Fight Finance

A European company just issued two bonds, a

• 1 year zero coupon bond at a yield of 8% pa, and a
• 2 year zero coupon bond at a yield of 10% pa.

What is the company's forward rate over the second year (from t=1 to t=2)? Give your answer as an effective annual rate, which is how the above bond yields are quoted.

A company has:

• 100 million ordinary shares outstanding which are trading at a price of $5 each. Market analysts estimated that the company's ordinary stock has a beta of 1.5. The risk-free rate is 5% and the market return is 10%.
• 1 million preferred shares which have a face (or par) value of $100 and pay a constant annual dividend of 9% of par. The next dividend will be paid in one year. Assume that all preference dividends will be paid when promised. They currently trade at a price of $90 each.
• Debentures that have a total face value of $200 million and a yield to maturity of 6% per annum. They are publicly traded and their market price is equal to 110% of their face value.

The corporate tax rate is 30%. All returns and yields are given as effective annual rates.

What is the company's after-tax Weighted Average Cost of Capital (WACC)? Assume a classical tax system.

A project's Profitability Index (PI) is less than 1. Select the most correct statement:

You have $100,000 in the bank. The bank pays interest at 10% pa, given as an effective annual rate.

You wish to consume an equal amount now (t=0), in one year (t=1) and in two years (t=2), and still have $50,000 in the bank after that (t=2).

How much can you consume at each time?

A 30 year Japanese government bond was just issued at par with a yield of 1.7% pa. The fixed coupon payments are semi-annual. The bond has a face value of $100.

Six months later, just after the first coupon is paid, the yield of the bond increases to 2% pa. What is the bond's new price?

In the Merton model of corporate debt, buying a levered company's debt is equivalent to buying risk free government bonds and:

The accounting identity states that the book value of a company's assets (A) equals its liabilities (L) plus owners equity (OE), so A = L + OE.

The finance version states that the market value of a company's assets (V) equals the market value of its debt (D) plus equity (E), so V = D + E.

Therefore a business's assets can be seen as a portfolio of the debt and equity that fund the assets.

Let ##\sigma_\text{V total}^2## be the total variance of returns on assets, ##\sigma_\text{V syst}^2## be the systematic variance of returns on assets, and ##\sigma_\text{V idio}^2## be the idiosyncratic variance of returns on assets, and ##\rho_\text{D idio, E idio}## be the correlation between the idiosyncratic returns on debt and equity.

Which of the following equations is NOT correct?

You just entered into a fully amortising home loan with a principal of $600,000, a variable interest rate of 4.25% pa and a term of 25 years.

Immediately after settling the loan, the variable interest rate suddenly falls to 4% pa! You can't believe your luck. Despite this, you plan to continue paying the same home loan payments as you did before. How long will it now take to pay off your home loan?

Assume that the lower interest rate was granted immediately and that rates were and are now again expected to remain constant. Round your answer up to the nearest whole month.

Which of the following statements about futures contracts on shares is NOT correct, assuming that markets are efficient?

When an equity future is first negotiated (at t=0):

Calculate Australia’s GDP over the 2016 calendar year using the below table:

Source: ABS 5206.0 Australian National Accounts: National Income, Expenditure and Product. Table 3. Expenditure on Gross Domestic Product (GDP), Current prices.

Over the 2016 calendar year, Australia’s GDP was: