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Question 40  DDM, perpetuity with growth

A stock is expected to pay the following dividends:

Cash Flows of a Stock
Time (yrs) 0 1 2 3 4 ...
Dividend ($) 0.00 1.00 1.05 1.10 1.15 ...

After year 4, the annual dividend will grow in perpetuity at 5% pa, so;

  • the dividend at t=5 will be $1.15(1+0.05),
  • the dividend at t=6 will be $1.15(1+0.05)^2, and so on.

The required return on the stock is 10% pa. Both the growth rate and required return are given as effective annual rates.

What will be the price of the stock in three and a half years (t = 3.5)?

Question 193  bond pricing, premium par and discount bonds

Which one of the following bonds is trading at par?

Question 234  debt terminology

An 'interest only' loan can also be called a:

Question 548  equivalent annual cash flow, time calculation, no explanation

An Apple iPhone 6 smart phone can be bought now for $999. An Android Kogan Agora 4G+ smart phone can be bought now for $240.

If the Kogan phone lasts for one year, approximately how long must the Apple phone last for to have the same equivalent annual cost?

Assume that both phones have equivalent features besides their lifetimes, that both are worthless once they've outlasted their life, the discount rate is 10% pa given as an effective annual rate, and there are no extra costs or benefits from either phone.

Question 572  bond pricing, zero coupon bond, term structure of interest rates, expectations hypothesis, forward interest rate, yield curve

In the below term structure of interest rates equation, all rates are effective annual yields and the numbers in subscript represent the years that the yields are measured over:

###(1+r_{0-3})^3 = (1+r_{0-1})(1+r_{1-2})(1+r_{2-3}) ###

Which of the following statements is NOT correct?

Question 578  inflation, real and nominal returns and cash flows

Which of the following statements about inflation is NOT correct?

Question 654  future, forward

Which of the following statements about futures and forward contracts is NOT correct?

Question 834  option, delta, theta, gamma, standard deviation, Black-Scholes-Merton option pricing

Which of the following statements about an option (either a call or put) and its underlying stock is NOT correct?

European Call Option
on a non-dividend paying stock
Description Symbol Quantity
Spot price ($) ##S_0## 20
Strike price ($) ##K_T## 18
Risk free cont. comp. rate (pa) ##r## 0.05
Standard deviation of the stock's cont. comp. returns (pa) ##\sigma## 0.3
Option maturity (years) ##T## 1
Call option price ($) ##c_0## 3.939488
Delta ##\Delta = N[d_1]## 0.747891
##N[d_2]## ##N[d_2]## 0.643514
Gamma ##\Gamma## 0.053199
Theta ($/year) ##\Theta = \partial c / \partial T## 1.566433


Question 968  foreign exchange rate, forward foreign exchange rate, cross currency interest rate parity, no explanation

Below is a graph showing the spread or difference between government bond yields in different countries compared to the US. Assume that all governments have zero credit risk.

According to the principle of cross-currency interest rate parity, which country is likely to have the greatest expected currency appreciation against the USD over the next 2 years?

Question 988  variance, covariance, beta, CAPM, risk, no explanation

Price Data Time Series
Sourced from Yahoo Finance Historical Price Data
Date S&P500 Index (^GSPC)   Apple (AAPL)
Open High Low Close Adj close   Open High Low Close Adj close
2007, Wed 3 Jan 1418 1429 1408 1417 1417 12.33 12.37 11.7 11.97 10.42
2008, Wed 2 Jan 1468 1472 1442 1447 1447 28.47 28.61 27.51 27.83 24.22
2009, Fri 2 Jan 903 935 899 932 932 12.27 13.01 12.17 12.96 11.28
2010, Mon 4 Jan 1117 1134 1117 1133 1133 30.49 30.64 30.34 30.57 26.6
Source: Yahoo Finance.


Which of the following statements about the above table which is used to calculate Apple's equity beta is NOT correct?