Bonds A and B are issued by the same company. They have the same face value, maturity, seniority and coupon payment frequency. The only difference is that bond A has a 5% coupon rate, while bond B has a 10% coupon rate. The yield curve is flat, which means that yields are expected to stay the same.
Which bond would have the higher current price?
A firm changes its capital structure by issuing a large amount of equity and using the funds to repay debt. Its assets are unchanged. Ignore interest tax shields.
According to the Capital Asset Pricing Model (CAPM), which statement is correct?
A 2 year corporate bond yields 3% pa with a coupon rate of 5% pa, paid semi-annually.
Find the effective monthly rate, effective six month rate, and effective annual rate.
##r_\text{eff monthly}##, ##r_\text{eff 6 month}##, ##r_\text{eff annual}##.
Question 419 capital budgeting, NPV, interest tax shield, WACC, CFFA, CAPM, no explanation
| Project Data | ||
| Project life | 1 year | |
| Initial investment in equipment | $6m | |
| Depreciation of equipment per year | $6m | |
| Expected sale price of equipment at end of project | 0 | |
| Unit sales per year | 9m | |
| Sale price per unit | $8 | |
| Variable cost per unit | $6 | |
| Fixed costs per year, paid at the end of each year | $1m | |
| Interest expense in first year (at t=1) | $0.53m | |
| Tax rate | 30% | |
| Government treasury bond yield | 5% | |
| Bank loan debt yield | 6% | |
| Market portfolio return | 10% | |
| Covariance of levered equity returns with market | 0.08 | |
| Variance of market portfolio returns | 0.16 | |
| Firm's and project's debt-to-assets ratio | 50% | |
Notes
- Due to the project, current assets will increase by $5m now (t=0) and fall by $5m at the end (t=1). Current liabilities will not be affected.
Assumptions
- The debt-to-assets ratio will be kept constant throughout the life of the project. The amount of interest expense at the end of each period has been correctly calculated to maintain this constant debt-to-equity ratio.
- Millions are represented by 'm'.
- All cash flows occur at the start or end of the year as appropriate, not in the middle or throughout the year.
- All rates and cash flows are real. The inflation rate is 2% pa.
- All rates are given as effective annual rates.
- The 50% capital gains tax discount is not available since the project is undertaken by a firm, not an individual.
What is the net present value (NPV) of the project?
Question 554 inflation, real and nominal returns and cash flows
On his 20th birthday, a man makes a resolution. He will put $30 cash under his bed at the end of every month starting from today. His birthday today is the first day of the month. So the first addition to his cash stash will be in one month. He will write in his will that when he dies the cash under the bed should be given to charity.
If the man lives for another 60 years, how much money will be under his bed if he dies just after making his last (720th) addition?
Also, what will be the real value of that cash in today's prices if inflation is expected to 2.5% pa? Assume that the inflation rate is an effective annual rate and is not expected to change.
The answers are given in the same order, the amount of money under his bed in 60 years, and the real value of that money in today's prices.
Question 559 variance, standard deviation, covariance, correlation
Which of the following statements about standard statistical mathematics notation is NOT correct?
Question 794 option, Black-Scholes-Merton option pricing, option delta, no explanation
Which of the following quantities from the Black-Scholes-Merton option pricing formula gives the Delta of a European call option?
Where:
###d_1=\dfrac{\ln[S_0/K]+(r+\sigma^2/2).T)}{\sigma.\sqrt{T}}### ###d_2=d_1-\sigma.\sqrt{T}=\dfrac{\ln[S_0/K]+(r-\sigma^2/2).T)}{\sigma.\sqrt{T}}###Which of the following statements is NOT correct? Money market securities are:
Which of the following statements about an asset’s standard deviation of returns is NOT correct? All other things remaining equal, the higher the asset’s standard deviation of returns: