Fight Finance

Question 230  bond pricing, capital raising

A firm wishes to raise $10 million now. They will issue 6% pa semi-annual coupon bonds that will mature in 8 years and have a face value of $1,000 each. Bond yields are 10% pa, given as an APR compounding every 6 months, and the yield curve is flat.

How many bonds should the firm issue? All numbers are rounded up.

(a) 9,023 bonds

(b) 10,000 bonds

(c) 11,485 bonds

(d) 12,713 bonds

(e) 12,768 bonds

Question 270  real estate, DDM, effective rate conversion

You own an apartment which you rent out as an investment property.

What is the price of the apartment using discounted cash flow (DCF, same as NPV) valuation?

Assume that:

• You just signed a contract to rent the apartment out to a tenant for the next 12 months at $2,000 per month, payable in advance (at the start of the month, t=0). The tenant is just about to pay you the first $2,000 payment.
• The contract states that monthly rental payments are fixed for 12 months. After the contract ends, you plan to sign another contract but with rental payment increases of 3%. You intend to do this every year.
  So rental payments will increase at the start of the 13th month (t=12) to be $2,060 (=2,000(1+0.03)), and then they will be constant for the next 12 months.
  Rental payments will increase again at the start of the 25th month (t=24) to be $2,121.80 (=2,000(1+0.03)²), and then they will be constant for the next 12 months until the next year, and so on.
• The required return of the apartment is 8.732% pa, given as an effective annual rate.
• Ignore all taxes, maintenance, real estate agent, council and strata fees, periods of vacancy and other costs. Assume that the apartment will last forever and so will the rental payments.

(a) $415,149.4048

(b) $438,252.6707

(c) $441,067.7356

(d) $444,155.5276

(e) $455,263.0844

Question 310  foreign exchange rate

Is it possible for all countries' exchange rates to appreciate by 5% in the same year, including the USD? or ?

Question 318  foreign exchange rate, American and European terms

How is the AUD normally quoted in Australia? Using or terms?

Question 450  CAPM, risk, portfolio risk, no explanation

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) ##r_V = \dfrac{D}{V}.r_D + \dfrac{E}{V}.r_E##

(b) ##\beta_V = \dfrac{D}{V}.\beta_D + \dfrac{E}{V}.\beta_E##

(c) ##\sigma_\text{V syst}^2 = \left(\dfrac{D}{V}\right)^2.\sigma_\text{D syst}^2 + \left(\dfrac{E}{V}\right)^2.\sigma_\text{E syst}^2##

(d) ##\sigma_\text{V idio}^2 = \left(\dfrac{D}{V}\right)^2.\sigma_\text{D idio}^2 + \left(\dfrac{E}{V}\right)^2.\sigma_\text{E idio}^2 + 2.\dfrac{D}{V}.\dfrac{E}{V}.\rho_\text{D idio, E idio}.\sigma_\text{D idio}.\sigma_\text{E idio}##

(e) ##\sigma_\text{V total}^2 = \left(\dfrac{D}{V}\right)^2.\sigma_\text{D total}^2 + \left(\dfrac{E}{V}\right)^2.\sigma_\text{E total}^2##

Question 626  cross currency interest rate parity, foreign exchange rate, forward foreign exchange rate

The Australian cash rate is expected to be 2% pa over the next one year, while the Japanese cash rate is expected to be 0% pa, both given as nominal effective annual rates. The current exchange rate is 100 JPY per AUD.

What is the implied 1 year forward foreign exchange rate?

(a) 98.04 JPY per AUD.

(b) 100 JPY per AUD.

(c) 102 JPY per AUD.

(d) 1.02 AUD per JPY.

(e) 0.9804 AUD per JPY.

Question 730  DDM, income and capital returns, no explanation

A stock’s current price is $1. Its expected total return is 10% pa and its long term expected capital return is 4% pa. It pays an annual dividend and the next one will be paid in one year. All rates are given as effective annual rates. The dividend discount model is thought to be a suitable model for the stock. Ignore taxes. Which of the following statements about the stock is NOT correct?

(a) The expected dividend yield is 6% pa.

(b) The expected growth rate of the dividend is 4% pa.

(c) The dividend in one year is expected to be $0.06.

(d) The price is expected to be $1.06 in one year, just before the dividend is paid.

(e) The price is expected to be $1.04 in one year, just after the dividend is paid.

Question 776  market efficiency, systematic and idiosyncratic risk, beta, income and capital returns

Which of the following statements about returns is NOT correct? A stock's:

(a) Expected total return will equal its required total return if the stock is fairly priced.

(b) Expected total return will be less than its required total return if the stock is over-priced.

(c) Required total return should be higher than the risk free government bond yield if the stock has a positive beta.

(d) Required total return depends on its total variance, required capital return depends on systematic variance and the dividend yield depends on idiosyncratic variance.

(e) Expected capital return equals the expected total return less whatever the management decide that they will pay as an income return (which is the dividend yield).

Question 794  option, Black-Scholes-Merton option pricing, option delta, no explanation

Which of the following quantities from the Black-Scholes-Merton option pricing formula gives the Delta of a European call option?

(a) ##N[d_1]##

(b) ##N[d_2]##

(c) ##−N[−d_1]##

(d) ##−N[−d_2]##

(e) ##N[−d_2]##

Where:

###d_1=\dfrac{\ln⁡[S_0/K]+(r+\sigma^2/2).T)}{\sigma.\sqrt{T}}### ###d_2=d_1-\sigma.\sqrt{T}=\dfrac{\ln⁡[S_0/K]+(r-\sigma^2/2).T)}{\sigma.\sqrt{T}}###

Question 897  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) The equation of Adam’s production possibilities line is coconuts = -7/6*dates + 7.

(b) The equation of Bella’s production possibilities line is coconuts = -3/5*dates + 5

(c) Adam could pick 2 dates and 4.667 coconuts in one hour.

(d) Bella could pick 2 dates and 1.8 coconuts in one hour.