A stock has a beta of **0.5**. Its next dividend is expected to be $**3**, paid **one** year from now. Dividends are expected to be paid annually and grow by **2**% pa forever. Treasury bonds yield **5**% pa and the market portfolio's expected return is **10**% pa. All returns are effective annual rates.

What is the price of the stock now?

The first payment of a constant perpetual annual cash flow is received at time 5. Let this cash flow be ##C_5## and the required return be ##r##.

So there will be equal annual cash flows at time 5, 6, 7 and so on forever, and all of the cash flows will be equal so ##C_5 = C_6 = C_7 = ...##

When the perpetuity formula is used to value this stream of cash flows, it will give a value (V) at time:

The following cash flows are expected:

- Constant perpetual yearly payments of $70, with the first payment in 2.5 years from now (first payment at t=2.5).
- A single payment of $600 in 3 years and 9 months (t=3.75) from now.

What is the NPV of the cash flows if the discount rate is 10% given as an effective annual rate?

A trader just **bought** a European style **put** option on CBA stock. The current option premium is $**2**, the exercise price is $**75**, the option matures in one year and the spot CBA stock price is $**74**.

Which of the following statements is **NOT** correct?

**Question 758** time calculation, fully amortising loan, no explanation

**Two** years ago you entered into a **fully amortising** home loan with a principal of $**1,000,000**, an interest rate of **6**% pa compounding monthly with a term of **25** years.

Then interest rates suddenly fall to **4.5**% pa (t=0), but you continue to pay the same monthly home loan payments as you did before. How long will it now take to pay off your home loan? Measure the time taken to pay off the home loan from the current time which is 2 years after the home loan was first entered into.

Assume that the lower interest rate was given to you immediately after the loan repayment at the end of year 2, which was the 24th payment since the loan was granted. Also assume that rates were and are expected to remain constant.

**Question 829** option, future, delta, gamma, theta, no explanation

Below are some statements about futures and European-style options on non-dividend paying stocks. Assume that the risk free rate is always positive. Which of these statements is **NOT** correct? All other things remaining equal:

**Question 858** indirect security, intermediated finance, no explanation

Which of the following transactions involves an ‘indirect security’ using a ‘financial intermediary’?

**Question 859** money supply, no explanation

The below table shows Australian monetary aggregates. Note that ‘M3’ is the sum of all the figures in the table and ‘ADI’ stands for Authorised Deposit-taking Institution such as a bank, building society or credit union.

Australian Monetary Aggregates |
||||||

March 2017, AUD billions | ||||||

Currency | Current deposits with banks |
Certificates of deposit issued by banks |
Term deposits with banks |
Other deposits with banks |
Deposits with non-bank ADIs |
M3 |

69.3 | 271.6 | 207.2 | 562.3 | 838.7 | 36.9 | 1986.0 |

Source: RBA Statistical Table D3 Monetary Aggregates.

Which of the following statements is **NOT** correct?

The present value of an annuity of **3** annual payments of $**5,000** in arrears (at the end of each year) is $**12,434.26** when interest rates are **10**% pa compounding annually.

If the same amount of $12,434.26 is put in the bank at the same interest rate of 10% pa compounded annually and the same cash flow of $5,000 is withdrawn at the end of every year, **how much money** will be in the bank in **3** years, just **after** that third $5,000 payment is withdrawn?