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Question 97  WACC, no explanation

A company has:

  • 10 million common shares outstanding, each trading at a price of $90.
  • 1 million preferred shares which have a face (or par) value of $100 and pay a constant dividend of 9% of par. They currently trade at a price of $120 each.
  • Debentures that have a total face value of $60,000,000 and a yield to maturity of 6% per annum. They are publicly traded and their market price is equal to 90% of their face value.
  • The risk-free rate is 5% and the market return is 10%.
  • Market analysts estimate that the company's common stock has a beta of 1.2. The corporate tax rate is 30%.

What is the company's after-tax Weighted Average Cost of Capital (WACC)? Assume a classical tax system.



Question 101  payout policy, no explanation

An established mining firm announces that it expects large losses over the following year due to flooding which has temporarily stalled production at its mines. Which statement(s) are correct?

(i) If the firm adheres to a full dividend payout policy it will not pay any dividends over the following year.

(ii) If the firm wants to signal that the loss is temporary it will maintain the same level of dividends. It can do this so long as it has enough retained profits.

(iii) By law, the firm will be unable to pay a dividend over the following year because it cannot pay a dividend when it makes a loss.

Select the most correct response:



Question 135  credit card, APR, no explanation

Your credit card shows a $600 debt liability. The interest rate is 24% pa, payable monthly. You can't pay any of the debt off, except in 6 months when it's your birthday and you'll receive $50 which you'll use to pay off the credit card. If that is your only repayment, how much will the credit card debt liability be one year from now?



Question 147  bill pricing, simple interest rate, no explanation

A 30-day Bank Accepted Bill has a face value of $1,000,000. The interest rate is 8% pa and there are 365 days in the year. What is its price now?



Question 154  implicit interest rate in wholesale credit, no explanation

A wholesale vitamin supplements store offers credit to its customers. Customers are given 30 days to pay for their goods, but if they pay within 5 days they will get a 1% 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 5th day or the 30th day. All of the below answer choices are given as effective annual interest rates.



Question 157  bill pricing, simple interest rate, no explanation

A 90-day Bank Accepted Bill has a face value of $1,000,000. The interest rate is 6% pa and there are 365 days in the year. What is its price?



Question 166  DDM, no explanation

A stock pays annual dividends. It just paid a dividend of $3. The growth rate in the dividend is 4% pa. You estimate that the stock's required return is 10% pa. Both the discount rate and growth rate are given as effective annual rates. Using the dividend discount model, what will be the share price?



Question 175  pay back period, no explanation

A project has the following cash flows. Normally cash flows are assumed to happen at the given time. But here, assume that the cash flows are received smoothly over the year. So the $250 at time 2 is actually earned smoothly from t=1 to t=2:

Project Cash Flows
Time (yrs) Cash flow ($)
0 -400
1 200
2 250
 

What is the payback period of the project in years?



Question 185  NPV, DDM, no explanation

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 will be the price of the stock in 5 years (t = 5), just after the dividend at that time has been paid?



Question 196  DDM, no explanation

A share pays annual dividends. It just paid a dividend of $2. The growth rate in the dividend is 3% pa. You estimate that the stock's required return is 8% pa. Both the discount rate and growth rate are given as effective annual rates.

Using the dividend discount model, what is the share price?



Question 198  NPV, DDM, no explanation

A stock is expected to pay the following dividends:

Cash Flows of a Stock
Time (yrs) 0 1 2 3 4 ...
Dividend ($) 0 6 12 18 20 ...
 

After year 4, the dividend will grow in perpetuity at 5% pa. The required return of 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?



Question 199  NPV, DDM, no explanation

A stock is expected to pay the following dividends:

Cash Flows of a Stock
Time (yrs) 0 1 2 3 4 ...
Dividend ($) 0 6 12 18 20 ...
 

After year 4, the dividend will grow in perpetuity at 5% pa. The required return of the stock is 10% pa. Both the growth rate and required return are given as effective annual rates.

What will be the price of the stock in 7 years (t = 7), just after the dividend at that time has been paid?



Question 200  NPV, no explanation

A stock is expected to pay the following dividends:

Cash Flows of a Stock
Time (yrs) 0 1 2 3 4 ...
Dividend ($) 0 6 12 18 20 ...
 

After year 4, the dividend will grow in perpetuity at 5% pa. The required return of the stock is 10% pa. Both the growth rate and required return are given as effective annual rates.

If all of the dividends since time period zero were deposited into a bank account yielding 8% pa as an effective annual rate, how much money will be in the bank account in 2.5 years (in other words, at t=2.5)?



Question 207  income and capital returns, bond pricing, coupon rate, no explanation

For a bond that pays fixed semi-annual coupons, how is the annual coupon rate defined, and how is the bond's annual income yield from time 0 to 1 defined mathematically?

Let: ##P_0## be the bond price now,

##F_T## be the bond's face value,

##T## be the bond's maturity in years,

##r_\text{total}## be the bond's total yield,

##r_\text{income}## be the bond's income yield,

##r_\text{capital}## be the bond's capital yield, and

##C_t## be the bond's coupon at time t in years. So ##C_{0.5}## is the coupon in 6 months, ##C_1## is the coupon in 1 year, and so on.



Question 220  pay back period, no explanation

A project has the following cash flows. Normally cash flows are assumed to happen at the given time. But here, assume that the cash flows are received smoothly over the year. So the $105 at time 2 is actually earned smoothly from t=1 to t=2:

Project Cash Flows
Time (yrs) Cash flow ($)
0 -90
1 30
2 105
 

What is the payback period of the project in years?



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 247  cross currency interest rate parity, no explanation

In the so called 'Swiss Loans Affair' of the 1980's, Australian banks offered loans denominated in Swiss Francs to Australian farmers at interest rates as low as 4% pa. This was far lower than interest rates on Australian Dollar loans which were above 10% due to very high inflation in Australia at the time.

In the late-1980's there was a large depreciation in the Australian Dollar. The Australian Dollar nearly halved in value against the Swiss Franc. Many Australian farmers went bankrupt since they couldn't afford the interest payments on the Swiss Franc loans because the Australian Dollar value of those payments nearly doubled. The farmers accused the banks of promoting Swiss Franc loans without making them aware of the risks.

What fundamental principal of finance did the Australian farmers (and the bankers) fail to understand?



Question 308  risk, standard deviation, variance, no explanation

A stock's standard deviation of returns is expected to be:

  • 0.09 per month for the first 5 months;
  • 0.14 per month for the next 7 months.

What is the expected standard deviation of the stock per year ##(\sigma_\text{annual})##?

Assume that returns are independently and identically distributed (iid) and therefore have zero auto-correlation.



Question 327  bill pricing, simple interest rate, no explanation

On 27/09/13, three month Swiss government bills traded at a yield of -0.2%, given as a simple annual yield. That is, interest rates were negative.

If the face value of one of these 90 day bills is CHF1,000,000 (CHF represents Swiss Francs, the Swiss currency), what is the price of one of these bills?



Question 336  forward foreign exchange rate, no explanation

The Australian cash rate is expected to be 6% pa while the US federal funds rate is expected to be 4% pa over the next 3 years, both given as effective annual rates. The current exchange rate is 0.80 AUD per USD.

What is the implied 3 year forward foreign exchange rate?



Question 376  leverage, capital structure, no explanation

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


Question 378  leverage, capital structure, no explanation

A levered company's required return on debt is always less than its required return on equity. or ?


Question 399  option, no explanation

A European call option will mature in ##T## years with a strike price of ##K## dollars. The underlying asset has a price of ##S## dollars.

What is an expression for the payoff at maturity ##(f_T)## in dollars from owning (being long) the call option?



Question 400  option, no explanation

A European put option will mature in ##T## years with a strike price of ##K## dollars. The underlying asset has a price of ##S## dollars.

What is an expression for the payoff at maturity ##(f_T)## in dollars from owning (being long) the put option?



Question 402  PE ratio, no explanation

Which of the following companies is most suitable for valuation using PE multiples techniques?



Question 403  PE ratio, no explanation

Which of the following investable assets is the LEAST suitable for valuation using PE multiples techniques?



Question 405  DDM, income and capital returns, no explanation

The perpetuity with growth formula is:

###P_0= \dfrac{C_1}{r-g}###

Which of the following is NOT equal to the total required return (r)?



Question 412  enterprise value, no explanation

A large proportion of a levered firm's assets is cash held at the bank. The firm is financed with half equity and half debt.

Which of the following statements about this firm's enterprise value (EV) and total asset value (V) is NOT correct?



Question 414  PE ratio, pay back period, no explanation

A mature firm has constant expected future earnings and dividends. Both amounts are equal. So earnings and dividends are expected to be equal and unchanging.

Which of the following statements is NOT correct?



Question 415  income and capital returns, real estate, no explanation

You just bought a residential apartment as an investment property for $500,000.

You intend to rent it out to tenants. They are ready to move in, they would just like to know how much the monthly rental payments will be, then they will sign a twelve-month lease.

You require a total return of 8% pa and a rental yield of 5% pa.

What would the monthly paid-in-advance rental payments have to be this year to receive that 5% annual rental yield?

Also, if monthly rental payments can be increased each year when a new lease agreement is signed, by how much must you increase rents per year to realise the 8% pa total return on the property?

Ignore all taxes and the costs of renting such as maintenance costs, real estate agent fees, utilities and so on. Assume that there will be no periods of vacancy and that tenants will promptly pay the rental prices you charge.

Note that the first rental payment will be received at t=0. The first lease agreement specifies the first 12 equal payments from t=0 to 11. The next lease agreement can have a rental increase, so the next twelve equal payments from t=12 to 23 can be higher than previously, and so on forever.



Question 419  capital budgeting, NPV, interest tax shield, WACC, CFFA, CAPM, no explanation

Project Data
Project life 1 year
Initial investment in equipment $6m
Depreciation of equipment per year $6m
Expected sale price of equipment at end of project 0
Unit sales per year 9m
Sale price per unit $8
Variable cost per unit $6
Fixed costs per year, paid at the end of each year $1m
Interest expense in first year (at t=1) $0.53m
Tax rate 30%
Government treasury bond yield 5%
Bank loan debt yield 6%
Market portfolio return 10%
Covariance of levered equity returns with market 0.08
Variance of market portfolio returns 0.16
Firm's and project's debt-to-assets ratio 50%
 

Notes

  1. Due to the project, current assets will increase by $5m now (t=0) and fall by $5m at the end (t=1). Current liabilities will not be affected.

Assumptions

  • The debt-to-assets ratio will be kept constant throughout the life of the project. The amount of interest expense at the end of each period has been correctly calculated to maintain this constant debt-to-equity ratio.
  • Millions are represented by 'm'.
  • All cash flows occur at the start or end of the year as appropriate, not in the middle or throughout the year.
  • All rates and cash flows are real. The inflation rate is 2% pa.
  • All rates are given as effective annual rates.
  • The 50% capital gains tax discount is not available since the project is undertaken by a firm, not an individual.

What is the net present value (NPV) of the project?



Question 430  option, no explanation

A European call option will mature in ##T## years with a strike price of ##K## dollars. The underlying asset has a price of ##S## dollars.

What is an expression for the payoff at maturity ##(f_T)## in dollars from having written (being short) the call option?



Question 431  option, no explanation

A European put option will mature in ##T## years with a strike price of ##K## dollars. The underlying asset has a price of ##S## dollars.

What is an expression for the payoff at maturity ##(f_T)## in dollars from having written (being short) the put option?



Question 432  option, option intrinsic value, no explanation

An American style call option with a strike price of ##K## dollars will mature in ##T## years. The underlying asset has a price of ##S## dollars.

What is an expression for the current intrinsic value in dollars from owning (being long) the American style call option? Note that the intrinsic value of an option does not subtract the premium paid to buy the option.



Question 433  Merton model of corporate debt, real option, option, no explanation

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 equity holders at maturity, assuming that they keep their shares until maturity?



Question 435  option, no explanation

Will the price of a call option on equity or if the standard deviation of returns (risk) of the underlying shares becomes higher?


Question 436  option, no explanation

Will the price of an out-of-the-money put option on equity or if the standard deviation of returns (risk) of the underlying shares becomes higher?


Question 437  option, no explanation

Two call options are exactly the same, but one matures in one year and the other matures in two years. Which option would you expect to have the higher price, the option which matures or , or should they have the price?


Question 438  option, no explanation

Two put options are exactly the same, but one matures in one year and the other matures in two years. Which option would you expect to have the higher price, the option which matures or , or should they have the price?


Question 439  option, no explanation

Two call options are exactly the same, but one has a low and the other has a high exercise price. Which option would you expect to have the higher price, the option with the or exercise price, or should they have the price?


Question 440  option, no explanation

Two put options are exactly the same, but one has a low and the other has a high exercise price. Which option would you expect to have the higher price, the option with the or exercise price, or should they have the price?


Question 442  economic depreciation, no explanation

A fairly valued share's current price is $4 and it has a total required return of 30%. Dividends are paid annually and next year's dividend is expected to be $1. After that, dividends are expected to grow by 5% pa. All rates are effective annual returns.

What is the expected dividend cash flow, economic depreciation, and economic income and economic value added (EVA) that will be earned over the second year (from t=1 to t=2) and paid at the end of that year (t=2)?



Question 450  CAPM, risk, portfolio risk, no explanation

The accounting identity states that the book value of a company's assets (A) equals its liabilities (L) plus owners equity (OE), so A = L + OE.

The finance version states that the market value of a company's assets (V) equals the market value of its debt (D) plus equity (E), so V = D + E.

Therefore a business's assets can be seen as a portfolio of the debt and equity that fund the assets.

Let ##\sigma_\text{V total}^2## be the total variance of returns on assets, ##\sigma_\text{V syst}^2## be the systematic variance of returns on assets, and ##\sigma_\text{V idio}^2## be the idiosyncratic variance of returns on assets, and ##\rho_\text{D idio, E idio}## be the correlation between the idiosyncratic returns on debt and equity.

Which of the following equations is NOT correct?



Question 458  capital budgeting, no explanation

Which of the following is NOT a valid method to estimate future revenues or costs in a pro-forma income statement when trying to value a company?



Question 469  franking credit, personal tax on dividends, imputation tax system, no explanation

A firm pays a fully franked cash dividend of $70 to one of its Australian shareholders who has a personal marginal tax rate of 45%. The corporate tax rate is 30%.

What will be the shareholder's personal tax payable due to the dividend payment?



Question 470  accounting ratio, no explanation

Which of the following statements is NOT correct?



Question 475  payout ratio, dividend, no explanation

The below screenshot of Commonwealth Bank of Australia's (CBA) details were taken from the Google Finance website on 7 Nov 2014. Some information has been deliberately blanked out.

Image of CBA on Google finance on 7 Nov 2014

What was CBA's approximate payout ratio over the 2014 financial year?

Note that the firm's interim and final dividends were $1.83 and $2.18 respectively over the 2014 financial year.



Question 484  payout ratio, dividend, no explanation

The below screenshot of Microsoft's (MSFT) details were taken from the Google Finance website on 28 Nov 2014. Some information has been deliberately blanked out.

Image of MSFT on Google finance on 28 Nov 2014

What was MSFT's approximate payout ratio over the last year?

Note that MSFT's past four quarterly dividends were $0.31, $0.28, $0.28 and $0.28.



Question 495  risk, accounting ratio, no explanation

High risk firms in danger of bankruptcy tend to have:



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?



Question 529  DDM, real and nominal returns and cash flows, inflation, real estate, no explanation

If housing rents are constrained from growing more than the maximum target inflation rate, and houses can be priced as a perpetuity of growing net rental cash flows, then what is the implication for house prices, all things remaining equal? Select the most correct answer.

Background: Since 1990, many central banks across the world have become 'inflation targeters'. They have adopted a policy of trying to keep inflation in a predictable narrow range, with the hope of encouraging long-term lending to fund more investment and maintain higher GDP growth.

Australia's central bank, the Reserve Bank of Australia (RBA), has specifically stated their inflation target range is between 2 and 3% pa.

Some Australian residential property market commentators suggest that because rental costs comprise a large part of the Australian consumer price index (CPI), rent costs across the nation cannot significantly exceed the maximum inflation target range of 3% pa without the prices of other goods growing by less than the target range for long periods, which is unlikely.


Question 530  Annuity, annuity due, no explanation

You are promised 20 payments of $100, where the first payment is immediate (t=0) and the last is at the end of the 19th year (t=19). The effective annual discount rate is ##r##.

Which of the following equations does NOT give the correct present value of these 20 payments?



Question 533  NPV, no explanation

You have $100,000 in the bank. The bank pays interest at 10% pa, given as an effective annual rate.

You wish to consume twice as much now (t=0) as in one year (t=1) and have nothing left in the bank at the end.

How much can you consume at time zero and one? The answer choices are given in the same order.



Question 534  NPV, no explanation

You have $100,000 in the bank. The bank pays interest at 10% pa, given as an effective annual rate.

You wish to consume half as much now (t=0) as in one year (t=1) and have nothing left in the bank at the end.

How much can you consume at time zero and one? The answer choices are given in the same order.



Question 537  PE ratio, Multiples valuation, no explanation

Estimate the French bank Societe Generale's share price using a backward-looking price earnings (PE) multiples approach with the following assumptions and figures only. Note that EUR is the euro, the European monetary union's currency.

  • The 4 major European banks Credit Agricole (ACA), Deutsche Bank AG (DBK), UniCredit (UCG) and Banco Santander (SAN) are comparable companies to Societe Generale (GLE);
  • Societe Generale's (GLE's) historical earnings per share (EPS) is EUR 2.92;
  • ACA's backward-looking PE ratio is 16.29 and historical EPS is EUR 0.84;
  • DBK's backward-looking PE ratio is 25.01 and historical EPS is EUR 1.26;
  • SAN's backward-looking PE ratio is 14.71 and historical EPS is EUR 0.47;
  • UCG's backward-looking PE ratio is 15.78 and historical EPS is EUR 0.40;

Note: Figures sourced from Google Finance on 27 March 2015.



Question 538  bond pricing, income and capital returns, no explanation

Risk-free government bonds that have coupon rates greater than their yields:



Question 540  APR, effective rate, no explanation

Which one of the below statements about effective rates and annualised percentage rates (APR's) is NOT correct?



Question 544  bond pricing, capital raising, no explanation

A firm wishes to raise $10 million now. They will issue 6% pa semi-annual coupon bonds that will mature in 3 years and have a face value of $100 each. Bond yields are 5% pa, given as an APR compounding every 6 months, and the yield curve is flat.

How many bonds should the firm issue?



Question 545  income and capital returns, fully amortising loan, no explanation

Which of the following statements about the capital and income returns of a 25 year fully amortising loan asset is correct?

Assume that the yield curve (which shows total returns over different maturities) is flat and is not expected to change.

Over the 25 years from issuance to maturity, a fully amortising loan's expected annual effective:



Question 546  income and capital returns, interest only loan, no explanation

Which of the following statements about the capital and income returns of an interest-only loan is correct?

Assume that the yield curve (which shows total returns over different maturities) is flat and is not expected to change.

An interest-only loan's expected:



Question 547  PE ratio, Multiples valuation, DDM, income and capital returns, no explanation

A firm pays out all of its earnings as dividends. Because of this, the firm has no real growth in earnings, dividends or stock price since there is no re-investment back into the firm to buy new assets and make higher earnings. The dividend discount model is suitable to value this company.

The firm's revenues and costs are expected to increase by inflation in the foreseeable future. The firm has no debt. It operates in the services industry and has few physical assets so there is negligible depreciation expense and negligible net working capital required.

Which of the following statements about this firm's PE ratio is NOT correct? The PE ratio should:

Note: The inverse of x is 1/x.



Question 548  equivalent annual cash flow, time calculation, no explanation

An Apple iPhone 6 smart phone can be bought now for $999. An Android Kogan Agora 4G+ smart phone can be bought now for $240.

If the Kogan phone lasts for one year, approximately how long must the Apple phone last for to have the same equivalent annual cost?

Assume that both phones have equivalent features besides their lifetimes, that both are worthless once they've outlasted their life, the discount rate is 10% pa given as an effective annual rate, and there are no extra costs or benefits from either phone.



Question 618  capital structure, no explanation

Who owns a company's shares? The:



Question 624  franking credit, personal tax on dividends, imputation tax system, no explanation

Which of the following statements about Australian franking credits is NOT correct? Franking credits:



Question 632  foreign exchange rate, no explanation

Below is a graph of the USD against the JPY and EUR from 1980 to 2015, compiled by the RBA. Select the correct statement about what occurred between 1980 and 2015. Note that in 1980 the euro was around 1.3 USD per EUR and the Yen was around 250 JPY per USD.

Image of USD vs JPY and EUR graph



Question 636  option, option payoff at maturity, no explanation

Which of the below formulas gives the payoff ##(f)## at maturity ##(T)## from being long a call option? Let the underlying asset price at maturity be ##S_T## and the exercise price be ##X_T##.



Question 637  option, option payoff at maturity, no explanation

Which of the below formulas gives the payoff ##(f)## at maturity ##(T)## from being short a call option? Let the underlying asset price at maturity be ##S_T## and the exercise price be ##X_T##.



Question 638  option, option payoff at maturity, no explanation

Which of the below formulas gives the payoff ##(f)## at maturity ##(T)## from being long a put option? Let the underlying asset price at maturity be ##S_T## and the exercise price be ##X_T##.



Question 639  option, option payoff at maturity, no explanation

Which of the below formulas gives the payoff ##(f)## at maturity ##(T)## from being short a put option? Let the underlying asset price at maturity be ##S_T## and the exercise price be ##X_T##.



Question 640  option, future, no explanation

Which one of the below option and futures contracts gives the possibility of potentially unlimited gains?



Question 641  future, no explanation

Which of the below formulas gives the payoff at maturity ##(f_T)## from being long a future? Let the underlying asset price at maturity be ##S_T## and the locked-in futures price be ##K_T##.



Question 642  future, no explanation

Which of the below formulas gives the payoff at maturity ##(f_T)## from being short a future? Let the underlying asset price at maturity be ##S_T## and the locked-in futures price be ##K_T##.



Question 643  future, no explanation

A trader buys one crude oil futures contract on the CME expiring in one year with a locked-in futures price of $38.94 per barrel. If the trader doesn’t close out her contract before expiry then in one year she will have the:



Question 644  future, no explanation

A trader sells one crude oil futures contract on the CME expiring in one year with a locked-in futures price of $38.94 per barrel. The crude oil spot price is $40.33. If the trader doesn’t close out her contract before expiry then in one year she will have the:



Question 645  option, no explanation

A trader buys one crude oil European style call option contract on the CME expiring in one year with an exercise price of $44 per barrel for a price of $6.64. The crude oil spot price is $40.33. If the trader doesn’t close out her contract before maturity, then at maturity she will have the:



Question 657  systematic and idiosyncratic risk, CAPM, no explanation

A stock's required total return will decrease when its:



Question 658  CFFA, income statement, balance sheet, no explanation

To value a business's assets, the free cash flow of the firm (FCFF, also called CFFA) needs to be calculated. This requires figures from the firm's income statement and balance sheet. For what figures is the income statement needed? Note that the income statement is sometimes also called the profit and loss, P&L, or statement of financial performance.



Question 659  APR, effective rate, effective rate conversion, no explanation

A home loan company advertises an interest rate of 9% pa, payable monthly. Which of the following statements about the interest rate is NOT correct? All rates are given with an accuracy of 4 decimal places.



Question 662  APR, effective rate, effective rate conversion, no explanation

Which of the following interest rate labels does NOT make sense?



Question 667  forward foreign exchange rate, foreign exchange rate, cross currency interest rate parity, no explanation

The Australian cash rate is expected to be 2% pa over the next one year, while the US cash rate is expected to be 0% pa, both given as nominal effective annual rates. The current exchange rate is 0.73 USD per AUD.

What is the implied 1 year USD per AUD forward foreign exchange rate?



Question 675  option, option profit, no explanation

Which of the below formulas gives the profit ##(\pi)## from being long a call option? Let the underlying asset price at maturity be ##S_T##, the exercise price be ##X_T## and the option price be ##f_{LC,0}##. Note that ##S_T##, ##X_T## and ##f_{LC,0}## are all positive numbers.



Question 676  option, option profit, no explanation

Which of the below formulas gives the profit ##(\pi)## from being short a call option? Let the underlying asset price at maturity be ##S_T##, the exercise price be ##X_T## and the option price be ##f_{LC,0}##. Note that ##S_T##, ##X_T## and ##f_{LC,0}## are all positive numbers.



Question 677  option, option profit, no explanation

Which of the below formulas gives the profit ##(\pi)## from being long a put option? Let the underlying asset price at maturity be ##S_T##, the exercise price be ##X_T## and the option price be ##f_{LP,0}##. Note that ##S_T##, ##X_T## and ##f_{LP,0}## are all positive numbers.



Question 678  option, option profit, no explanation

Which of the below formulas gives the profit ##(\pi)## from being short a put option? Let the underlying asset price at maturity be ##S_T##, the exercise price be ##X_T## and the option price be ##f_{LP,0}##. Note that ##S_T##, ##X_T## and ##f_{LP,0}## are all positive numbers.



Question 679  option, no explanation

A trader sells one crude oil European style call option contract on the CME expiring in one year with an exercise price of $44 per barrel for a price of $6.64. The crude oil spot price is $40.33. If the trader doesn’t close out her contract before maturity, then at maturity she will have the:



Question 680  option, no explanation

A trader buys one crude oil European style put option contract on the CME expiring in one year with an exercise price of $44 per barrel for a price of $6.64. The crude oil spot price is $40.33. If the trader doesn’t close out her contract before maturity, then at maturity she will have the:



Question 681  no explanation

A trader sells one crude oil European style put option contract on the CME expiring in one year with an exercise price of $44 per barrel for a price of $6.64. The crude oil spot price is $40.33. If the trader doesn’t close out her contract before maturity, then at maturity she will have the:



Question 684  future, arbitrage, no explanation

An equity index stands at 100 points and the one year equity futures price is 102.

The equity index is expected to have a dividend yield of 4% 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:



Question 685  future, arbitrage, no explanation

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:



Question 687  option, no explanation

Which of the following statements about call options is NOT correct?



Question 691  continuously compounding rate, effective rate, continuously compounding rate conversion, no explanation

A bank quotes an interest rate of 6% pa with quarterly compounding. Note that another way of stating this rate is that it is an annual percentage rate (APR) compounding discretely every 3 months.

Which of the following statements about this rate is NOT correct? All percentages are given to 6 decimal places. The equivalent:



Question 692  future, hedging, no explanation

The standard deviation of monthly changes in the spot price of corn is 50 cents per bushel. The standard deviation of monthly changes in the futures price of corn is 40 cents per bushel. The correlation between the spot price of corn and the futures price of corn is 0.9.

It is now March. A corn chip manufacturer is committed to buying 250,000 bushels of corn in May. The spot price of corn is 381 cents per bushel and the June futures price is 399 cents per bushel.

The corn chip manufacturer wants to use the June corn futures contracts to hedge his risk. Each futures contract is for the delivery of 5,000 bushels of corn. One bushel is about 127 metric tons.

How many corn futures should the corn chip manufacturer buy to hedge his risk? Round your answer to the nearest whole number of contracts. Remember to tail the hedge.



Question 714  return distribution, no explanation

Which of the following quantities is commonly assumed to be normally distributed?



Question 728  inflation, real and nominal returns and cash flows, income and capital returns, no explanation

Which of the following statements about gold is NOT correct? Assume that the gold price increases by inflation. Gold has a:



Question 729  book and market values, balance sheet, no explanation

If a firm makes a profit and pays no dividends, which of the firm’s accounts will increase?



Question 730  DDM, income and capital returns, no explanation

A stock’s current price is $1. Its expected total return is 10% pa and its long term expected capital return is 4% pa. It pays an annual dividend and the next one will be paid in one year. All rates are given as effective annual rates. The dividend discount model is thought to be a suitable model for the stock. Ignore taxes. Which of the following statements about the stock is NOT correct?



Question 734  real and nominal returns and cash flows, inflation, DDM, no explanation

An equities analyst is using the dividend discount model to price a company's shares. The company operates domestically and has no plans to expand overseas. It is part of a mature industry with stable positive growth prospects.

The analyst has estimated the real required return (r) of the stock and the value of the dividend that the stock just paid a moment before ##(C_\text{0 before})##.

What is the highest perpetual real growth rate of dividends (g) that can be justified? Select the most correct statement from the following choices. The highest perpetual real expected growth rate of dividends that can be justified is the country's expected:



Question 742  price gains and returns over time, no explanation

For an asset's price to quintuple (be five times as big, say from $1 to $5) every 5 years, what must be its effective annual capital return?



Question 743  price gains and returns over time, no explanation

How many years will it take for an asset's price to triple (increase from say $1 to $3) if it grows by 5% pa?



Question 747  DDM, no explanation

A share will pay its next dividend of ##C_1## in one year, and will continue to pay a dividend every year after that forever, growing at a rate of ##g##. So the next dividend will be ##C_2=C_1 (1+g)^1##, then ##C_3=C_2 (1+g)^1##, and so on forever.

The current price of the share is ##P_0## and its required return is ##r##

Which of the following is NOT equal to the expected share price in 2 years ##(P_2)## just after the dividend at that time ##(C_2)## has been paid?



Question 756  bond pricing, capital raising, no explanation

A firm wishes to raise $50 million now. They will issue 5% pa semi-annual coupon bonds that will mature in 3 years and have a face value of $100 each. Bond yields are 6% pa, given as an APR compounding every 6 months, and the yield curve is flat.

How many bonds should the firm issue?



Question 757  bond pricing, capital raising, no explanation

A firm wishes to raise $50 million now. They will issue 5% pa semi-annual coupon bonds that will mature in 10 years and have a face value of $100 each. Bond yields are 5% pa, given as an APR compounding every 6 months, and the yield curve is flat.

How many bonds should the firm issue?



Question 758  time calculation, fully amortising loan, no explanation

Two years ago you entered into a fully amortising home loan with a principal of $1,000,000, an interest rate of 6% pa compounding monthly with a term of 25 years.

Then interest rates suddenly fall to 4.5% pa (t=0), but you continue to pay the same monthly home loan payments as you did before. How long will it now take to pay off your home loan? Measure the time taken to pay off the home loan from the current time which is 2 years after the home loan was first entered into.

Assume that the lower interest rate was given to you immediately after the loan repayment at the end of year 2, which was the 24th payment since the loan was granted. Also assume that rates were and are expected to remain constant.



Question 759  time calculation, fully amortising loan, no explanation

Five years ago you entered into a fully amortising home loan with a principal of $500,000, an interest rate of 4.5% pa compounding monthly with a term of 25 years.

Then interest rates suddenly fall to 3% pa (t=0), but you continue to pay the same monthly home loan payments as you did before. How long will it now take to pay off your home loan? Measure the time taken to pay off the home loan from the current time which is 5 years after the home loan was first entered into.

Assume that the lower interest rate was given to you immediately after the loan repayment at the end of year 5, which was the 60th payment since the loan was granted. Also assume that rates were and are expected to remain constant.



Question 760  time calculation, interest only loan, no explanation

Five years ago (##t=-5## years) you entered into an interest-only home loan with a principal of $500,000, an interest rate of 4.5% pa compounding monthly with a term of 25 years.

Then interest rates suddenly fall to 3% pa (##t=0##), but you continue to pay the same monthly home loan payments as you did before. Will your home loan be paid off by the end of its remaining term? If so, in how many years from now? Measure the time taken to pay off the home loan from the current time which is 5 years after the home loan was first entered into.

Assume that the lower interest rate was given to you immediately after the loan repayment at the end of year 5, which was the 60th payment since the loan was granted. Also assume that rates were and are expected to remain constant.



Question 761  NPV, annuity due, no explanation

The phone company Optus have 2 mobile service plans on offer which both have the same amount of phone call, text message and internet data credit. Both plans have a contract length of 24 months and the monthly cost is payable in advance. The only difference between the two plans is that one is a:

  • 'Bring Your Own' (BYO) mobile service plan, costing $80 per month. There is no phone included in this plan. The other plan is a:
  • 'Bundled' mobile service plan that comes with the latest smart phone, costing $100 per month. This plan includes the latest smart phone.

Neither plan has any additional payments at the start or end. Assume that the discount rate is 1% per month given as an effective monthly rate.

The only difference between the plans is the phone, so what is the implied cost of the phone as a present value? Given that the latest smart phone actually costs $600 to purchase outright from another retailer, should you commit to the BYO plan or the bundled plan?



Question 762  equivalent annual cash flow, no explanation

Radio-Rentals.com offers the Apple iphone 5S smart phone for rent at $12.95 per week paid in advance on a 2 year contract. After renting the phone, you must return it to Radio-Rentals.

Kogan.com offers the Apple iphone 5S smart phone for sale at $699. You estimate that the phone will last for 3 years before it will break and be worthless.

Currently, the effective annual interest rate is 11.351%, the effective monthly interest rate 0.9% and the effective weekly interest rate is 0.207%. Assume that there are exactly 52 weeks per year and 12 months per year.

Find the equivalent annual cost of renting the phone and also buying the phone. The answers below are listed in the same order.



Question 764  bond pricing, no explanation

A 4.5% fixed coupon Australian Government bond was issued at par in mid-April 2009. Coupons are paid semi-annually in arrears in mid-April and mid-October each year. The face value is $1,000. The bond will mature in mid-April 2020, so the bond had an original tenor of 11 years.

Today is mid-September 2015 and similar bonds now yield 1.9% pa.

What is the bond's new price? Note: there are 10 semi-annual coupon payments remaining from now (mid-September 2015) until maturity (mid-April 2020); both yields are given as APR's compounding semi-annually; assume that the yield curve was flat before the change in yields, and remained flat afterwards as well.



Question 765  bond pricing, no explanation

An investor bought a 5 year government bond with a 2% pa coupon rate at par. Coupons are paid semi-annually. The face value is $100.

Calculate the bond's new price 8 months later after yields have increased to 3% pa. Note that both yields are given as APR's compounding semi-annually. Assume that the yield curve was flat before the change in yields, and remained flat afterwards as well.



Question 767  idiom, corporate financial decision theory, no explanation

The sayings "Don't cry over spilt milk", "Don't regret the things that you can't change" and "What's done is done" are most closely related to which financial concept?



Question 768  accounting terminology, book and market values, no explanation

Accountants and finance professionals have lots of names for the same things which can be quite confusing.

Which of the following groups of items are NOT synonyms?



Question 769  short selling, idiom, no explanation

"Buy low, sell high" is a well-known saying. It suggests that investors should buy low then sell high, in that order.

How would you re-phrase that saying to describe short selling?



Question 771  debt terminology, interest expense, interest tax shield, credit risk, no explanation

You deposit money into a bank account. Which of the following statements about this deposit is NOT correct?



Question 780  mispriced asset, NPV, DDM, market efficiency, no explanation

A company advertises an investment costing $1,000 which they say is under priced. They say that it has an expected total return of 15% pa, but a required return of only 10% pa. Of the 15% pa total expected return, the dividend yield is expected to be 4% pa and the capital yield 11% pa. Assume that the company's statements are correct.

What is the NPV of buying the investment if the 15% total return lasts for the next 100 years (t=0 to 100), then reverts to 10% after that time? Also, what is the NPV of the investment if the 15% return lasts forever?

In both cases, assume that the required return of 10% remains constant, the dividends can only be re-invested at 10% pa and all returns are given as effective annual rates. The answer choices below are given in the same order (15% for 100 years, and 15% forever):



Question 794  option, Black-Scholes-Merton option pricing, option delta, no explanation

Which of the following quantities from the Black-Scholes-Merton option pricing formula gives the Delta of a European call option?


Where:

###d_1=\dfrac{\ln⁡[S_0/K]+(r+\sigma^2/2).T)}{\sigma.\sqrt{T}}### ###d_2=d_1-\sigma.\sqrt{T}=\dfrac{\ln⁡[S_0/K]+(r-\sigma^2/2).T)}{\sigma.\sqrt{T}}###

Question 795  option, Black-Scholes-Merton option pricing, option delta, no explanation

Which of the following quantities from the Black-Scholes-Merton option pricing formula gives the Delta of a European put option?



Question 796  option, Black-Scholes-Merton option pricing, option delta, no explanation

Which of the following quantities from the Black-Scholes-Merton option pricing formula gives the risk-neutral probability that a European call option will be exercised?



Question 797  option, Black-Scholes-Merton option pricing, option delta, no explanation

Which of the following quantities from the Black-Scholes-Merton option pricing formula gives the risk-neutral probability that a European put option will be exercised?



Question 798  idiom, diversification, market efficiency, sunk cost, no explanation

The following quotes are most closely related to which financial concept?

  • “Opportunity is missed by most people because it is dressed in overalls and looks like work” -Thomas Edison
  • “The only place where success comes before work is in the dictionary” -Vidal Sassoon
  • “The safest way to double your money is to fold it over and put it in your pocket” - Kin Hubbard



Question 800  leverage, portfolio return, risk, portfolio risk, capital structure, no explanation

Which of the following assets would you expect to have the highest required rate of return? All values are current market values.



Question 802  negative gearing, leverage, capital structure, no explanation

Which of the following statements about ‘negative gearing’ is NOT correct?



Question 803  capital raising, rights issue, initial public offering, on market repurchase, no explanation

Which one of the following capital raisings or payouts involve the sale of shares to existing shareholders only?



Question 806  stock split, no explanation

A firm conducts a two-for-one stock split. Which of the following consequences would NOT be expected?



Question 807  market efficiency, expected and historical returns, CAPM, beta, systematic risk, no explanation

You work in Asia and just woke up. It looked like a nice day but then you read the news and found out that last night the American share market fell by 10% while you were asleep due to surprisingly poor macro-economic world news. You own a portfolio of liquid stocks listed in Asia with a beta of 1.6. When the Asian equity markets open, what do you expect to happen to your share portfolio? Assume that the capital asset pricing model (CAPM) is correct and that the market portfolio contains all shares in the world, of which American shares are a big part. Your portfolio beta is measured against this world market portfolio.

When the Asian equity market opens for trade, you would expect your portfolio value to:



Question 818  option, future, no explanation

Which derivatives position has the possibility of unlimited potential gains?



Question 819  option, derivative terminology, no explanation

Which of the following terms about options are NOT synonyms?



Question 820  option, future, no explanation

What derivative position are you exposed to if you have the obligation to sell the underlying asset at maturity, so you will definitely be forced to sell the underlying asset?



Question 821  option, option profit, option payoff at maturity, no explanation

You just paid $4 for a 3 month European style call option on a stock currently priced at $47 with a strike price of $50. The stock’s next dividend will be $1 in 4 months’ time. Note that the dividend is paid after the option matures. Which of the below statements is NOT correct?



Question 822  option, sunk cost, no explanation

When does a European option's last-traded market price become a sunk cost?



Question 823  option, option payoff at maturity, option profit, no explanation

A European call option should only be exercised if:



Question 824  option, no explanation

A put option written on a risky non-dividend paying stock will mature in one month. As is normal, assume that the option's exercise price is non-zero and positive ##(K>0)## and the stock has limited liability ##(S>0)##.

Which of the following statements is NOT correct? The put option's:



Question 825  future, hedging, tailing the hedge, speculation, no explanation

An equity index fund manager controls a USD500 million diversified equity portfolio with a beta of 0.9. The equity manager expects a significant rally in equity prices next year. The market does not think that this will happen. If the fund manager wishes to increase his portfolio beta to 1.5, how many S&P500 futures should he buy?

The US market equity index is the S&P500. One year CME futures on the S&P500 currently trade at 2,155 points and the spot price is 2,180 points. Each point is worth $250.

The number of one year S&P500 futures contracts that the fund manager should buy is:



Question 827  future, basis risk, no explanation

You intend to use futures on oil to hedge the risk of purchasing oil. There is no cross-hedging risk. Oil pays no dividends but it’s costly to store. Which of the following statements about basis risk in this scenario is NOT correct?



Question 828  future, future valuation, no explanation

You bought a 1.5 year (18 month) futures contract on oil. Oil storage costs are 4% pa continuously compounded and oil pays no dividends. The futures contract is entered into when the oil price is $40 per barrel and the risk-free rate of interest is 10% per annum with continuous compounding.

Which of the following statements is NOT correct?



Question 829  option, future, delta, gamma, theta, no explanation

Below are some statements about futures and European-style options on non-dividend paying stocks. Assume that the risk free rate is always positive. Which of these statements is NOT correct? All other things remaining equal:



Question 830  option, delta, gamma, no explanation

Below are some statements about European-style options on non-dividend paying stocks. Assume that the risk free rate is always positive. Which of these statements is NOT correct?



Question 831  option, American option, no explanation

Which of the following statements about American-style options is NOT correct? American-style:



Question 833  option, delta, theta, standard deviation, no explanation

Which of the following statements about an option (either a call or put) and its underlying stock is NOT correct?



Question 835  VaR, no explanation

A company has a 95% daily Value at Risk (VaR) of $1 million. The units of this VaR are in:



Question 836  VaR, no explanation

The 95% daily VaR corresponds to the result on the:



Question 843  monetary policy, institution, no explanation

The Australian central bank implements monetary policy by directly controlling which interest rate?



Question 844  gross domestic product deflator, consumer price index, inflation, no explanation

An Australian-owned company produces milk in New Zealand and exports all of it to China. If the price of the milk increases, which of the following would increase?



Question 845  accounting ratio, no explanation

Safe firms with low chances of bankruptcy will tend to have:



Question 848  monetary policy, no explanation

Which of the following is NOT the Australian central bank’s responsibility?



Question 849  credit card, APR, no explanation

You just spent $1,000 on your credit card. The interest rate is 24% pa compounding monthly. Assume that your credit card account has no fees and no minimum monthly repayment.

If you can't make any interest or principal payments on your credit card debt over the next year, how much will you owe one year from now?



Question 851  labour force, no explanation

Below is a table showing some figures about the Australian labour force.

Australian Labour Force and Employment Data
April 2017 Seasonally Adjusted figures
Employed persons ('000) 12 061.9
Unemployed persons ('000) 751.4
Unemployment rate (%) 5.9
Participation rate (%) 64.8
 

 

Source: ABS 6202.0 Labour Force, Australia, Apr 2017

What do you estimate is the size of working age population in thousands (‘000)?



Question 852  gross domestic product, inflation, employment, no explanation

When the economy is booming (in an upswing), you tend to see:



Question 854  speculation motive for keeping money, no explanation

What is the speculation motive for keeping money? The speculation motive encourages people to keep money available:



Question 856  credit terms, no explanation

Your supplier’s credit terms are "1/10 net 30". Which of the following statements about these credit terms is NOT correct?

If you intend to buy an item from your supplier for a tag price of $100 and you:



Question 858  indirect security, intermediated finance, no explanation

Which of the following transactions involves an ‘indirect security’ using a ‘financial intermediary’?



Question 859  money supply, no explanation

The below table shows Australian monetary aggregates. Note that ‘M3’ is the sum of all the figures in the table and ‘ADI’ stands for Authorised Deposit-taking Institution such as a bank, building society or credit union.

Australian Monetary Aggregates
March 2017, AUD billions
Currency Current deposits
with banks
Certificates of deposit
issued by banks
Term deposits
with banks
Other deposits
with banks
Deposits with
non-bank ADIs
M3
69.3 271.6 207.2 562.3 838.7 36.9 1986.0
 

 

Source: RBA Statistical Table D3 Monetary Aggregates.

Which of the following statements is NOT correct?



Question 861  open interest, closing out future contract, no explanation

Alice, Bob, Chris and Delta are traders in the futures market. The following trades occur over a single day in a newly-opened equity index future that matures in one year which the exchange just made available.

1. Alice buys 2 future from Bob.

2. Chris buys 5 futures from Delta.

3. Chris buys 9 futures from Bob.

These were the only trades made in this equity index future.

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.

Graph

Which of the following statements is NOT correct?



Question 880  gold standard, no explanation

Under the Gold Standard (1876 to 1913), currencies were priced relative to:



Question 881  Nixon Shock, Bretton Woods, foreign exchange rate, foreign exchange system history, no explanation

In the ‘Nixon Shock’ on August 15, 1971, the United States government:



Question 882  Asian currency crisis, foreign exchange rate, original sin, no explanation

In the 1997 Asian currency crisis, the businesses most vulnerable to bankruptcy were those that:



Question 884  monetary policy, impossible trinity, foreign exchange rate, no explanation

According to the impossible trinity, a currency can only have two of these three desirable traits: be fixed against the USD; convertible to and from USD for traders and investors so there are open goods, services and capital markets; and allow independent monetary policy set by the country’s central bank, independent of the US central bank.

Which of the following exchange rate regimes sacrifices fixing the exchange rate to the USD? In other words, which regime uses a floating exchange rate?



Question 885  foreign exchange rate, no explanation

A Brazilian lady wishes to convert 1 million Brazilian Real (BRL) into Chinese Renminbi (RMB, also called the Yuan or CNY). The exchange rate is 3.42 BRL per USD and 6.27 RMB per USD. How much is the BRL 1 million worth in RMB?



Question 886  foreign exchange rate, no explanation

A British man wants to calculate how many British pounds (GBP) he needs to buy a 1 million euro (EUR) apartment in Germany. The exchange rate is 1.42 USD per GBP and 1.23 USD per EUR. What is the EUR 1 million equivalent to in GBP?



Question 887  foreign exchange rate, no explanation

Examine the graph of the AUD versus the USD, EUR and JPY. Note that RHS means right hand side and LHS left hand side which indicates which axis each line corresponds to. Assume inflation rates in each country were equal over the time period 1984 to 2018.

Image of USD vs JPY and EUR graph

Which of the following statements is NOT correct?



Question 888  foreign exchange rate, speculation, no explanation

The current Australian exchange rate is 0.8 USD per AUD.

If you think that the AUD will depreciate against the USD, contrary to the rest of the market, how could you profit? Right now you should:



Question 889  cross currency interest rate parity, no explanation

Judging by the graph, in 2018 the USD short term interest rate set by the US Federal Reserve is higher than the JPY short term interest rate set by the Bank of Japan, which is higher than the EUR short term interest rate set by the European central bank.

At the latest date shown in 2018: ##r_{USD}>r_{JPY}>r_{EUR}##

Assume that each currency’s yield curve is flat at the latest date shown in 2018, so interest rates are expected to remain at their current level into the future.

Which of the following statements is NOT correct?

Over time you would expect the:



Question 890  foreign exchange rate, monetary policy, no explanation

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 increase the policy rate by 50 basis points due to increased fears of inflation.

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 suddenly:



Question 891  foreign exchange rate, monetary policy, no explanation

Suppose the market expects the Bank of Japan (BoJ) to decrease their short term interest rate by 15 basis points at their next meeting. The current short term interest rate is -0.1% pa and the exchange rate is 100 JPY per USD.

Then unexpectedly, the BoJ announce that they will leave the short term interest rate unchanged.

What do you expect to happen to Japan’s exchange rate on the day when the surprise announcement is made? The Japanese Yen (JPY) is likely to suddenly:



Question 892  foreign exchange reserve, foreign exchange rate, no explanation

The Chinese central bank has the largest amount of foreign currency reserves.

What could the large amounts of foreign exchange reserves held by the Chinese government be used for in a currency crisis? China's currency is called the Renminbi (RMB) or Yuan (CNY). In a Chinese currency crisis the Chinese government is likely to use its FX reserves to:



Question 894  balance of payments, current account, no explanation

Below are four graphs of Australia's external position, published in the RBA's chart pack.

Assume that all assets and liabilities are debt which makes interest income and equity which makes dividend income.

Which of the following statements is NOT correct? As at the end of 2017, Australia’s:



Question 896  comparative advantage in trade, production possibilities curve, no explanation

Adam and Bella are the only people on a remote island. Their production possibility curves are shown in the graph.

Which of the following statements is NOT correct?



Question 897  comparative advantage in trade, production possibilities curve, no explanation

Adam and Bella are the only people on a remote island. Their production possibility curves are shown in the graph.

Which of the following statements is NOT correct?



Question 898  comparative advantage in trade, production possibilities curve, no explanation

Adam and Bella are the only people on a remote island. Their production possibility curves are shown in the graph.

Assuming that Adam and Bella cooperate according to the principles of comparative advantage, what will be their combined production possibilities curve?



Question 899  comparative advantage in trade, production possibilities curve, no explanation

Adam and Bella are the only people on a remote island. Their production possibility curves are shown in the graph.

Assume that Adam and Bella cooperate according to the principle of comparative advantage.

Which of the following statements is NOT correct?



Question 920  SML, CAPM, Sharpe ratio, Treynor ratio, Jensens alpha, no explanation

Over-priced assets should NOT:



Question 921  utility, return distribution, log-normal distribution, arithmetic and geometric averages, no explanation

Who was the first theorist to propose the idea of ‘expected utility’?



Question 922  Stutzer portfolio performance indicator, Sharpe ratio, no explanation

Stutzer’s Portfolio Performance Indicator (PPI) ranks portfolios similarly to what other performance metric, assuming that the portfolios’ continuously compounded returns (LGDR’s) are normally distributed?



Question 923  omitted variable bias, CAPM, single factor model, single index model, no explanation

Capital Asset Pricing Model (CAPM) and the Single Index Model (SIM) are single factor models whose only risk factor is the market portfolio’s return. Say a Taxi company and an Umbrella company are influenced by two factors, the market portfolio return and rainfall. When it rains, both the Taxi and Umbrella companies’ stock prices do well. When there’s no rain, both do poorly. Assume that rainfall risk is a systematic risk that cannot be diversified and that rainfall has zero correlation with the market portfolio’s returns.

Which of the following statements about these two stocks is NOT correct?

The CAPM and SIM:



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?



Question 925  mean and median returns, return distribution, arithmetic and geometric averages, continuously compounding rate, no explanation

The arithmetic average and standard deviation of returns on the ASX200 accumulation index over the 24 years from 31 Dec 1992 to 31 Dec 2016 were calculated as follows:

###\bar{r}_\text{yearly} = \dfrac{ \displaystyle\sum\limits_{t=1992}^{24}{\left( \ln⁡ \left( \dfrac{P_{t+1}}{P_t} \right) \right)} }{T} = \text{AALGDR} =0.0949=9.49\% \text{ pa}###

###\sigma_\text{yearly} = \dfrac{ \displaystyle\sum\limits_{t=1992}^{24}{\left( \left( \ln⁡ \left( \dfrac{P_{t+1}}{P_t} \right) - \bar{r}_\text{yearly} \right)^2 \right)} }{T} = \text{SDLGDR} = 0.1692=16.92\text{ pp pa}###

Assume that the log gross discrete returns are normally distributed and that the above estimates are true population statistics, not sample statistics, so there is no standard error in the sample mean or standard deviation estimates. Also assume that the standardised normal Z-statistic corresponding to a one-tail probability of 2.5% is exactly -1.96.

Which of the following statements is NOT correct? If you invested $1m today in the ASX200, then over the next 4 years:



Question 928  mean and median returns, mode return, return distribution, arithmetic and geometric averages, continuously compounding rate, no explanation

The arithmetic average continuously compounded or log gross discrete return (AALGDR) on the ASX200 accumulation index over the 24 years from 31 Dec 1992 to 31 Dec 2016 is 9.49% pa.

The arithmetic standard deviation (SDLGDR) is 16.92 percentage points pa.

Assume that the log gross discrete returns are normally distributed and that the above estimates are true population statistics, not sample statistics, so there is no standard error in the sample mean or standard deviation estimates. Also assume that the standardised normal Z-statistic corresponding to a one-tail probability of 2.5% is exactly -1.96.

If you had a $1 million fund that replicated the ASX200 accumulation index, in how many years would the mode dollar value of your fund first be expected to lie outside the 95% confidence interval forecast?

Note that the mode of a log-normally distributed future price is: ##P_{T \text{ mode}} = P_0.e^{(\text{AALGDR} - \text{SDLGDR}^2 ).T} ##



Question 930  arbitrage table, future, no explanation

A non-dividend paying stock has a current price of $20.

The risk free rate is 5% pa given as a continuously compounded rate.

A 2 year futures contract on the stock has a futures price of $24.

You suspect that the futures contract is mis-priced and would like to conduct a risk-free arbitrage that requires zero capital. Which of the following steps about arbitraging the situation is NOT correct?



Question 947  arbitrage table, option, no explanation

A non-dividend paying stock has a current price of $20.

The risk free rate is 5% pa given as a continuously compounded rate.

Options on the stock are currently priced at $5 for calls and $5.55 for puts where both options have a 2 year maturity and an exercise price of $24.

You suspect that the call option contract is mis-priced and would like to conduct a risk-free arbitrage that requires zero capital. Which of the following steps about arbitraging the situation is NOT correct?



Question 963  Bretton Woods, foreign exchange rate, foreign exchange system history, no explanation

Under the Bretton Woods System (1944 to 1971), currencies were priced relative to:



Question 965  foreign exchange reserve, foreign exchange rate, no explanation

Observe the below graph of Chinese foreign exchange reserves held by the central bank, as well as the Chinese currency the Yuan (CNY, also called the Renminbi, RMB) against the US Dollar. Note the inverted y-axis scale on the Yuan exchange rate graph.

Image of Chinese FX reserves graph

Which of the below statements is NOT correct?



Question 966  foreign exchange rate, no explanation

A Malaysian man wishes to convert 1 million Malaysian Ringgit (MYR) into Indian Rupees (IND). The exchange rate is 4.2 MYR per USD and 71 IND per USD. How much is the MYR 1 million worth in IND?



Question 967  foreign exchange rate, no explanation

A New Zealand lady wants to calculate how many New Zealand Dollars (NZD) she needs to buy a 1 million Australian dollar (AUD) house in Sydney, Australia. The exchange rate is 0.69 USD per NZD and 0.72 USD per AUD. What is the AUD 1 million equivalent to in NZD?



Question 968  foreign exchange rate, forward foreign exchange rate, cross currency interest rate parity, no explanation

Below is a graph showing the spread or difference between government bond yields in different countries compared to the US. Assume that all governments have zero credit risk.

According to the principle of cross-currency interest rate parity, which country is likely to have the greatest expected currency appreciation against the USD over the next 2 years?



Question 969  foreign exchange rate, no explanation

RBA analyst Adam Hamilton wrote in the December 2018 Bulletin article ‘Understanding Exchange Rates and Why They Are Important’ the following passage about bilateral exchange rates:

A bilateral exchange rate refers to the value of one currency relative to another. It is the most commonly referenced type of exchange rate. Most bilateral exchange rates are quoted against the US dollar (USD), as it is the most traded currency globally. Looking at the Australian dollar (AUD), the AUD/USD exchange rate gives you the amount of US dollars that you will receive for each Australian dollar that you convert (or sell). For example, an AUD/USD exchange rate of 0.75 means that you will get US75 cents for every 1 AUD.

An appreciation of the Australian dollar is an increase in its value compared with a foreign currency. This means that each Australian dollar buys you more foreign currency than before. Equivalently, if you are buying an item that is priced in foreign currency it will now cost you less in Australian dollars than before. If there is a depreciation of the Australian dollar, the opposite is true.

Based on this information, which of the following statements is NOT correct?



Question 970  foreign exchange rate, no explanation

Examine the below graph.

Which of the below statements is NOT correct?



Question 971  foreign exchange rate, no explanation

Suppose the current Australian exchange rate is 0.8 USD per AUD.

If you think that the AUD will appreciate against the USD, contrary to the rest of the market, how could you profit? Right now you should:



Question 972  foreign exchange rate, no explanation

Examine the below graphs. The first graph shows daily FX turnover in the world by both the public (government) and private sectors. The second graph 'Official Reserve Assets' shows the FX reserves of the Australian central bank, the RBA. The third graph's top panel shows the FX reserves of the Chinese central bank, the PBoC.

Assume that the AUD and USD are priced at parity so 1 AUD = 1 USD.

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:



Question 974  foreign exchange rate, monetary policy, no explanation

Suppose the market expects the Bank of Japan (BoJ) to increase their short term interest rate by 15 basis points at their next meeting. The current short term interest rate is -0.1% pa and the exchange rate is 100 JPY per USD.

As expected, the BoJ announce that they will increase short term interest rate by 15 basis points.

What do you expect to happen to Japan’s exchange rate on the day when the announcement is made? The Japanese Yen (JPY) is likely to:



Question 975  comparative advantage in trade, production possibilities curve, no explanation

Arthur and Bindi are the only people on a remote island.

Luckily there are Coconut and Date palm trees on the island that grow delicious fruit. The problem is that harvesting the fruit takes a lot of work.

Arthur can pick 1 coconut per hour, 4 dates per hour or any linear combination of coconuts and dates. For example, he could pick 0.5 coconuts and 2 dates per hour.

Bindi can pick 2 coconuts per hour, 1 date per hour or any linear combination. For example, she could pick 0.5 coconuts and 0.75 dates per hour.

This information is summarised in the table and graph:

Harvest Rates Per Hour
  Coconuts Dates
Arthur 1 4
Bindi 2 1
 

 

Which of the following statements is NOT correct?



Question 976  comparative advantage in trade, production possibilities curve, no explanation

Arthur and Bindi are the only people on a remote island. Their production possibility curves are shown in the graph.

Which of the following statements is NOT correct?



Question 977  comparative advantage in trade, production possibilities curve, no explanation

Arthur and Bindi are the only people on a remote island. Their production possibility curves are shown in the graph.

Which of the following statements is NOT correct?



Question 978  comparative advantage in trade, production possibilities curve, no explanation

Arthur and Bindi are the only people on a remote island. Their production possibility curves are shown in the graph.

Assuming that Arthur and Bindi cooperate according to the principles of comparative advantage, what will be their combined production possibilities curve?



Question 979  balance of payments, current account, no explanation

This question is about the Balance of Payments.

Assume that all foreign and domestic assets are either debt which makes interest income or equity which makes dividend income, and vice versa for liabilities which cost interest and dividend payments, respectively.

Which of the following statements is NOT correct?



Question 980  balance of payments, current account, no explanation

Observe the below graph of the US current account surplus as a proportion of GDP.

Define lending as buying (or saving or investing in) debt and equity assets.

The sum of US ‘net private saving’ plus ‘net general government lending’ equals the US:



Question 984  principal agent problem, moral hazard, asymmetric information, no explanation

When does the ‘principal-agent problem’ occur? Is it when:

I. The principal has conflicting incentives (moral hazard);

II. The agent has conflicting incentives (moral hazard);

III. The principal has incomplete information about the agent (asymmetric information); or

IV. The agent has incomplete information about the principal (asymmetric information)?

The principal-agent problem occurs when statements:



Question 988  variance, covariance, beta, CAPM, risk, no explanation

Price Data Time Series
Sourced from Yahoo Finance Historical Price Data
Date S&P500 Index (^GSPC)   Apple (AAPL)
Open High Low Close Adj close   Open High Low Close Adj close
2007, Wed 3 Jan 1418 1429 1408 1417 1417 12.33 12.37 11.7 11.97 10.42
2008, Wed 2 Jan 1468 1472 1442 1447 1447 28.47 28.61 27.51 27.83 24.22
2009, Fri 2 Jan 903 935 899 932 932 12.27 13.01 12.17 12.96 11.28
2010, Mon 4 Jan 1117 1134 1117 1133 1133 30.49 30.64 30.34 30.57 26.6
 
Source: Yahoo Finance.
 

 

Which of the following statements about the above table which is used to calculate Apple's equity beta is NOT correct?



Question 1005  variance, covariance, beta, CAPM, risk, no explanation

Price Data Time Series
Sourced from Yahoo Finance Historical Price Data
Date Adjusted close
S&P500 Index
(^GSPC)
Tesla
(TSLA)
2017, Fri 29 Dec 2673.61 62.27
2018, Mon 31 Dec 2506.85 66.56
2019, Tue 31 Dec 3230.78 83.67
2020, Tue 31 Dec 3756.07 705.67
 
Source: Yahoo Finance.
 

 

Which of the following statements about the above table which is used to calculate Tesla's equity beta is NOT correct? Over the last 4 years the historical:



Question 1030  Multiples valuation, no explanation

Read these quotes from Adir Shiffman's 26 July 2021 article in the AFR 'Roll up, roll up and make a mint off Amazon sellers'.

"Amazon sellers outsource their warehousing and logistics to the tech giant in a model known as “fulfilled by Amazon”, or FBA. Joining FBA provides access to one of the world’s largest global warehousing operations and even a fleet of Boeing 747 cargo jets. Just as significantly, FBA sellers can much more easily qualify for Amazon’s Prime program, which guarantees free and fast shipping to members."
"Companies want to acquire and integrate a selection, or in business parlance, do a 'roll-up'."
"More than 100 companies are now racing to roll-up FBA sellers, and almost all have launched since 2017. At least a dozen of these boast war chests of more than $US100 million. The largest, Thrasio, was founded in 2018 and has raised more than $US1.7 billion. Thrasio targets businesses with high quality and differentiated products that generate $US1 to $US100 million in revenue annually" (Shiffman, 2021).

If Thrasio's total funds available to spend on the roll up is $1.7 billion, and it's buying targets at price-to-revenue multiples of 2, what's the largest number of firms with $50 million of annual revenue that it could buy?



Question 1032  inflation, percent of sales forecasting, no explanation

Investment bank Canaccord's Think Childcare (TNK) initiation of coverage states: "Building lease costs – Rent expense is the second largest cost and TNK reported rent/sales of 12.1%, within the industry range that we typically see as 12-14% of sales. TNK lease all their properties and do not intend to own property. Leases are generally long term with 10-15 year terms and additional options. Although terms vary across properties and landlords, rental increases are generally tied to the consumer price index (CPI)" (Canaccord, 2016).

Assuming that sales grow faster than the CPI, when Canaccord forecast TNK's building lease costs using the 'percent of sales' method, that proportion should:



Question 1037  gross domestic product, no explanation

What effect is being referred to in the following quote from the MARTIN model description?  

Economy-wide models also account for feedback between economic variables. For example, an increase in aggregate demand will encourage firms to hire more workers, which raises employment and lowers the unemployment rate. The tightening of the labour market is likely to lead to an increase in wages growth. The resulting increase in household incomes is likely to lead to an increase in consumption, further raising aggregate demand. (Ballantyne et al, 2019)

The name of the effect being referred to is:



Question 1038  fire sale, leverage, no explanation

Listen to 'Lessons and Questions from the GFC' on 6 December 2018 by RBA Deputy Governor Guy Debelle from 17:58 to 20:08 or read the below transcript:

Guy Debelle talks about the GFC and says that the Australian government’s guarantee of wholesale debt and deposits on 12 October 2008 was "introduced to facilitate the flow of credit to the real economy at a reasonable price and, in some cases, alleviate the need for asset fire sales, which have the capacity to tip markets and the economy into a worse equilibrium... The crisis very much demonstrated the critical importance of keeping the lending flowing. The lesson is that countries that did that fared better than countries that didn't. That lesson is relevant to the situation today in Australia, where there is a risk that a reduced appetite to lend will overly curtail borrowing with consequent effects for the Australian economy." (Debelle, 2019)

When assets are sold in a fire sale, there’s usually a large increase in the:



Question 1050  Miller debt and taxes, interest tax shields, Miller and Modigliani, no explanation

In Miller's 1977 article 'Debt and Taxes', he argues that interest tax shields are likely to benefit who? Note that this 1977 article is contrary to his past research findings with Modigliani (1958), modern textbooks and common practice by valuers.

Miller (1977) concludes that the benefits of interest tax shields are likely to benefit:



Question 1074  monetary policy, inflation, no explanation

From 2:31 up to 4:00, Glenn Stevens discusses different shocks and how they affect inflation:

Which of the following shocks might reduce Australian inflation?



Question 1080  bankruptcy or insolvency, no explanation

If a firm goes bankrupt, who is paid first?



Question 1081  market efficiency, no explanation

If markets were NOT semi-strong form efficient, then it’s possible for:



Question 1094  bank run, duration, no explanation

On 6 April 2023 Gillian Tett wrote: "As Powell observed: "At a basic level, Silicon Valley Bank management failed badly [because] they grew the bank very quickly, they exposed the bank to significant liquidity risk and interest rate risk, didn't hedge that risk." In plain English, the core reason a panic erupted was that SVB's balance sheet was stuffed with long-term Treasury bonds whose value has plunged in the last year as the Fed has raised rates, creating losses" (Tett, 2023).

Which of the following statements is most correct? The reason why Silicon Valley Bank (SIVB) made large losses prior to the bank run was that its assets: