Fight Finance

Question 48  IRR, NPV, bond pricing, premium par and discount bonds, market efficiency

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?

(a) The internal rate of return (IRR) of buying a fairly priced bond is equal to the bond's yield.

(b) The Present Value of a fairly priced bond's coupons and face value is equal to its price.

(c) If a fairly priced bond's required return rises, its price will fall.

(d) Fairly priced premium bonds' yields are less than their coupon rates, prices are more than their face values, and the NPV of buying them is therefore positive.

(e) The NPV of buying a fairly priced bond is zero.

Question 96  bond pricing, zero coupon bond, term structure of interest rates, forward interest rate

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) 6.01%

(b) 6.02%

(c) 9.20%

(d) 12.02%

(e) 18.40%

Question 256  APR, effective rate

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}##.

(a) 0.002466, 0.014889, 0.03.

(b) 0.002485, 0.015, 0.030225.

(c) 0.004074, 0.024695, 0.05.

(d) 0.004124, 0.025, 0.050625.

(e) 0.004167, 0.025, 0.05.

Question 470  accounting ratio, no explanation

Which of the following statements is NOT correct?

(a) A firm's quick ratio will always be equal to or less than its current ratio.

(b) A firm will have positive net working capital if it has a current ratio that's greater than one.

(c) A firm's gross margin will be greater than or equal to its operating margin, which will be greater than or equal to its net profit margin.

(d) A firm's fixed asset turnover will be less than or equal to asset turnover.

(e) A firm's debt to equity ratio will always be greater than or equal to its debt to assets ratio.

Question 742  price gains and returns over time, no explanation

For an asset's price to quintuple (be five times as big, say from $1 to $5) every 5 years, what must be its effective annual capital return?

(a) 20% pa.

(b) 37.973% pa.

(c) 43.0969% pa.

(d) 56.9031% pa.

(e) 80% pa.

Question 878  foreign exchange rate, American and European terms

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?

Question 952  option, in the money option

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##)?

Question 972  foreign exchange rate, no explanation

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?

(a) If the RBA tried to make the AUD appreciate, it would buy AUD and this would reduce its FX reserves.

(b) The Australian central bank’s FX reserves as a proportion of daily AUD per USD turnover is around 0.3.

(c) The Chinese central bank’s FX reserves as a proportion of daily RMB per USD turnover is around 15.

(d) The Australian central bank’s FX reserves may include AUD.

(e) The Chinese central bank’s FX reserves may include AUD.

Question 973  foreign exchange rate, monetary policy, no explanation

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:

(a) Remain at 0.8 USD per AUD.

(b) Appreciate against the USD to be, say, 0.81 USD per AUD.

(c) Appreciate against the USD to be, say, 0.79 USD per AUD.

(d) Depreciate against the USD to be, say, 0.81 USD per AUD.

(e) Depreciate against the USD to be, say, 0.79 USD per AUD.

Question 1000  duration, duration of a perpetuity with growth, needs refinement

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:

(a) Increase.

(b) Decrease.

(c) Remain unchanged.

(d) Not enough information is provided to answer the question.