A wholesale building supplies business offers credit to its customers. Customers are given 60 days to pay for their goods, but if they pay within 7 days they will get a 2% discount.
What is the effective interest rate implicit in the discount being offered?
Assume 365 days in a year and that all customers pay on either the 7th day or the 60th day. All rates given below are effective annual rates.
Diversification in a portfolio of two assets works best when the correlation between their returns is:
The cheapest mobile phones available tend to be those that are 'locked' into a cell phone operator's network. Locked phones can not be used with other cell phone operators' networks.
Locked mobile phones are cheaper than unlocked phones because the locked-in network operator helps create a monopoly by:
One year ago you bought $100,000 of shares partly funded using a margin loan. The margin loan size was $70,000 and the other $30,000 was your own wealth or 'equity' in the share assets.
The interest rate on the margin loan was 7.84% pa.
Over the year, the shares produced a dividend yield of 4% pa and a capital gain of 5% pa.
What was the total return on your wealth? Ignore taxes, assume that all cash flows (interest payments and dividends) were paid and received at the end of the year, and all rates above are effective annual rates.
Hint: Remember that wealth in this context is your equity (E) in the house asset (V = D+E) which is funded by the loan (D) and your deposit or equity (E).
Question 526 real and nominal returns and cash flows, inflation, no explanation
How can a nominal cash flow be precisely converted into a real cash flow?
A credit card company advertises an interest rate of 18% pa, payable monthly. Which of the following statements about the interest rate is NOT correct? All rates are given to four decimal places.
After doing extensive fundamental analysis of a company, you believe that their shares are overpriced and will soon fall significantly. The market believes that there will be no such fall.
Which of the following strategies is NOT a good idea, assuming that your prediction is true?
An equity index is currently at 5,200 points. The 6 month futures price is 5,300 points and the total required return is 6% pa with continuous compounding. Each index point is worth $25.
What is the implied dividend yield as a continuously compounded rate per annum?
Question 791 mean and median returns, return distribution, arithmetic and geometric averages, continuously compounding rate, log-normal distribution, VaR, confidence interval
A risk manager has identified that their pension fund’s continuously compounded portfolio returns are normally distributed with a mean of 5% pa and a standard deviation of 20% pa. The fund’s portfolio is currently valued at $1 million. Assume that there is no estimation error in the above figures. To simplify your calculations, all answers below use 2.33 as an approximation for the normal inverse cumulative density function at 99%. All answers are rounded to the nearest dollar. Which of the following statements is NOT correct?
Short selling is a way to make money from falling prices. In what order must the following steps be completed to short-sell an asset? Let Tom, Dick and Harry be traders in the share market.
- Step P: Purchase the asset from Harry.
- Step G: Give the asset to Tom.
- Step W: Wait and hope that the asset price falls.
- Step B: Borrow the asset from Tom.
- Step S: Sell the asset to Dick.
Select the statement with the correct order of steps.