Question 25 bond pricing, zero coupon bond, term structure of interest rates, forward interest rate
A European company just issued two bonds, a
- 2 year zero coupon bond at a yield of 8% pa, and a
- 3 year zero coupon bond at a yield of 10% pa.
What is the company's forward rate over the third year (from t=2 to t=3)? Give your answer as an effective annual rate, which is how the above bond yields are quoted.
A stock is expected to pay the following dividends:
| Cash Flows of a Stock | ||||||
| Time (yrs) | 0 | 1 | 2 | 3 | 4 | ... |
| Dividend ($) | 0.00 | 1.00 | 1.05 | 1.10 | 1.15 | ... |
After year 4, the annual dividend will grow in perpetuity at 5% pa, so;
- the dividend at t=5 will be $1.15(1+0.05),
- the dividend at t=6 will be $1.15(1+0.05)^2, and so on.
The required return on the stock is 10% pa. Both the growth rate and required return are given as effective annual rates. What is the current price of the stock?
A share just paid its semi-annual dividend of $5. The dividend is expected to grow at 1% every 6 months forever. This 1% growth rate is an effective 6 month rate.
Therefore the next dividend will be $5.05 in six months. The required return of the stock 8% pa, given as an effective annual rate.
What is the price of the share now?
One formula for calculating a levered firm's free cash flow (FFCF, or CFFA) is to use earnings before interest and tax (EBIT).
###\begin{aligned} FFCF &= (EBIT)(1-t_c) + Depr - CapEx -\Delta NWC + IntExp.t_c \\ &= (Rev - COGS - Depr - FC)(1-t_c) + Depr - CapEx -\Delta NWC + IntExp.t_c \\ \end{aligned} \\###
A European put option will mature in ##T## years with a strike price of ##K## dollars. The underlying asset has a price of ##S## dollars.
What is an expression for the payoff at maturity ##(f_T)## in dollars from owning (being long) the put option?
Which of the below formulas gives the profit ##(\pi)## from being long a put option? Let the underlying asset price at maturity be ##S_T##, the exercise price be ##X_T## and the option price be ##f_{LP,0}##. Note that ##S_T##, ##X_T## and ##f_{LP,0}## are all positive numbers.
Question 785 fixed for floating interest rate swap, non-intermediated swap
The below table summarises the borrowing costs confronting two companies A and B.
| Bond Market Yields | ||||
| Fixed Yield to Maturity (%pa) | Floating Yield (%pa) | |||
| Firm A | 3 | L - 0.4 | ||
| Firm B | 5 | L + 1 | ||
Firm A wishes to borrow at a floating rate and Firm B wishes to borrow at a fixed rate. Design a non-intermediated swap that benefits firm A only. What will be the swap rate?
A one year European-style put option has a strike price of $4.
The option's underlying stock currently trades at $5, pays no dividends and its standard deviation of continuously compounded returns is 47% pa.
The risk-free interest rate is 10% pa continuously compounded.
Use the Black-Scholes-Merton formula to calculate the option price. The put option price now is:
Question 874 utility, return distribution, log-normal distribution, arithmetic and geometric averages
Who was the first theorist to endorse the maximisiation of the geometric average gross discrete return for investors (not gamblers) since it gave a "...portfolio that has a greater probability of being as valuable or more valuable than any other significantly different portfolio at the end of n years, n being large"?
This question is about the Balance of Payments. Australia's current account as a percent of nominal gross domestic product (GDP) per annum is shown in the graph below.
Assume that all foreign and domestic assets are either debt which makes interest income or equity which makes dividend income, and vice versa for liabilities which cost interest and dividend payments, respectively.
Which of the following statements is NOT correct?