# Fight Finance

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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?

According to the theory of the Capital Asset Pricing Model (CAPM), total variance can be broken into two components, systematic variance and idiosyncratic variance. Which of the following events would be considered the most diversifiable according to the theory of the CAPM?

Question 109  credit rating, credit risk

Bonds with lower (worse) credit ratings tend to have:

 Project Data Project life 2 yrs Initial investment in equipment $600k Depreciation of equipment per year$250k Expected sale price of equipment at end of project $200k Revenue per job$12k Variable cost per job $4k Quantity of jobs per year 120 Fixed costs per year, paid at the end of each year$100k Interest expense in first year (at t=1) $16.091k Interest expense in second year (at t=2)$9.711k Tax rate 30% Government treasury bond yield 5% Bank loan debt yield 6% Levered cost of equity 12.5% Market portfolio return 10% Beta of assets 1.24 Beta of levered equity 1.5 Firm's and project's debt-to-equity ratio 25%

Notes

1. The project will require an immediate purchase of $50k of inventory, which will all be sold at cost when the project ends. Current liabilities are negligible so they can be ignored. Assumptions • The debt-to-equity 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. Note that interest expense is different in each year. • Thousands are represented by 'k' (kilo). • 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 nominal. 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? The below screenshot of Commonwealth Bank of Australia's (CBA) details were taken from the Google Finance website on 7 Nov 2014. Some information has been deliberately blanked out. What was CBA's backwards-looking price-earnings ratio? The expression 'you have to spend money to make money' relates to which business decision? An investor bought a 5 year government bond with a 2% pa coupon rate at par. Coupons are paid semi-annually. The face value is$100.

Calculate the bond's new price 8 months later after yields have increased to 3% pa. Note that both yields are given as APR's compounding semi-annually. Assume that the yield curve was flat before the change in yields, and remained flat afterwards as well.

Examine the graphs below. Assume that asset A is a single stock. Which of the following statements is NOT correct? Asset A:

On which date would the stock price increase if the dividend and earnings are higher than expected?

It’s often thought that the ideal currency or exchange rate regime would:

1. Be fixed against the USD;

2. Be convertible to and from USD for traders and investors so there are open goods, services and capital markets, and;

3. Allow independent monetary policy set by the country’s central bank, independent of the US central bank. So the country can set its own interest rate independent of the US Federal Reserve’s USD interest rate.

However, not all of these characteristics can be achieved. One must be sacrificed. This is the 'impossible trinity'.

Which of the following exchange rate regimes sacrifices independent monetary policy?