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Question 143  bond pricing, zero coupon bond, term structure of interest rates, forward interest rate

An Australian company just issued two bonds:

  • A 6-month zero coupon bond at a yield of 6% pa, and
  • A 12 month zero coupon bond at a yield of 7% pa.

What is the company's forward rate from 6 to 12 months? Give your answer as an APR compounding every 6 months, which is how the above bond yields are quoted.

Question 285  covariance, portfolio risk

Two risky stocks A and B comprise an equal-weighted portfolio. The correlation between the stocks' returns is 70%.

If the variance of stock A's returns increases but the:

  • Prices and expected returns of each stock stays the same,
  • Variance of stock B's returns stays the same,
  • Correlation of returns between the stocks stays the same.

Which of the following statements is NOT correct?

Question 287  bond pricing

A 30 year Japanese government bond was just issued at par with a yield of 1.7% pa. The fixed coupon payments are semi-annual. The bond has a face value of $100.

Six months later, just after the first coupon is paid, the yield of the bond increases to 2% pa. What is the bond's new price?

Question 376  leverage, capital structure, no explanation

Interest expense on debt is tax-deductible, but dividend payments on equity are not. or ?

Question 434  Merton model of corporate debt, real option, option

A risky firm will last for one period only (t=0 to 1), then it will be liquidated. So it's assets will be sold and the debt holders and equity holders will be paid out in that order. The firm has the following quantities:

##V## = Market value of assets.

##E## = Market value of (levered) equity.

##D## = Market value of zero coupon bonds.

##F_1## = Total face value of zero coupon bonds which is promised to be paid in one year.

What is the payoff to debt holders at maturity, assuming that they keep their debt until maturity?

Question 486  capital budgeting, opportunity cost, sunk cost

A young lady is trying to decide if she should attend university. Her friends say that she should go to university because she is more likely to meet a clever young man than if she begins full time work straight away.

What's the correct way to classify this item from a capital budgeting perspective when trying to find the Net Present Value of going to university rather than working?

The opportunity to meet a desirable future spouse should be classified as:

Question 500  NPV, IRR

The below graph shows a project's net present value (NPV) against its annual discount rate.

For what discount rate or range of discount rates would you accept and commence the project?

All answer choices are given as approximations from reading off the graph.

Question 599  bond pricing

On 22-Mar-2013 the Australian Government issued series TB139 treasury bonds with a combined face value $23.4m, listed on the ASX with ticker code GSBG25.

The bonds mature on 21-Apr-2025, the fixed coupon rate is 3.25% pa and coupons are paid semi-annually on the 21st of April and October of each year. Each bond's face value is $1,000.

At market close on Friday 11-Sep-2015 the bonds' yield was 2.736% pa.

At market close on Monday 14-Sep-2015 the bonds' yield was 2.701% pa. Both yields are given as annualised percentage rates (APR's) compounding every 6 months. For convenience, assume 183 days in 6 months and 366 days in a year.

What was the historical total return over those 3 calendar days between Friday 11-Sep-2015 and Monday 14-Sep-2015?

There are 183 calendar days from market close on the last coupon 21-Apr-2015 to the market close of the next coupon date on 21-Oct-2015.

Between the market close times from 21-Apr-2015 to 11-Sep-2015 there are 143 calendar days. From 21-Apr-2015 to 14-Sep-2015 there are 146 calendar days.

From 14-Sep-2015 there were 20 coupons remaining to be paid including the next one on 21-Oct-2015.

All of the below answers are given as effective 3 day rates.

Question 660  fully amortising loan, interest only loan, APR

How much more can you borrow using an interest-only loan compared to a 25-year fully amortising loan if interest rates are 6% pa compounding per month and are not expected to change? If it makes it easier, assume that you can afford to pay $2,000 per month on either loan. Express your answer as a proportional increase using the following formula:

###\text{Proportional Increase} = \dfrac{V_\text{0,interest only}}{V_\text{0,fully amortising}} - 1###

Question 815  expected and historical returns

If future required returns fall, and future expected cash flows remain the same, then prices will , or remain the ?