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Question 4  DDM

For a price of $13, Carla will sell you a share which will pay a dividend of $1 in one year and every year after that forever. The required return of the stock is 10% pa.

Would you like to Carla's share or politely ?


Question 13  bond pricing

For a price of $100, Rad will sell you a 5 year bond paying semi-annual coupons of 16% pa. The face value of the bond is $100. Other bonds with the same risk, maturity and coupon characteristics trade at a yield of 6% pa.

Would you like to the bond or politely ?


Question 28  DDM, income and capital returns

The following equation is the Dividend Discount Model, also known as the 'Gordon Growth Model' or the 'Perpetuity with growth' equation.

### P_{0} = \frac{C_1}{r_{\text{eff}} - g_{\text{eff}}} ###

What would you call the expression ## C_1/P_0 ##?



Question 248  CAPM, DDM, income and capital returns

The total return of any asset can be broken down in different ways. One possible way is to use the dividend discount model (or Gordon growth model):

###p_0 = \frac{c_1}{r_\text{total}-r_\text{capital}}###

Which, since ##c_1/p_0## is the income return (##r_\text{income}##), can be expressed as:

###r_\text{total}=r_\text{income}+r_\text{capital}###

So the total return of an asset is the income component plus the capital or price growth component.

Another way to break up total return is to use the Capital Asset Pricing Model:

###r_\text{total}=r_\text{f}+β(r_\text{m}- r_\text{f})###

###r_\text{total}=r_\text{time value}+r_\text{risk premium}###

So the risk free rate is the time value of money and the term ##β(r_\text{m}- r_\text{f})## is the compensation for taking on systematic risk.

Using the above theory and your general knowledge, which of the below equations, if any, are correct?

(I) ##r_\text{income}=r_\text{time value}##

(II) ##r_\text{income}=r_\text{risk premium}##

(III) ##r_\text{capital}=r_\text{time value}##

(IV) ##r_\text{capital}=r_\text{risk premium}##

(V) ##r_\text{income}+r_\text{capital}=r_\text{time value}+r_\text{risk premium}##

Which of the equations are correct?



Question 521  NPV, Annuity

The following cash flows are expected:

  • 10 yearly payments of $80, with the first payment in 6.5 years from now (first payment at t=6.5).
  • A single payment of $500 in 4 years and 3 months (t=4.25) from now.

What is the NPV of the cash flows if the discount rate is 10% given as an effective annual rate?



Question 664  real and nominal returns and cash flows, inflation, no explanation

What is the present value of real payments of $100 every year forever, with the first payment in one year? The nominal discount rate is 7% pa and the inflation rate is 4% pa.



Question 682  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. Bob 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?



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?



Question 842  monetary policy, institution

Which Australian institution is in charge of monetary policy?



Question 943  dividend date, ex dividend date

On which date would the stock price increase if the dividend and earnings are higher than expected?