# Fight Finance

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The theory of fixed interest bond pricing is an application of the theory of Net Present Value (NPV). Also, a 'fairly priced' asset is not over- or under-priced. Buying or selling a fairly priced asset has an NPV of zero.

Considering this, which of the following statements is NOT correct?

An Australian company just issued two bonds paying semi-annual coupons:

• 1 year zero coupon bond at a yield of 8% pa, and a
• 2 year zero coupon bond at a yield of 10% pa.

What is the forward rate on the company's debt from years 1 to 2? Give your answer as an APR compounding every 6 months, which is how the above bond yields are quoted.

A 2 year corporate bond yields 3% pa with a coupon rate of 5% pa, paid semi-annually.

Find the effective monthly rate, effective six month rate, and effective annual rate.

$r_\text{eff monthly}$, $r_\text{eff 6 month}$, $r_\text{eff annual}$.

Which of the following statements is NOT correct?

For an asset's price to quintuple every 5 years, what must be its effective annual capital return? Note that a stock's price quintuples when it increases from say $1 to$5.

If the Australian dollar quote of 0.8 USD per AUD suddenly falls to 0.7 USD per AUD, has the Australian dollar or against the US dollar?

If a put option is in-the-money, then the spot price ($S_0$) is than, than or to the put option's strike price ($K_T$)?

Examine the below graphs. The first graph shows daily FX turnover in the world by both the public (government) and private sectors. The second graph 'Official Reserve Assets' shows the FX reserves of the Australian central bank, the RBA. The third graph's top panel shows the FX reserves of the Chinese central bank, the PBoC.

Assume that the AUD and USD are priced at parity so 1 AUD = 1 USD.

Which of the following statements is NOT correct?

Suppose the market expects the Reserve Bank of Australia (RBA) to increase the policy rate by 25 basis points at their next meeting. The current exchange rate is 0.8 USD per AUD.

Then unexpectedly, the RBA announce that they will leave the policy rate unchanged due to increasing unemployment and fears of a potential recession.

What do you expect to happen to Australia's exchange rate on the day when the surprise announcement is made? The Australian dollar is likely to:

An unlevered firm cuts its dividends and re-invests in zero-NPV projects with the same risk as its existing projects. This decreases the dividend yield, but increases the firm's equity's dividend growth rate and duration, while its total required return on equity remains unchanged. The equity can be valued as a perpetuity and the duration of a perpetuity is given below:

$$D_\text{Macaulay} = \dfrac{1+r}{r-g}$$

What will be the effect on the stock's CAPM beta? Assume that there's no change in the risk free rate or market risk premium. The company's equity beta will: