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Question 43  pay back period

A project to build a toll road will take 3 years to complete, costing three payments of $50 million, paid at the start of each year (at times 0, 1, and 2).

After completion, the toll road will yield a constant $10 million at the end of each year forever with no costs. So the first payment will be at t=4.

The required return of the project is 10% pa given as an effective nominal rate. All cash flows are nominal.

What is the payback period?



Question 103  option

Below are 4 option graphs. Note that the y-axis is payoff at maturity (T). What options do they depict? List them in the order that they are numbered.

Image of option graphs



Question 111  portfolio risk, correlation

All things remaining equal, the variance of a portfolio of two positively-weighted stocks rises as:



Question 128  debt terminology, needs refinement

An 'interest payment' is the same thing as a 'coupon payment'. or ?


Question 459  interest only loan, inflation

In Australia in the 1980's, inflation was around 8% pa, and residential mortgage loan interest rates were around 14%.

In 2013, inflation was around 2.5% pa, and residential mortgage loan interest rates were around 4.5%.

If a person can afford constant mortgage loan payments of $2,000 per month, how much more can they borrow when interest rates are 4.5% pa compared with 14.0% pa?

Give your answer as a proportional increase over the amount you could borrow when interest rates were high ##(V_\text{high rates})##, so:

###\text{Proportional increase} = \dfrac{V_\text{low rates}-V_\text{high rates}}{V_\text{high rates}} ###

Assume that:

  • Interest rates are expected to be constant over the life of the loan.
  • Loans are interest-only and have a life of 30 years.
  • Mortgage loan payments are made every month in arrears and all interest rates are given as annualised percentage rates (APR's) compounding per month.



Question 698  utility, risk aversion, utility function

Mr Blue, Miss Red and Mrs Green are people with different utility functions. Which of the statements about the 3 utility functions is NOT correct?

Utility curves



Question 740  real and nominal returns and cash flows, DDM, inflation

Taking inflation into account when using the DDM can be hard. Which of the following formulas will NOT give a company's current stock price ##(P_0)##? Assume that the annual dividend was just paid ##(C_0)##, and the next dividend will be paid in one year ##(C_1)##.



Question 770  expected and historical returns, income and capital returns, coupon rate, bond pricing

Which of the following statements is NOT correct? Assume that all events are a surprise and that all other things remain equal. So for example, don't assume that just because a company's dividends and profit rise that its required return will also rise, assume the required return stays the same.



Question 873  Sharpe ratio, Treynor ratio, Jensens alpha, SML, CAPM

Which of the following statements is NOT correct? Fairly-priced assets should:



Question 969  foreign exchange rate, no explanation

RBA analyst Adam Hamilton wrote in the December 2018 Bulletin article ‘Understanding Exchange Rates and Why They Are Important’ the following passage about bilateral exchange rates:

A bilateral exchange rate refers to the value of one currency relative to another. It is the most commonly referenced type of exchange rate. Most bilateral exchange rates are quoted against the US dollar (USD), as it is the most traded currency globally. Looking at the Australian dollar (AUD), the AUD/USD exchange rate gives you the amount of US dollars that you will receive for each Australian dollar that you convert (or sell). For example, an AUD/USD exchange rate of 0.75 means that you will get US75 cents for every 1 AUD.

An appreciation of the Australian dollar is an increase in its value compared with a foreign currency. This means that each Australian dollar buys you more foreign currency than before. Equivalently, if you are buying an item that is priced in foreign currency it will now cost you less in Australian dollars than before. If there is a depreciation of the Australian dollar, the opposite is true.

Based on this information, which of the following statements is NOT correct?