The following is the Dividend Discount Model (DDM) used to price stocks:

### P_0 = \frac{d_1}{r-g} ###Assume that the assumptions of the DDM hold and that the time period is measured in years.

Which of the following is equal to the expected dividend in 3 years, ## d_3 ##?

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 project has the following cash flows. Normally cash flows are assumed to happen at the given time. But here, assume that the cash flows are received smoothly over the year. So the $105 at time 2 is actually earned smoothly from t=1 to t=2:

Project Cash Flows | |

Time (yrs) | Cash flow ($) |

0 | -90 |

1 | 30 |

2 | 105 |

What is the payback period of the project in years?

Select the most correct statement from the following.

'Chartists', also known as 'technical traders', believe that:

Total cash flows can be broken into income and capital cash flows. What is the name given to the **income** cash flow from owning shares?

A Chinese man wishes to convert **AUD 1 million** into Chinese Renminbi (RMB, also called the Yuan (CNY)). The exchange rate is **6.35 RMB per USD**, and **0.72 USD per AUD**. How much is the AUD 1 million worth in RMB?

**Question 729** book and market values, balance sheet, no explanation

If a firm makes a profit and pays no dividends, which of the following accounts will increase?

**Question 760** time calculation, interest only loan, no explanation

**Five** years ago (##t=-5## years) you entered into an **interest-only** home loan with a principal of $**500,000**, an interest rate of **4.5**% pa compounding monthly with a term of **25** years.

Then interest rates suddenly fall to **3**% pa (##t=0##), but you continue to pay the same monthly home loan payments as you did before. Will your home loan be paid off by the end of its remaining term? If so, in how many years from now? Measure the time taken to pay off the home loan from the current time which is 5 years after the home loan was first entered into.

Assume that the lower interest rate was given to you immediately after the loan repayment at the end of year 5, which was the 60th payment since the loan was granted. Also assume that rates were and are expected to remain constant.

**Question 784** boot strapping zero coupon yield, forward interest rate, term structure of interest rates

Information about three risk free Government bonds is given in the table below.

Federal Treasury Bond Data |
||||

Maturity |
Yield to maturity |
Coupon rate |
Face value |
Price |

(years) | (pa, compounding annually) | (pa, paid annually) | ($) | ($) |

1 | 0% | 2% | 100 | 102 |

2 | 1% | 2% | 100 | 101.9703951 |

3 | 2% | 2% | 100 | 100 |

Based on the above government bonds' yields to maturity, which of the below statements about the spot zero rates and forward zero rates is **NOT** correct?

Below are some statements about European-style options on non-dividend paying stocks. Assume that the risk free rate is always positive. Which of these statements is **NOT** correct?