Question 64 inflation, real and nominal returns and cash flows, APR, effective rate
In Germany, nominal yields on semi-annual coupon paying Government Bonds with 2 years until maturity are currently 0.04% pa.
The inflation rate is currently 1.4% pa, given as an APR compounding per quarter. The inflation rate is not expected to change over the next 2 years.
What is the real yield on these bonds, given as an APR compounding every 6 months?
Question 210 real estate, inflation, real and nominal returns and cash flows, income and capital returns
Assume that the Gordon Growth Model (same as the dividend discount model or perpetuity with growth formula) is an appropriate method to value real estate.
An old rule of thumb in the real estate industry is that properties should yield a 5% pa rental return. Some investors also regard property to be as risky as the stock market, therefore property is thought to have a required total return of 9% pa which is the average total return on the stock market including dividends.
Assume that all returns are effective annual rates and they are nominal (not reduced by inflation). Inflation is expected to be 2% pa.
You're considering purchasing an investment property which has a rental yield of 5% pa and you expect it to have the same risk as the stock market. Select the most correct statement about this property.
Estimate Microsoft's (MSFT) share price using a price earnings (PE) multiples approach with the following assumptions and figures only:
- Apple, Google and Microsoft are comparable companies,
- Apple's (AAPL) share price is $526.24 and historical EPS is $40.32.
- Google's (GOOG) share price is $1,215.65 and historical EPS is $36.23.
- Micrsoft's (MSFT) historical earnings per share (EPS) is $2.71.
Source: Google Finance 28 Feb 2014.
An equity index stands at 100 points and the one year equity futures price is 107.
The equity index is expected to have a dividend yield of 3% pa. Assume that investors are risk-neutral so their total required return on the shares is the same as the risk free Treasury bond yield which is 10% pa. Both are given as discrete effective annual rates.
Assuming that the equity index is fairly priced, an arbitrageur would recognise that the equity futures are:
A firm wishes to raise $100 million now. The firm's current market value of equity is $300m and the market price per share is $5. They estimate that they'll be able to issue shares in a rights issue at a subscription price of $4. All answers are rounded to 6 decimal places. Ignore the time value of money and assume that all shareholders exercise their rights. Which of the following statements is NOT correct?
A 12 month European-style call option with a strike price of $11 is written on a dividend paying stock currently trading at $10. The dividend is paid annually and the next dividend is expected to be $0.40, paid in 9 months. The risk-free interest rate is 5% pa continuously compounded and the standard deviation of the stock’s continuously compounded returns is 30 percentage points pa. The stock's continuously compounded returns are normally distributed. Using the Black-Scholes-Merton option valuation model, determine which of the following statements is NOT correct.
Question 862 yield curve, bond pricing, bill pricing, monetary policy, no explanation
Refer to the below graph when answering the questions.
Which of the following statements is NOT correct?
Question 973 foreign exchange rate, monetary policy, no explanation
Suppose the market expects the Reserve Bank of Australia (RBA) to increase the policy rate by 25 basis points at their next meeting. The current exchange rate is 0.8 USD per AUD.
Then unexpectedly, the RBA announce that they will leave the policy rate unchanged due to increasing unemployment and fears of a potential recession.
What do you expect to happen to Australia's exchange rate on the day when the surprise announcement is made? The Australian dollar is likely to: