Question 56 income and capital returns, bond pricing, premium par and discount bonds
Which of the following statements about risk free government bonds is NOT correct?
Hint: Total return can be broken into income and capital returns as follows:
###\begin{aligned} r_\text{total} &= \frac{c_1}{p_0} + \frac{p_1-p_0}{p_0} \\ &= r_\text{income} + r_\text{capital} \end{aligned} ###
The capital return is the growth rate of the price.
The income return is the periodic cash flow. For a bond this is the coupon payment.
A wholesale store offers credit to its customers. Customers are given 60 days to pay for their goods, but if they pay immediately they will get a 1.5% discount.
What is the effective interest rate implicit in the discount being offered? Assume 365 days in a year and that all customers pay either immediately or the 60th day. All of the below answer choices are given as effective annual interest rates.
In the dividend discount model:
###P_0 = \dfrac{C_1}{r-g}###
The return ##r## is supposed to be the:
A fairly valued share's current price is $4 and it has a total required return of 30%. Dividends are paid annually and next year's dividend is expected to be $1. After that, dividends are expected to grow by 5% pa in perpetuity. All rates are effective annual returns.
What is the expected dividend income paid at the end of the second year (t=2) and what is the expected capital gain from just after the first dividend (t=1) to just after the second dividend (t=2)? The answers are given in the same order, the dividend and then the capital gain.
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?
The standard deviation of monthly changes in the spot price of corn is 50 cents per bushel. The standard deviation of monthly changes in the futures price of corn is 40 cents per bushel. The correlation between the spot price of corn and the futures price of corn is 0.9.
It is now March. A corn chip manufacturer is committed to buying 250,000 bushels of corn in May. The spot price of corn is 381 cents per bushel and the June futures price is 399 cents per bushel.
The corn chip manufacturer wants to use the June corn futures contracts to hedge his risk. Each futures contract is for the delivery of 5,000 bushels of corn. One bushel is about 127 metric tons.
How many corn futures should the corn chip manufacturer buy to hedge his risk? Round your answer to the nearest whole number of contracts. Remember to tail the hedge.
Question 745 real and nominal returns and cash flows, inflation, income and capital returns
If the nominal gold price is expected to increase at the same rate as inflation which is 3% pa, which of the following statements is NOT correct?
Question 767 idiom, corporate financial decision theory, no explanation
The sayings "Don't cry over spilt milk", "Don't regret the things that you can't change" and "What's done is done" are most closely related to which financial concept?
Question 895 comparative advantage in trade, production possibilities curve
Adam and Bella 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.
Adam can pick 7 coconuts per hour, 6 dates per hour or any linear combination of coconuts and dates. For example, he could pick 3.5 coconuts and 3 dates per hour.
Bella can pick 3 coconuts per hour, 5 dates per hour or any linear combination. For example, she could pick 1.5 coconuts and 2.5 dates per hour.
This information is summarised in the table and graph:
Harvest Rates Per Hour | ||
Coconuts | Dates | |
Adam | 7 | 6 |
Bella | 3 | 5 |
Which of the following statements is NOT correct?