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 project's NPV is positive. Select the most correct statement:
A stock is expected to pay the following dividends:
Cash Flows of a Stock | ||||||
Time (yrs) | 0 | 1 | 2 | 3 | 4 | ... |
Dividend ($) | 2 | 2 | 2 | 10 | 3 | ... |
After year 4, the dividend will grow in perpetuity at 4% pa. The required return on the stock is 10% pa. Both the growth rate and required return are given as effective annual rates.
What is the current price of the stock?
In mid 2009 the listed mining company Rio Tinto announced a 21-for-40 renounceable rights issue. Below is the chronology of events:
- 04/06/2009. Share price opens at $69.00 and closes at $66.90.
- 05/06/2009. 21-for-40 rights issue announced at a subscription price of $28.29.
- 16/06/2009. Last day that shares trade cum-rights. Share price opens at $76.40 and closes at $75.50.
- 17/06/2009. Shares trade ex-rights. Rights trading commences.
All things remaining equal, what would you expect Rio Tinto's stock price to open at on the first day that it trades ex-rights (17/6/2009)? Ignore the time value of money since time is negligibly short. Also ignore taxes.
Question 245 foreign exchange rate, monetary policy, foreign exchange rate direct quote, no explanation
Investors expect Australia's central bank, the RBA, to leave the policy rate unchanged at their next meeting.
Then unexpectedly, the policy rate is reduced due to fears that Australia's GDP growth is slowing.
What do you expect to happen to Australia's exchange rate? Direct and indirect quotes are given from the perspective of an Australian.
The Australian dollar will:
Question 542 price gains and returns over time, IRR, NPV, income and capital returns, effective return
For an asset price to double every 10 years, what must be the expected future capital return, given as an effective annual rate?
An American wishes to convert USD 1 million to Australian dollars (AUD). The exchange rate is 0.8 USD per AUD. How much is the USD 1 million worth in AUD?
A pig farmer in the US is worried about the price of hogs falling and wants to lock in a price now. In one year the pig farmer intends to sell 1,000,000 pounds of hogs. Luckily, one year CME lean hog futures expire on the exact day that he wishes to sell his pigs. The futures have a notional principal of 40,000 pounds (about 18 metric tons) and currently trade at a price of 63.85 cents per pound. The underlying lean hogs spot price is 77.15 cents per pound. The correlation between the futures price and the underlying hogs price is one and the standard deviations are both 4 cents per pound. The initial margin is USD1,500 and the maintenance margin is USD1,200 per futures contract.
Which of the below statements is NOT correct?
Question 850 gross domestic product, gross domestic product per capita
Below is a table showing some countries’ GDP, population and GDP per capita.
Countries' GDP and Population | |||
GDP | Population | GDP per capita | |
USD million | millions of people | USD | |
United States | 18,036,648 | 325 | 55,492 |
China | 11,158,457 | 1,383 | 8,066 |
Japan | 4,383,076 | 127 | 34,586 |
Germany | 3,363,600 | 83 | 40,623 |
Norway | 500,519 | 5 | 95,027 |
Source: "GDP and its breakdown at current prices in US Dollars" United Nations Statistics Division. December 2016.
Using this data only, which one of these countries’ citizens have the highest living standards?
Question 924 foreign exchange rate, forward foreign exchange rate, arbitrage, forward interest rate, no explanation
Suppose that the yield curve in the United States of America and Australia is flat and that the current:
- USD federal funds rate is 1% pa;
- AUD cash rate is 1.5% pa;
- Spot AUD exchange rate is 1 USD per AUD;
- One year forward AUD exchange rate is 0.97 USD per AUD.
You suspect that there’s an arbitrage opportunity.
Which one of the following statements about the potential arbitrage opportunity is NOT correct?