Question 993 inflation, real and nominal returns and cash flows
In February 2020, the RBA cash rate was 0.75% pa and the Australian CPI inflation rate was 1.8% pa.
You currently have $100 in the bank which pays a 0.75% pa interest rate.
Apples currently cost $1 each at the shop and inflation is 1.8% pa which is the expected growth rate in the apple price.
This information is summarised in the table below, with some parts missing that correspond to the answer options. All rates are given as effective annual rates. Note that when payments are not specified as real, as in this question, they're conventionally assumed to be nominal.
| Wealth in Dollars and Apples | ||||
| Time (year) | Bank account wealth ($) | Apple price ($) | Wealth in apples | |
| 0 | 100 | 1 | 100 | |
| 1 | 100.75 | 1.018 | (a) | |
| 2 | (b) | (c) | (d) | |
Which of the following statements is NOT correct? Your:
Question 578 inflation, real and nominal returns and cash flows
Which of the following statements about inflation is NOT correct?
Assume that the market portfolio has a duration of 15 years and an individual stock has a duration of 20 years.
What can you say about the stock's (single factor CAPM) beta with respect to the market portfolio? The stock's beta is likely to be:
Question 959 negative gearing, leverage, capital structure, interest tax shield, real estate
Last year, two friends Gear and Nogear invested in residential apartments. Each invested $1 million of their own money (their net wealth).
Apartments cost $1,000,000 last year and they earned net rents of $30,000 pa over the last year. Net rents are calculated as rent revenues less the costs of renting such as property maintenance, land tax and council rates. However, interest expense and personal income taxes are not deducted from net rents.
Gear and Nogear funded their purchases in different ways:
- Gear used $1,000,000 of her own money and borrowed $4,000,000 from the bank in the form of an interest-only loan with an interest rate of 5% pa to buy 5 apartments.
- Nogear used $1,000,000 of his own money to buy one apartment. He has no mortgage loan on his property.
Both Gear and Nogear also work in high-paying jobs and are subject personal marginal tax rates of 45%.
Which of the below statements about the past year is NOT correct?