- Your RRR is 10%. How much would you be willing to pay today for an annuity which pays £14 each year for 16 years, with the first payment 3 months from now?
- A three year bond pays an annual coupon of 8% of face value, and is trading at an annual YTM of 4%. What is the current market price?
- True or False?
The PV of a near-term cashflow is less sensitive to a 0.01% change in the RRR than the PV of a cashflow further into the future. - True or False?
All else equal, bonds with higher credit ratings tend to trade at lower YTMs - One London financial institution tells you that the exchange rate between euro and UK pound (£) is 0.881, another institution tells you that the exchange rate between these two currencies is 1.1351. Is this most likely to be:
Select one:
a. because one institution is in the City of London, whilst the 0ther is in the docklands, on the other side of the Greenwich meridian.
b. Impossible
c. A common arbitrage opportunity
d. Because the two institutions are using different conventions for quoting this exchange rate
6.What is the approximate one year forward rate of interest starting in one year’s time if the one year spot interest rate is 13% and the two year spot interest rate is 11%?
7.What is the IRR of the following cashflows?
Now 1 year 2 years
-11 -22 -20
Select one:
a. There are likely to be multiple IRRs
b. 81.82%
c. 100.00%
d. 3.2%
e. There is no IRR for these cashflows
- The carry trade between Swiss Francs and the Australian Dollar involves borrowing in Swiss francs at the Swiss risk-free interest rate of 5% and lending at the Australian risk-free rate 7%.
If you had taken out this carry trade at these interest rates one year ago, what profit would you now have made on this trade?
Select one:
a. -2.0%
b. 2.0%
c. Impossible to tell with the information provided
d. 5%
e. 7%
- What IRR would be generated by an investment which costs £107m now and is expected to be sold at £168m 3 years from now?
Select one:
a. 15.3%
b. 18.9%
c. 57.0%
d. 14.4%
e. 16.2%
- The diagram above shows daily returns on FTSE and a specific asset, with a fitted trendline. Which of the following statements about the beta and idiosyncratic risk (specific risk) of this asset is closest to the truth?
Select one:
a. High idiosyncratic risk and beta≈0.45
b. Very low idiosyncratic risk and beta≈0.45
c. High idiosyncratic risk and beta≈1.08
d. High idiosyncratic risk and beta≈2.1 - The expected market return is 6%, and its standard deviation is 10%. The risk-free rate is 3%. If CAPM holds, what is the expected return on an asset which generates alpha=1%, has beta=1.9 and standard deviation=13%?
- True or False?
The IRR of a bond is always less than its yield to maturity (YTM)
13.True or False?
Futures contracts specify in advance the quantity of the asset to be exchanged and the price that will be paid.
- A bond matures in 11 years and is trading at a YTM of 10%. It pays a significant coupon, but you do not know exactly how large. What is the modified duration?
Select one:
a. between 10 and 11
b. less than 10
c. exactly 10
d. exactly 11
e. greater than 11 - I expect an equity to pay its annual dividend of $2 per share in exactly one year’s time, with dividend growth of 3% per annum thereafter. My RRR for this stock is 7.8%. The risk-free rate is 1%. How much should I be willing to pay per share?
- I calculate that a zero coupon bond which pays 100 exactly one year from now has PV=86. What would I expect the PV to be when I calculate it again in 3 months’ time, assuming that my RRR does not change?
- I expect an equity to pay its first annual dividend of $3 per share in exactly two years’ time, with dividend growth of 2.3% per annum thereafter. My RRR for this stock is 8.7%. How much should I be willing to pay per share today?
18 A bond which pays a coupon of 5.3% of face value is currently trading at a yield of 4.7%. Which of the following statements is true?
(1) If you bought the bond at the current market price, the cashflows would generate an IRR of 4.7%
(2) The bond is trading at a premium
(3) The bond is trading at a discount
Select one:
a. Only statement (1)
b. Statement (1) and statement (2)
c. Statement (1) and statement (3)
d. Only statement (2)
e. 0nly statement (3)
19 The market price of a discount instrument which pays 100 in 5 months’ time is 95.7. What is the implicit annual discount rate?
20 What annual IRR would be generated by an investment costing £100m now which is expected to be sold at £124m 19 months from now?
Select one:
a. 1.14%
b. 24.00%
c. 14.55%
d. 15.16%
e. 13.65%
- True or False?
A market that is semi-strong form efficient might also be strong form efficient - Which of the following projects has the highest PV? Assume that you use the same positive discount rate for all three projects.
Year 1 Year 2 Year 3
Project 1 912 900 888
Project 2 888 900 912
Project 3 900 900 900
Select one:
a. All are equally attractive 0
b. Cannot be determined without knowing the exact discount rate
c. Project 3
d. Project 2
e. Project 1
- True or False?
The buyer of a put option chooses whether to exercise the option - Put Option A has strike price 38. Put option B is identical except that it has a strike price 39.
Which of the following statements is true?
Select one:
a. Both will trade at the same premium 0
b. Option B is more expensive
c. Impossible to tell with the information given.
d. Option A is more expensive
- You expect to receive a specific sum of cash in the year 2099. You previously calculated the PV of this cashflow at £6.9million. Now, 19 months later, you revisit your calculations and decide that all the assumptions you previously made remain valid, and that you should use an annual discount rate of 7%, as you did before. All that has changed is today’s date. What would you now estimate the PV to be?
Select one:
a. 7.68
b. 6.20
c. 8.18
d. 24.95
e. 6.9
- What is the present value of a cashflow of £89million that you expect to receive 23 months from now? Your discount rate is 8%.
Select one:
a. 103.1
b. 76.8
c. 89
d. 76.3
e. 15.2 - What is the annual discount rate if a cashflow of £51million in 6 years’ time is currently valued at £27million?
Select one:
a. 11.18%
b. 111.18%
c. 88.89%
d. 89.94%
e. 14.81% - You have sold (written) a put option on an equity with a strike price $49 at premium of $1.7. What is your maximum possible profit?
Select one:
a. zero
b. 49
c. infinite
d. 1.7
e. 47.3 - The TWO year spot interest rate is 7.8%. The THREE year spot interest rate is 9.1%. What is the approximate one year forward rate of interest starting in TWO years’ time?
Select one:
a. 12.80%
b. 11.75%
c. 10.81%
d. 10.34%
e. 10.42% - As a manager of a firm you must evaluate a project. The project will run forever and earn an annual cashflow of $3.6m, with the first cashflow in exactly one year. The IRR of the project is 5%. The costs of this investment are all due immediately. Which of the following figures is closest (in millions) to these costs?
Select one:
a. 72.0
b. 70.2
c. 77.4
d. 75.6
e. 73.8 - True or False?
The pure expectations theory cannot explain a downward-sloping yield curve - A specific zero coupon bond matures in 16 years and is trading at a YTM of 9%.
By how much will the price change if the yield increases by 0.01%?
Select one:
a. -0.01%
b. -0.147%
c. 0.147%
d. -0.160%
e. -0.136% - What is the Yield to Maturity (YTM) of a bond with one year maturity and face value=100 which pays an annual coupon of 5% of face value and is trading at a discount of 4%?
Select one:
a. -8.57%
b. 9.00%
c. 9.38%
d. 0.96%
e. 1.00% - True or False?
Asset prices in an efficient market follow a random walk because available information is already priced into the market.