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 280  equivalent annual cash flow

You own a nice suit which you wear once per week on nights out. You bought it one year ago for $600. In your experience, suits used once per week last for 6 years. So you expect yours to last for another 5 years.

Your younger brother said that retro is back in style so he wants to wants to borrow your suit once a week when he goes out. With the increased use, your suit will only last for another 4 years rather than 5.

What is the present value of the cost of letting your brother use your current suit for the next 4 years?

Assume: that bank interest rates are 10% pa, given as an effective annual rate; you will buy a new suit when your current one wears out and your brother will not use the new one; your brother will only use your current suit so he will only use it for the next four years; and the price of a new suit never changes.

(a) 108.1063

(b) 98.2785

(c) 94.095

(d) 85.5409

(e) 68.3013

Question 329  DDM, expected and historical returns

In the dividend discount model:

### P_0= \frac{d_1}{r-g} ###

The pronumeral ##g## is supposed to be the:

(a) Expected future growth rate of the dividend.

(b) Actual historical growth rate of the dividend.

(c) Expected future growth rate of the total required return on equity r.

(d) Actual historical growth rate of the market share price.

(e) Actual historical growth rate of the return on equity (ROE) defined as (Net Income / Owners Equity).

Question 346  NPV, annuity due

Your poor friend asks to borrow some money from you. He would like $1,000 now (t=0) and every year for the next 5 years, so there will be 6 payments of $1,000 from t=0 to t=5 inclusive. In return he will pay you $10,000 in seven years from now (t=7).

What is the net present value (NPV) of lending to your friend?

Assume that your friend will definitely pay you back so the loan is risk-free, and that the yield on risk-free government debt is 10% pa, given as an effective annual rate.

(a) $1,340.7944

(b) $1,172.2533

(c) $776.3205

(d) $705.7459

(e) $340.7944

Question 349  CFFA, depreciation tax shield

Which one of the following will decrease net income (NI) but increase cash flow from assets (CFFA) 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 - \Delta NWC+IntExp###

(a) An increase in revenue (Rev).

(b) An increase in rent expense (part of fixed costs, FC).

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

(d) An decrease in net working capital (ΔNWC).

(e) An increase in dividends.

Question 438  option, no explanation

Two put options are exactly the same, but one matures in one year and the other matures in two years. Which option would you expect to have the higher price, the option which matures or , or should they have the price?

Question 500  NPV, IRR

The below graph shows a project's net present value (NPV) against its annual discount rate.

For what discount rate or range of discount rates would you accept and commence the project?

All answer choices are given as approximations from reading off the graph.

(a) From 0 to 10% pa.

(b) From 0 to 5% pa.

(c) At 5.5% pa.

(d) From 6 to 20% pa.

(e) From 0 to 20% pa.

Question 787  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	2	L - 0.1
Firm B	2.5	L

 

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 0.15% and grants the remaining swap benefits to Firm A only. Which of the following statements about the swap is NOT correct?

(a) Firm A is less risky than Firm B. Firm A would have a higher credit rating.

(b) Firm A has the absolute advantage issuing bonds in both the fixed and floating coupon bond markets.

(c) Firm A has a comparative advantage issuing bonds in the floating coupon bond market.

(d) The net benefit from the swap available to Firm A is 0.25%.

(e) The swap rate between Firm B and the Bank would be 2.5% pa.

Question 831  option, American option, no explanation

Which of the following statements about American-style options is NOT correct? American-style:

(a) Options are always worth more than or equal to equivalent European-style options.

(b) Call options on dividend-paying stocks should sometimes be exercised just before the dividend.

(c) Put options on dividend-paying stocks should sometimes be exercised just after the dividend.

(d) Call options should be exercised now if the intrinsic option value ##(S-K)## is greater than the expected present value of the option’s future payoffs.

(e) Put options should be exercised now if the intrinsic option value ##(K-S)## is less than the expected present value of the option’s future payoffs.

Question 842  monetary policy, institution

Which Australian institution is in charge of monetary policy?

(a) Commonwealth Bank of Australia.

(b) Reserve Bank of Australia.

(c) National Australia Bank.

(d) Elected Federal Government.

(e) Australian Treasury.