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 48 IRR, NPV, bond pricing, premium par and discount bonds, market efficiency
The theory of fixed interest bond pricing is an application of the theory of Net Present Value (NPV). Also, a 'fairly priced' asset is not over- or under-priced. Buying or selling a fairly priced asset has an NPV of zero.
Considering this, which of the following statements is NOT correct?
Which statement(s) are correct?
(i) All stocks that plot on the Security Market Line (SML) are fairly priced.
(ii) All stocks that plot above the Security Market Line (SML) are overpriced.
(iii) All fairly priced stocks that plot on the Capital Market Line (CML) have zero idiosyncratic risk.
Select the most correct response:
A stock is expected to pay the following dividends:
| Cash Flows of a Stock | ||||||
| Time (yrs) | 0 | 1 | 2 | 3 | 4 | ... |
| Dividend ($) | 8 | 8 | 8 | 20 | 8 | ... |
After year 4, the dividend will grow in perpetuity at 4% pa. The required return on the stock is 10% pa. Both the growth rate and required return are given as effective annual rates. Note that the $8 dividend at time zero is about to be paid tonight.
What is the current price of the stock?
A firm has forecast its Cash Flow From Assets (CFFA) for this year and management is worried that it is too low. Which one of the following actions will lead to a higher CFFA for this year (t=0 to 1)? Only consider cash flows this year. Do not consider cash flows after one year, or the change in the NPV of the firm. Consider each action in isolation.
In the dividend discount model:
### P_0= \frac{d_1}{r-g} ###
The pronumeral ##g## is supposed to be the:
A company conducts a 2 for 3 rights issue at a subscription price of $8 when the pre-announcement stock price was $9. Assume that all investors use their rights to buy those extra shares.
What is the percentage increase in the stock price and the number of shares outstanding? The answers are given in the same order.
When does a European option's last-traded market price become a sunk cost?
Question 859 money supply, no explanation
The below table shows Australian monetary aggregates. Note that ‘M3’ is the sum of all the figures in the table and ‘ADI’ stands for Authorised Deposit-taking Institution such as a bank, building society or credit union.
| Australian Monetary Aggregates | ||||||
| March 2017, AUD billions | ||||||
| Currency | Current deposits with banks |
Certificates of deposit issued by banks |
Term deposits with banks |
Other deposits with banks |
Deposits with non-bank ADIs |
M3 |
| 69.3 | 271.6 | 207.2 | 562.3 | 838.7 | 36.9 | 1986.0 |
Source: RBA Statistical Table D3 Monetary Aggregates.
Which of the following statements is NOT correct?
Question 964 monetary policy, impossible trinity, foreign exchange rate
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?