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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.

Question 95  interest tax shield

The equations for Net Income (NI, also known as Earnings or Net Profit After Tax) and Cash Flow From Assets (CFFA, also known as Free Cash Flow to the Firm) per year are:


###CFFA=NI+Depr-CapEx - \varDelta NWC+IntExp###

For a firm with debt, what is the formula for the present value of interest tax shields if the tax shields occur in perpetuity?

You may assume:

  • the value of debt (D) is constant through time,
  • The cost of debt and the yield on debt are equal and given by ##r_D##.
  • the appropriate rate to discount interest tax shields is ##r_D##.
  • ##\text{IntExp}=D.r_D##

Question 142  DDM, income and capital returns

When using the dividend discount model to price a stock:

### p_{0} = \frac{d_1}{r - g} ###

The growth rate of dividends (g):

Question 193  bond pricing, premium par and discount bonds

Which one of the following bonds is trading at par?

Question 236  diversification, correlation, risk

Diversification in a portfolio of two assets works best when the correlation between their returns is:

Question 405  DDM, income and capital returns, no explanation

The perpetuity with growth formula is:

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

Which of the following is NOT equal to the total required return (r)?

Question 407  income and capital returns, inflation, real and nominal returns and cash flows

A stock has a real expected total return of 7% pa and a real expected capital return of 2% pa.

Inflation is expected to be 2% pa. All rates are given as effective annual rates.

What is the nominal expected total return, capital return and dividend yield? The answers below are given in the same order.

Question 680  option, no explanation

A trader buys one crude oil European style put option contract on the CME expiring in one year with an exercise price of $44 per barrel for a price of $6.64. The crude oil spot price is $40.33. If the trader doesn’t close out her contract before maturity, then at maturity she will have the:

Question 889  cross currency interest rate parity, no explanation

Judging by the graph, in 2018 the USD short term interest rate set by the US Federal Reserve is higher than the JPY short term interest rate set by the Bank of Japan, which is higher than the EUR short term interest rate set by the European central bank.

At the latest date shown in 2018: ##r_{USD}>r_{JPY}>r_{EUR}##

Assume that each currency’s yield curve is flat at the latest date shown in 2018, so interest rates are expected to remain at their current level into the future.

Which of the following statements is NOT correct?

Over time you would expect the:

Question 955  option, out of the money option

If a put option is out-of-the-money, then the spot price (##S_0##) is than, than or to the put option's strike price (##K_T##)?

Copyright © 2014 Keith Woodward