Fight Finance

In Australia, nominal yields on semi-annual coupon paying Government Bonds with 2 years until maturity are currently 2.83% pa.

The inflation rate is currently 2.2% pa, given as an APR compounding per quarter. The inflation rate is not expected to change over the next 2 years.

What is the real yield on these bonds, given as an APR compounding every 6 months?

You operate a cattle farm that supplies hamburger meat to the big fast food chains. You buy a lot of grain to feed your cattle, and you sell the fully grown cattle on the livestock market.

You're afraid of adverse movements in grain and livestock prices. What options should you buy to hedge your exposures in the grain and cattle livestock markets?

Select the most correct response:

An investor bought two fixed-coupon bonds issued by the same company, a zero-coupon bond and a 7% pa semi-annual coupon bond. Both bonds have a face value of $1,000, mature in 10 years, and had a yield at the time of purchase of 8% pa.

A few years later, yields fell to 6% pa. Which of the following statements is correct? Note that a capital gain is an increase in price.

The market expects the Reserve Bank of Australia (RBA) to decrease the policy rate by 25 basis points at their next meeting.

Then unexpectedly, the RBA announce that they will decrease the policy rate by 50 basis points due to fears of a recession and deflation.

What do you expect to happen to Australia's exchange rate? The Australian dollar will:

Notes

1. The project will require an immediate purchase of $50k of inventory, which will all be sold at cost when the project ends. Current liabilities are negligible so they can be ignored.

Assumptions

• The debt-to-equity ratio will be kept constant throughout the life of the project. The amount of interest expense at the end of each period has been correctly calculated to maintain this constant debt-to-equity ratio. Note that interest expense is different in each year.
• Thousands are represented by 'k' (kilo).
• All cash flows occur at the start or end of the year as appropriate, not in the middle or throughout the year.
• All rates and cash flows are nominal. The inflation rate is 2% pa.
• All rates are given as effective annual rates.
• The 50% capital gains tax discount is not available since the project is undertaken by a firm, not an individual.

What is the net present value (NPV) of the project?

Which firms tend to have low forward-looking price-earnings (PE) ratios? Only consider firms with positive PE ratios.

Which of the following statements about call options is NOT correct?

An effective semi-annual return of 5% ##(r_\text{eff 6mth})## is equivalent to an effective annual return ##(r_\text{eff annual})## of:

An investor owns a portfolio with:

• 80% invested in stock A; and
• 20% invested in stock B.

Today there was a:

• 10% rise in stock A's price; and
• No change in stock B's price.

No dividends were paid on either stock. What was the total historical portfolio return on this day? All returns above and answer options below are given as effective daily rates.

Arthur and Bindi are the only people on a remote island.

Luckily there are Coconut and Date palm trees on the island that grow delicious fruit. The problem is that harvesting the fruit takes a lot of work.

Arthur can pick 1 coconut per hour, 4 dates per hour or any linear combination of coconuts and dates. For example, he could pick 0.5 coconuts and 2 dates per hour.

Bindi can pick 2 coconuts per hour, 1 date per hour or any linear combination. For example, she could pick 0.5 coconuts and 0.75 dates per hour.

This information is summarised in the table and graph:

Which of the following statements is NOT correct?