Your neighbour asks you for a loan of $100 and offers to pay you back $120 in one year.
You don't actually have any money right now, but you can borrow and lend from the bank at a rate of 10% pa. Rates are given as effective annual rates.
Assume that your neighbour will definitely pay you back. Ignore interest tax shields and transaction costs.
The Net Present Value (NPV) of lending to your neighbour is $9.09. Describe what you would do to actually receive a $9.09 cash flow right now with zero net cash flows in the future.
Bonds X and Y are issued by the same company. Both bonds yield 10% pa, and they have the same face value ($100), maturity, seniority, and payment frequency.
The only difference is that bond X pays coupons of 6% pa and bond Y pays coupons of 8% pa. Which of the following statements is true?
The following cash flows are expected:
- 10 yearly payments of $80, with the first payment in 6.5 years from now (first payment at t=6.5).
- A single payment of $500 in 4 years and 3 months (t=4.25) from now.
What is the NPV of the cash flows if the discount rate is 10% given as an effective annual rate?
Question 543 price gains and returns over time, IRR, NPV, income and capital returns, effective return
For an asset price to triple every 5 years, what must be the expected future capital return, given as an effective annual rate?
The efficient markets hypothesis (EMH) and no-arbitrage pricing theory are most closely related to which of the following concepts?
Question 732 real and nominal returns and cash flows, inflation, income and capital returns
An investor bought a bond for $100 (at t=0) and one year later it paid its annual coupon of $1 (at t=1). Just after the coupon was paid, the bond price was $100.50 (at t=1). Inflation over the past year (from t=0 to t=1) was 3% pa, given as an effective annual rate.
Which of the following statements is NOT correct? The bond investment produced a:
Question 784 boot strapping zero coupon yield, forward interest rate, term structure of interest rates
Information about three risk free Government bonds is given in the table below.
Federal Treasury Bond Data | ||||
Maturity | Yield to maturity | Coupon rate | Face value | Price |
(years) | (pa, compounding annually) | (pa, paid annually) | ($) | ($) |
1 | 0% | 2% | 100 | 102 |
2 | 1% | 2% | 100 | 101.9703951 |
3 | 2% | 2% | 100 | 100 |
Based on the above government bonds' yields to maturity, which of the below statements about the spot zero rates and forward zero rates is NOT correct?
Question 801 negative gearing, leverage, capital structure, no explanation
The following steps set out the process of ‘negative gearing’ an investment property in Australia. Which of these steps or statements is NOT correct? To successfully achieve negative gearing on an investment property:
Question 807 market efficiency, expected and historical returns, CAPM, beta, systematic risk, no explanation
You work in Asia and just woke up. It looked like a nice day but then you read the news and found out that last night the American share market fell by 10% while you were asleep due to surprisingly poor macro-economic world news. You own a portfolio of liquid stocks listed in Asia with a beta of 1.6. When the Asian equity markets open, what do you expect to happen to your share portfolio? Assume that the capital asset pricing model (CAPM) is correct and that the market portfolio contains all shares in the world, of which American shares are a big part. Your portfolio beta is measured against this world market portfolio.
When the Asian equity market opens for trade, you would expect your portfolio value to:
Question 821 option, option profit, option payoff at maturity, no explanation
You just paid $4 for a 3 month European style call option on a stock currently priced at $47 with a strike price of $50. The stock’s next dividend will be $1 in 4 months’ time. Note that the dividend is paid after the option matures. Which of the below statements is NOT correct?