Fight Finance

(a) -3.74 years

(b) 1.81 years

(c) 3.33 years

(d) 3.61 years

(e) 3.74 years

(a) Premium bonds have a positive expected capital return.

(b) Discount bonds have a positive expected capital return.

(c) Par bonds have a zero expected capital return.

(d) Par bonds have a total expected yield equal to their coupon yield.

(e) Zero coupon bonds selling at par would have zero expected total, income and capital yields.

(a) If stock A's return increases, stock B's return is also expected to increase.

(b) If stock A's return decreases, stock B's return is also expected to decrease.

(c) If stock A and B were combined in a portfolio, there would be no diversification at all since they are positively correlated.

(d) Stock A and B's returns have positive covariance.

(e) a and b.

(a) The single cash flow equation.

(b) The level annuity equation.

(c) The annuity with growth equation.

(d) The level perpetuity equation.

(e) The perpetuity with growth equation.

(a) 5.7145% pa

(b) 4.0952% pa

(c) 3.8096% pa

(d) 2.1904% pa

(e) 1.9048% pa

(a) Mr Blue's expected utility of wealth from gambling is 7.5 while refusing is 8.54. So the gamble makes him less happy.

(b) Miss Red's expected utility of wealth from gambling is 5 and refusing is also 5. So the gamble doesn't affect her happiness at all.

(c) Mr Blue's certainty equivalent of the risky gamble is $25. This is less than his current wealth which is why he would refuse.

(d) Miss Red's certainty equivalent of the risky gamble is any wealth. She's indifferent since she always has the same level of happiness.

(e) Mrs Green's certainty equivalent of the risky gamble is $25. This is less than her current wealth which is why she would refuse.

(a) Prices, ##P_1##.

(b) Gross discrete returns per annum, ##r_{\text{gdr 0 }\rightarrow \text{ 1}} = \dfrac{P_1}{P_0} ##.

(c) Effective annual returns per annum also known as net discrete returns, ##r_{\text{eff 0 }\rightarrow \text{ 1}} = \dfrac{P_1 - P_0}{P_0} = \dfrac{P_1}{P_0}-1##.

(d) Continuously compounded returns per annum, ##r_{\text{cc 0 }\rightarrow \text{ 1}} = \ln \left( \dfrac{P_1}{P_0} \right)##.

(e) Annualised percentage rates compounding per month, ##r_{\text{apr comp monthly 0 }\rightarrow \text{ 1 mth}} = \left( \dfrac{P_1 - P_0}{P_0} \right) \times 12##.

(a) Are a lender.

(b) Issued debt.

(c) Bought debt.

(d) Are a debt holder.

(e) Own a debt asset.

(a) ##P_0 (1+g)^2##

(b) ##P_0 (1+g)^2 - C_1 - C_2##

(c) ##(P_0 (1+r)^1 - C_1 ) (1+g)^1##

(d) ##(P_0 (1+r)^1 - C_1 ) (1+r)^1 - C_2##

(e) ##(P_0 (1+g)^1 ) (1+r)^1 - C_2##

(a) Right now, borrow USD in America, convert it into AUD at the spot, lend it in Australia, lock in to buy USD and sell AUD forward one year. One year later, withdraw the AUD, convert it into USD and pay back the USD loan.

(b) American debt may be over-priced, sell it.

(c) Australian debt may be under-priced, buy it.

(d) The spot AUD may be under-priced compared to the USD, buy the AUD now.

(e) The forward AUD may be under-priced compared to the USD, lock in to buy the AUD in one year.