Futures are a zero-sum game in the sense that the winner gains at the expense of the loser.

(c) Buyers of futures have to pay the futures price at the start.

(d) Buyers of futures do not care about the credit risk of the original future seller since the contract is novated by the exchange.

(e) Speculators who sell futures hope that the underlying asset price falls.

Question 692  future, hedging, no explanation

The standard deviation of monthly changes in the spot price of corn is 50 cents per bushel. The standard deviation of monthly changes in the futures price of corn is 40 cents per bushel. The correlation between the spot price of corn and the futures price of corn is 0.9.

It is now March. A corn chip manufacturer is committed to buying 250,000 bushels of corn in May. The spot price of corn is 381 cents per bushel and the June futures price is 399 cents per bushel.

The corn chip manufacturer wants to use the June corn futures contracts to hedge his risk. Each futures contract is for the delivery of 5,000 bushels of corn. One bushel is about 127 metric tons.

How many corn futures should the corn chip manufacturer buy to hedge his risk? Round your answer to the nearest whole number of contracts. Remember to tail the hedge.

(a) 34

(b) 48

(c) 52

(d) 54

(e) 59

Question 771  debt terminology, interest expense, interest tax shield, credit risk, no explanation

You deposit money into a bank account. Which of the following statements about this deposit is NOT correct?

(a) You have a debt asset.

(b) The bank sold you its promise to pay back interest and principal payments.

(c) The bank is exposed to your credit risk, it’s afraid that you’ll default on your debt.

(d) The interest income you’re paid is taxable income for you.

(e) The interest expense that the bank pays is tax-deductible for the bank.

Question 777  CAPM, beta

The market's expected total return is 10% pa and the risk free rate is 5% pa, both given as effective annual rates.

A stock has a beta of 0.5.

In the last 5 minutes, the federal government unexpectedly raised taxes. Over this time the share market fell by 3%. The risk free rate was unchanged.

What do you think was the stock's historical return over the last 5 minutes, given as an effective 5 minute rate?

(a) -1%

(b) -1.5%

(c) -2.5%

(d) -3%

(e) -7.5%