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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.

Question 149  fully amortising loan, APR

You want to buy an apartment priced at $500,000. You have saved a deposit of $50,000. The bank has agreed to lend you the $450,000 as a fully amortising loan with a term of 30 years. The interest rate is 6% pa and is not expected to change. What will be your monthly payments?

Question 180  equivalent annual cash flow, inflation, real and nominal returns and cash flows

Details of two different types of light bulbs are given below:

  • Low-energy light bulbs cost $3.50, have a life of nine years, and use about $1.60 of electricity a year, paid at the end of each year.
  • Conventional light bulbs cost only $0.50, but last only about a year and use about $6.60 of energy a year, paid at the end of each year.

The real discount rate is 5%, given as an effective annual rate. Assume that all cash flows are real. The inflation rate is 3% given as an effective annual rate.

Find the Equivalent Annual Cost (EAC) of the low-energy and conventional light bulbs. The below choices are listed in that order.

Question 217  NPV, DDM, multi stage growth model

A stock is expected to pay a dividend of $15 in one year (t=1), then $25 for 9 years after that (payments at t=2 ,3,...10), and on the 11th year (t=11) the dividend will be 2% less than at t=10, and will continue to shrink at the same rate every year after that forever. The required return of the stock is 10%. All rates are effective annual rates.

What is the price of the stock now?

Question 247  cross currency interest rate parity, no explanation

In the so called 'Swiss Loans Affair' of the 1980's, Australian banks offered loans denominated in Swiss Francs to Australian farmers at interest rates as low as 4% pa. This was far lower than interest rates on Australian Dollar loans which were above 10% due to very high inflation in Australia at the time.

In the late-1980's there was a large depreciation in the Australian Dollar. The Australian Dollar nearly halved in value against the Swiss Franc. Many Australian farmers went bankrupt since they couldn't afford the interest payments on the Swiss Franc loans because the Australian Dollar value of those payments nearly doubled. The farmers accused the banks of promoting Swiss Franc loans without making them aware of the risks.

What fundamental principal of finance did the Australian farmers (and the bankers) fail to understand?

Question 444  investment decision, corporate financial decision theory

The investment decision primarily affects which part of a business?

Question 739  real and nominal returns and cash flows, inflation

There are a number of different formulas involving real and nominal returns and cash flows. Which one of the following formulas is NOT correct? All returns are effective annual rates. Note that the symbol ##\approx## means 'approximately equal to'.

Question 786  fixed for floating interest rate swap, intermediated swap

The below table summarises the borrowing costs confronting two companies A and B.

Bond Market Yields
  Fixed Yield to Maturity (%pa) Floating Yield (%pa)
Firm A 3 L - 0.4
Firm B 5 L + 1


Firm A wishes to borrow at a floating rate and Firm B wishes to borrow at a fixed rate. Design an intermediated swap (which means there will actually be two swaps) that nets a bank 0.1% and shares the remaining swap benefits between Firms A and B equally. Which of the following statements about the swap is NOT correct?

Question 869  economic order quantity

A Queensland farmer grows strawberries in greenhouses and supplies Australian supermarkets all year round. The farmer must decide how often he should contract the truck driver to deliver his strawberries and how many boxes to send on each delivery. The farmer:

  • Sells 100,000 boxes of strawberries per year;
  • Incurs holding costs (refrigeration and spoilage) of $16 per box per year; and
  • Must pay the truck driver delivery fees at $0.20 per box plus a $500 fixed fee per delivery.

Which of the following statements about the Economic Order Quantity is NOT correct?

Question 972  foreign exchange rate, no explanation

Examine the below graphs. The first graph shows daily FX turnover in the world by both the public (government) and private sectors. The second graph 'Official Reserve Assets' shows the FX reserves of the Australian central bank, the RBA. The third graph's top panel shows the FX reserves of the Chinese central bank, the PBoC.

Assume that the AUD and USD are priced at parity so 1 AUD = 1 USD.

Which of the following statements is NOT correct?

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