**Question 24** implicit interest rate in wholesale credit, effective rate

A bathroom and plumbing supplies shop offers credit to its customers. Customers are given 60 days to pay for their goods, but if they pay within 7 days they will get a 2% discount.

What is the effective interest rate implicit in the discount being offered? Assume 365 days in a year and that all customers pay on either the 7th day or the 60th day. All rates given in this question are effective annual rates.

**Question 213** income and capital returns, bond pricing, premium par and discount bonds

The coupon rate of a fixed annual-coupon bond is constant (always the same).

What can you say about the income return (##r_\text{income}##) of a fixed annual coupon bond? Remember that:

###r_\text{total} = r_\text{income} + r_\text{capital}###

###r_\text{total, 0 to 1} = \frac{c_1}{p_0} + \frac{p_1-p_0}{p_0}###

Assume that there is no change in the bond's total annual yield to maturity from when it is issued to when it matures.

Select the most correct statement.

From its date of issue until maturity, the **income return** of a fixed annual coupon:

Acquirer firm plans to launch a takeover of Target firm. The deal is expected to create a present value of synergies totaling $**0.5** million, but investment bank fees and integration costs with a present value of $**1.5** million is expected. A **10**% **cash** and **90**% **scrip** offer will be made that pays the fair price for the target's shares only. Assume that the Target and Acquirer agree to the deal. The cash will be paid out of the firms' cash holdings, no new debt or equity will be raised.

Firms Involved in the Takeover | ||

Acquirer | Target | |

Assets ($m) | 60 | 10 |

Debt ($m) | 20 | 2 |

Share price ($) | 10 | 8 |

Number of shares (m) | 4 | 1 |

Assume that the firms' debt and equity are fairly priced, and that each firms' debts' risk, yield and values remain constant. The acquisition is planned to occur immediately, so ignore the time value of money.

Calculate the merged firm's share price and total number of shares after the takeover has been completed.

The expression 'cash is king' emphasizes the importance of having enough cash to pay your short term debts to avoid bankruptcy. Which business decision is this expression most closely related to?

A stock's required total return will **increase** when its:

An economy has only two investable assets: stocks and cash.

Stocks had a historical nominal average total return of negative two percent per annum (-2% pa) over the last 20 years. Stocks are liquid and actively traded. Stock returns are variable, they have risk.

Cash is riskless and has a nominal constant return of zero percent per annum (0% pa), which it had in the past and will have in the future. Cash can be kept safely at zero cost. Cash can be converted into shares and vice versa at zero cost.

The nominal total return of the shares over the **next** year is **expected** to be:

The risk-weight on "Margin lending against listed instruments on recognised exchanges" is **20**% according to APRA's interpretation of the Basel 3 Accord in 'Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk, Attachment A: Risk-weights for on-balance sheet assets'.

A bank is considering lending a $**100,000** margin loan secured by an ASX-listed stock. How much regulatory capital will the bank require to grant this loan under the Basel 3 Accord? Ignore the capital conservation buffer and the off-balance sheet exposure.

A stock's returns are normally distributed with a mean of 10% pa and a standard deviation of 20 percentage points pa. What is the **95**% confidence interval of returns over the next year? Note that the Z-statistic corresponding to a **one**-tail:

- 90% normal probability density function is 1.282.
- 95% normal probability density function is 1.645.
- 97.5% normal probability density function is 1.960.

The **95**% confidence interval of annual returns is between: