An investor bought a 10 year 2.5% pa fixed coupon government bond priced at par. The face value is $100. Coupons are paid semi-annually and the next one is in 6 months.
Six months later, just after the coupon at that time was paid, yields suddenly and unexpectedly fell to 2% pa. Note that all yields above are given as APR's compounding semi-annually.
What was the bond investors' historical total return over that first 6 month period, given as an effective semi-annual rate?
Question 598 future, tailing the hedge, cross hedging
The standard deviation of monthly changes in the spot price of lamb is $0.015 per pound. The standard deviation of monthly changes in the futures price of live cattle is $0.012 per pound. The correlation between the spot price of lamb and the futures price of cattle is 0.4.
It is now January. A lamb producer is committed to selling 1,000,000 pounds of lamb in May. The spot price of live cattle is $0.30 per pound and the June futures price is $0.32 per pound. The spot price of lamb is $0.60 per pound.
The producer wants to use the June live cattle futures contracts to hedge his risk. Each futures contract is for the delivery of 50,000 pounds of cattle.
How many live cattle futures should the lamb farmer sell to hedge his risk? Round your answer to the nearest whole number of contracts.
The below three graphs show probability density functions (PDF) of three different random variables Red, Green and Blue.
Which of the below statements is NOT correct?
Question 758 time calculation, fully amortising loan, no explanation
Two years ago you entered into a fully amortising home loan with a principal of $1,000,000, an interest rate of 6% pa compounding monthly with a term of 25 years.
Then interest rates suddenly fall to 4.5% pa (t=0), but you continue to pay the same monthly home loan payments as you did before. How long will it now take to pay off your home loan? Measure the time taken to pay off the home loan from the current time which is 2 years after the home loan was first entered into.
Assume that the lower interest rate was given to you immediately after the loan repayment at the end of year 2, which was the 24th payment since the loan was granted. Also assume that rates were and are expected to remain constant.
Question 785 fixed for floating interest rate swap, non-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 | 3 | L - 0.4 | ||
Firm B | 5 | L + 1 | ||
Firm A wishes to borrow at a floating rate and Firm B wishes to borrow at a fixed rate. Design a non-intermediated swap that benefits firm A only. What will be the swap rate?
What derivative position are you exposed to if you have the obligation to sell the underlying asset at maturity, so you will definitely be forced to sell the underlying asset?
Which of the following statements about the Basel 3 minimum capital requirements is NOT correct? Common equity tier 1 (CET1) comprises the highest quality components of capital that fully satisfy all of the following characteristics:
Question 923 omitted variable bias, CAPM, single factor model, single index model, no explanation
Capital Asset Pricing Model (CAPM) and the Single Index Model (SIM) are single factor models whose only risk factor is the market portfolio’s return. Say a Taxi company and an Umbrella company are influenced by two factors, the market portfolio return and rainfall. When it rains, both the Taxi and Umbrella companies’ stock prices do well. When there’s no rain, both do poorly. Assume that rainfall risk is a systematic risk that cannot be diversified and that rainfall has zero correlation with the market portfolio’s returns.
Which of the following statements about these two stocks is NOT correct?
The CAPM and SIM:
Question 941 negative gearing, leverage, capital structure, interest tax shield, real estate
Last year, two friends Lev and Nolev each bought similar investment properties for $1 million. Both earned net rents of $30,000 pa over the past year. They funded their purchases in different ways:
- Lev used $200,000 of his own money and borrowed $800,000 from the bank in the form of an interest-only loan with an interest rate of 5% pa.
- Nolev used $1,000,000 of his own money, he has no mortgage loan on his property.
Both Lev and Nolev also work in high-paying jobs and are subject personal marginal tax rates of 45%.
Which of the below statements about the past year is NOT correct?