Fight Finance

Question 35  bond pricing, zero coupon bond, term structure of interest rates, forward interest rate

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) 0.0185

(b) 0.0374

(c) 0.0604

(d) 0.1204

(e) 0.1250

Question 139  implicit interest rate in wholesale credit

A wholesale shop offers credit to its customers. The customers are given 21 days to pay for their goods. But if they pay straight away (now) they get a 1% discount.

What is the effective interest rate given to customers who pay in 21 days? All rates given below are effective annual rates. Assume 365 days in a year.

(a) 0.0005

(b) 0.0006

(c) 0.1603

(d) 0.1738

(e) 0.1909

Question 233  bond pricing

A four year bond has a face value of $100, a yield of 9% and a fixed coupon rate of 6%, paid semi-annually. What is its price?

(a) $94.6187

(b) $90.1062

(c) $72.592

(d) $70.3185

(e) $53.1754

Question 359  CFFA

Which one of the following will have no effect on net income (NI) but decrease cash flow from assets (CFFA or FFCF) in this year for a tax-paying firm, all else remaining constant?

Remember:

###NI=(Rev-COGS-FC-Depr-IntExp).(1-t_c )### ###CFFA=NI+Depr-CapEx - ΔNWC+IntExp###

(a) An increase in revenue (Rev).

(b) An increase in rent expense (a type of recurring fixed cost, FC).

(c) An increase in depreciation expense (Depr).

(d) An increase in inventories (a current asset).

(e) An decrease in interest expense (IntExp).

Question 402  PE ratio, no explanation

Which of the following companies is most suitable for valuation using PE multiples techniques?

(a) A company with positive earnings that does not have any comparable firms.

(b) A company with positive earnings that has comparable firms with positive earnings.

(c) A company with positive earnings that has comparable firms with negative earnings.

(d) A company with negative earnings that has comparable firms with negative earnings.

(e) A company with negative earnings that has comparable firms with positive earnings.

Question 629  yield curve, forward interest rate

Which of the following statements about yield curves is NOT correct?

(a) A yield curve graph shows bonds' spot yields at different maturities. The y-axis shows spot yields and the x-axis shows the bonds' times to maturity.

(b) A yield curve is a graph of forward rates.

(c) Normal yield curves slope upwards, they have a positive gradient.

(d) A yield curve is 'as at' a certain date, it's a snapshot in time.

(e) Every point on the yield curve corresponds to a different bond with a different maturity.

Question 670  fixed for floating interest rate swap

A company can invest funds in a five year project at LIBOR plus 50 basis points pa. The five-year swap rate is 4% pa. What fixed rate of interest can the company earn over the next five years by using the swap?

(a) 0% pa

(b) 3.5% pa

(c) 4% pa

(d) 4.5% pa

(e) 5% pa

Question 683  open interest, trade volume, future

Alice, Bob, Chris and Delta are traders in the futures market. The following trades occur over a single day in a newly-opened equity index future that matures in one year which the exchange just made available.

1. Alice buys a future from Bob.

2. Chris buys a future from Delta.

3. Alice buys a future from Chris.

These were the only trades made in this equity index future. What was the trading volume and what is the open interest?

(a) Daily trading volume is 3 contracts, open interest is 3 contracts.

(b) Daily trading volume is 3 contracts, open interest is 2 contracts.

(c) Daily trading volume is 3 contracts, open interest is 1 contract.

(d) Daily trading volume is 2 contracts, open interest is 3 contracts.

(e) Daily trading volume is 2 contracts, open interest is 2 contracts.

Question 795  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 put option?

(a) ##N[d_1]##

(b) ##N[d_2]##

(c) ##−N[−d_1]##

(d) ##−N[−d_2]##

(e) ##N[−d_2]##

Question 924  foreign exchange rate, forward foreign exchange rate, arbitrage, forward interest rate, no explanation

Suppose that the yield curve in the United States of America and Australia is flat and that the current:

• USD federal funds rate is 1% pa;
• AUD cash rate is 1.5% pa;
• Spot AUD exchange rate is 1 USD per AUD;
• One year forward AUD exchange rate is 0.97 USD per AUD.

You suspect that there’s an arbitrage opportunity.

Which one of the following statements about the potential arbitrage opportunity is NOT correct?

(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.