Fight Finance

Question 52  IRR, pay back period

A three year project's NPV is negative. The cash flows of the project include a negative cash flow at the very start and positive cash flows over its short life. The required return of the project is 10% pa. Select the most correct statement.

(a) The payback period is negative.

(b) The project's IRR is negative.

(c) The project's IRR is less than its required return.

(d) The project's IRR is more than its required return.

(e) The project's IRR is equal to its required return.

Question 179  bond pricing, capital raising

A firm wishes to raise $20 million now. They will issue 8% pa semi-annual coupon bonds that will mature in 5 years and have a face value of $100 each. Bond yields are 6% pa, given as an APR compounding every 6 months, and the yield curve is flat.

How many bonds should the firm issue?

(a) 140,202

(b) 184,280

(c) 184,460

(d) 186,881

(e) 200,000

Question 313  foreign exchange rate, American and European terms

If the AUD appreciates against the USD, the American terms quote of the AUD will or ?

Question 325  foreign exchange rate

In the 1997 Asian financial crisis many countries' exchange rates depreciated rapidly against the US dollar (USD). The Thai, Indonesian, Malaysian, Korean and Filipino currencies were severely affected. The below graph shows these Asian countries' currencies in USD per one unit of their currency, indexed to 100 in June 1997.

Of the statements below, which is NOT correct? The Asian countries':

(a) Exports denominated in domestic currency became cheaper to foreigners.

(b) Imports denominated in domestic currency became more expensive.

(c) Citizens would have to pay more in their own currency when holidaying in the US.

(d) USD interest payments on USD fixed-interest bonds became more expensive in their own currency.

(e) Domestic currency interest payments on fixed-interest bonds denominated in domestic currency became cheaper in their own currency.

Question 328  bond pricing, APR

A 10 year Australian government bond was just issued at par with a yield of 3.9% pa. The fixed coupon payments are semi-annual. The bond has a face value of $1,000.

Six months later, just after the first coupon is paid, the yield of the bond decreases to 3.65% pa. What is the bond's new price?

(a) $1,000

(b) $1,019.9181

(c) $1,033.8330

(d) $1,052.7005

(e) $1,060.5226

Question 367  CFFA, interest tax shield

There are many ways to calculate a firm's free cash flow (FFCF), also called cash flow from assets (CFFA). Some include the annual interest tax shield in the cash flow and some do not.

Which of the below FFCF formulas include the interest tax shield in the cash flow?

###(1) \quad FFCF=NI + Depr - CapEx -ΔNWC + IntExp### ###(2) \quad FFCF=NI + Depr - CapEx -ΔNWC + IntExp.(1-t_c)### ###(3) \quad FFCF=EBIT.(1-t_c )+ Depr- CapEx -ΔNWC+IntExp.t_c### ###(4) \quad FFCF=EBIT.(1-t_c) + Depr- CapEx -ΔNWC### ###(5) \quad FFCF=EBITDA.(1-t_c )+Depr.t_c- CapEx -ΔNWC+IntExp.t_c### ###(6) \quad FFCF=EBITDA.(1-t_c )+Depr.t_c- CapEx -ΔNWC### ###(7) \quad FFCF=EBIT-Tax + Depr - CapEx -ΔNWC### ###(8) \quad FFCF=EBIT-Tax + Depr - CapEx -ΔNWC-IntExp.t_c### ###(9) \quad FFCF=EBITDA-Tax - CapEx -ΔNWC### ###(10) \quad FFCF=EBITDA-Tax - CapEx -ΔNWC-IntExp.t_c###

The formulas for net income (NI also called earnings), EBIT and EBITDA are given below. Assume that depreciation and amortisation are both represented by 'Depr' and that 'FC' represents fixed costs such as rent.

###NI=(Rev - COGS - Depr - FC - IntExp).(1-t_c )### ###EBIT=Rev - COGS - FC-Depr### ###EBITDA=Rev - COGS - FC### ###Tax =(Rev - COGS - Depr - FC - IntExp).t_c= \dfrac{NI.t_c}{1-t_c}###

(a) 1, 3, 5, 7, 9.

(b) 2, 4, 6, 8, 10.

(c) 1, 4, 6, 8, 10.

(d) 2, 3, 5, 7, 9.

(e) 1, 3, 5, 8, 10.

Question 691  continuously compounding rate, effective rate, continuously compounding rate conversion, no explanation

A bank quotes an interest rate of 6% pa with quarterly compounding. Note that another way of stating this rate is that it is an annual percentage rate (APR) compounding discretely every 3 months.

Which of the following statements about this rate is NOT correct? All percentages are given to 6 decimal places. The equivalent:

(a) Continuously compounded rate is 5.955445% per annum. Note that this rate is the annual rate with continuous compounding.

(b) Continuously compounded rate is 1.500000% per quarter. Note that this rate is the quarterly rate with continuous compounding.

(c) Effective quarterly rate is 1.500000% per quarter. Note that this rate is the quarterly rate with discrete quarterly compounding.

(d) Effective annual rate is 6.136355% per annum. Note that this rate is the annual rate with discrete annual compounding.

(e) $1,000,000 invested in this bank account for one year will give $1,061,363.551 at the end of the year.

Question 824  option, no explanation

A put option written on a risky non-dividend paying stock will mature in one month. As is normal, assume that the option's exercise price is non-zero and positive ##(K>0)## and the stock has limited liability ##(S>0)##.

Which of the following statements is NOT correct? The put option's:

(a) Price must be greater than zero (p>0).

(b) Price can be greater than its exercise price (p>K).

(c) Price can be greater than the underlying asset's price (p>S).

(d) Exercise price can be greater than the underlying asset's price (K>S).

(e) Profit must be less than the payoff at maturity from the long trader’s perspective.

Question 876  foreign exchange rate, forward foreign exchange rate, cross currency interest rate parity

Suppose the yield curve in the USA and Germany is flat and the:

• USD federal funds rate at the Federal Reserve is 1% pa;
• EUR deposit facility at the European Central Bank is -0.4% pa (note the negative sign);
• Spot EUR exchange rate is 1 USD per EUR;
• One year forward EUR exchange rate is 1.011 USD per EUR.

You suspect that there’s an arbitrage opportunity. Which one of the following statements about the potential arbitrage opportunity is NOT correct?

(a) Right now, borrow USD in America, convert it into EUR at the spot, lend it in Germany and lock in to buy USD and sell EUR forward one year. One year later, withdraw the EUR, convert it into USD and pay back the USD loan.

(b) American debt may be under-priced, buy it.

(c) German debt may be over-priced, sell it.

(d) The spot EUR may be over-priced compared to the USD, sell the EUR now.

(e) The forward EUR may be under-priced compared to the USD, lock in to buy the EUR in one year.

Question 950  future, backwardation

If futures prices are in backwardation, then futures prices (##F_{0,T}##) are than, than or to spot prices (##S_0##)?