A two year Government bond has a face value of $100, a yield of 2.5% pa and a fixed coupon rate of 0.5% pa, paid semi-annually. What is its price?
Find Piano Bar's Cash Flow From Assets (CFFA), also known as Free Cash Flow to the Firm (FCFF), over the year ending 30th June 2013.
Piano Bar | ||
Income Statement for | ||
year ending 30th June 2013 | ||
$m | ||
Sales | 310 | |
COGS | 185 | |
Operating expense | 20 | |
Depreciation | 15 | |
Interest expense | 10 | |
Income before tax | 80 | |
Tax at 30% | 24 | |
Net income | 56 | |
Piano Bar | ||
Balance Sheet | ||
as at 30th June | 2013 | 2012 |
$m | $m | |
Assets | ||
Current assets | 240 | 230 |
PPE | ||
Cost | 420 | 400 |
Accumul. depr. | 50 | 35 |
Carrying amount | 370 | 365 |
Total assets | 610 | 595 |
Liabilities | ||
Current liabilities | 180 | 190 |
Non-current liabilities | 290 | 265 |
Owners' equity | ||
Retained earnings | 90 | 90 |
Contributed equity | 50 | 50 |
Total L and OE | 610 | 595 |
Note: all figures are given in millions of dollars ($m).
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.
Question 339 bond pricing, inflation, market efficiency, income and capital returns
Economic statistics released this morning were a surprise: they show a strong chance of consumer price inflation (CPI) reaching 5% pa over the next 2 years.
This is much higher than the previous forecast of 3% pa.
A vanilla fixed-coupon 2-year risk-free government bond was issued at par this morning, just before the economic news was released.
What is the expected change in bond price after the economic news this morning, and in the next 2 years? Assume that:
- Inflation remains at 5% over the next 2 years.
- Investors demand a constant real bond yield.
- The bond price falls by the (after-tax) value of the coupon the night before the ex-coupon date, as in real life.
Question 539 debt terminology, fully amortising loan, bond pricing
A 'fully amortising' loan can also be called a:
The efficient markets hypothesis (EMH) and no-arbitrage pricing theory are most closely related to which of the following concepts?
A $100 stock has a continuously compounded expected total return of 10% pa. Its dividend yield is 2% pa with continuous compounding. What do you expect its price to be in 2.5 years?
Question 768 accounting terminology, book and market values, no explanation
Accountants and finance professionals have lots of names for the same things which can be quite confusing.
Which of the following groups of items are NOT synonyms?
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 883 monetary policy, impossible trinity, foreign exchange rate
It’s often thought that the ideal currency or exchange rate regime would:
1. Be fixed against the USD;
2. Be convertible to and from USD for traders and investors so there are open goods, services and capital markets, and;
3. Allow independent monetary policy set by the country’s central bank, independent of the US central bank. So the country can set its own interest rate independent of the US Federal Reserve’s USD interest rate.
However, not all of these characteristics can be achieved. One must be sacrificed. This is the 'impossible trinity'.
Which of the following exchange rate regimes sacrifices convertibility?