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Question 46  NPV, annuity due

The phone company Telstra have 2 mobile service plans on offer which both have the same amount of phone call, text message and internet data credit. Both plans have a contract length of 24 months and the monthly cost is payable in advance. The only difference between the two plans is that one is a:

  • 'Bring Your Own' (BYO) mobile service plan, costing $50 per month. There is no phone included in this plan. The other plan is a:
  • 'Bundled' mobile service plan that comes with the latest smart phone, costing $71 per month. This plan includes the latest smart phone.

Neither plan has any additional payments at the start or end.

The only difference between the plans is the phone, so what is the implied cost of the phone as a present value?

Assume that the discount rate is 2% per month given as an effective monthly rate, the same high interest rate on credit cards.

Question 147  bill pricing, simple interest rate, no explanation

A 30-day Bank Accepted Bill has a face value of $1,000,000. The interest rate is 8% pa and there are 365 days in the year. What is its price now?

Question 171  DDM, income and capital returns

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

### p_0=\frac{d_1}{r-g} ###

Which of the following statements about the Dividend Discount Model is NOT correct?

Question 215  equivalent annual cash flow, effective rate conversion

You're about to buy a car. These are the cash flows of the two different cars that you can buy:

  • You can buy an old car for $5,000 now, for which you will have to buy $90 of fuel at the end of each week from the date of purchase. The old car will last for 3 years, at which point you will sell the old car for $500.
  • Or you can buy a new car for $14,000 now for which you will have to buy $50 of fuel at the end of each week from the date of purchase. The new car will last for 4 years, at which point you will sell the new car for $1,000.

Bank interest rates are 10% pa, given as an effective annual rate. Assume that there are exactly 52 weeks in a year. Ignore taxes and environmental and pollution factors.

Should you buy the or the ?

Question 283  portfolio risk, correlation, needs refinement

Three important classes of investable risky assets are:

  • Corporate debt which has low total risk,
  • Real estate which has medium total risk,
  • Equity which has high total risk.

Assume that the correlation between total returns on:

  • Corporate debt and real estate is 0.1,
  • Corporate debt and equity is 0.1,
  • Real estate and equity is 0.5.

You are considering investing all of your wealth in one or more of these asset classes. Which portfolio will give the lowest total risk? You are restricted from shorting any of these assets. Disregard returns and the risk-return trade-off, pretend that you are only concerned with minimising risk.

Question 392  real option, option

An abandonment option is best modeled as a or option?

Question 393  real option, option

A timing option is best modeled as a or option?

Question 652  future, continuously compounding rate

An equity index is currently at 5,200 points. The 6 month futures price is 5,300 points and the total required return is 6% pa with continuous compounding. Each index point is worth $25.

What is the implied dividend yield as a continuously compounded rate per annum?

Question 787  fixed for floating interest rate swap, intermediated swap

The below table summarises the borrowing costs confronting two companies A and B.

Bond Market Yields
  Fixed Yield to Maturity (%pa) Floating Yield (%pa)
Firm A 2 L - 0.1
Firm B 2.5 L


Firm A wishes to borrow at a floating rate and Firm B wishes to borrow at a fixed rate. Design an intermediated swap (which means there will actually be two swaps) that nets a bank 0.15% and grants the remaining swap benefits to Firm A only. Which of the following statements about the swap is NOT correct?

Question 900  Basel accord

Which of the following statements about the Basel 3 minimum capital requirements is NOT correct? Common equity tier 1 (CET1) comprises the highest quality components of capital that fully satisfy all of the following characteristics:

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