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FM213 Finance > FM213 Problem Set and Past Paper > Flashcards

FM213 Problem Set and Past Paper Flashcards

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1
Q

Amortization loan

A
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2
Q

Explain intuitively why the yield to maturity on the 1.5 coupon bond is less than that on the 0.5 coupon bond

A

The yield depends upon both the patterns of coupon payments and spot rates at the time of the coupon payment. The 1.5% bond has a slightly greater proportion of its total payments coming earlier, when interest rates are low, than does the 0.5% bond. Thus, the yield of the 1.5% bond is slightly lower.

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3
Q

Why is the 0.5% coupon bond selling at discount and 1.5% coupon bond selling at premium?

A

The 0.5% bond is selling at discount because its coupons are small relative to (most of the) spot rates. This implies that the coupon stream is not delivering the market-determined time value of money. Thus, to induce an investor to hold the bond, the purchase price that an investor pays must be below the face value that will be delivered at the end of the bond’s lifetime

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4
Q

Briefly explain the difference between beta as a measure of risk and variance as a measure of risk

A
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5
Q

What is the correlation coefficient between 2 stocks that gives the maximum reduction in risk for a two-stock portfolio?

(assuming that the portfolio contains long positions in both stocks)

A
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6
Q

Leveraged position

A
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7
Q

Market inefficiency

A
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8
Q

What is risk shifting problem?

Discuss the relationship between risk shifting and face value of debt

A
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9
Q

What is debt overhang problem?

A
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10
Q

Conversion premium

Why conversion value is different from market price of convertible?

A
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11
Q

Can the market price of the convertible be less than the conversion value?

A

No. Not if the investor is free to convert immediately

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12
Q

Explain how convertible debt alleviate risk-shifting problem?

A
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13
Q

Share-financed vs cash-financed takeover

How payment methods in takeover affect the size of the merged company?

A

1) Share-financed takeover keeps all assets in the company
2) cash-financed takeover pays out part of the assets to target shareholders

All else equal, the size of the merged firm financed by stock is bigger

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14
Q

What will happen to the share price on the first day when registered owners are no longer eligible to receive the quarterly dividend?

Assume no dividend and capital gain tax

A

Since both dividends and capital gains are not taxable, the share price will decrease by the amount of the dividend

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15
Q

Comment on the costs of debt financing

A

Debt overhang related discussion:

  • Reducing equity holders’ incentives to invest in good projects.
  • Incremental CF goes to creditors first
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16
Q

Benefit of issuing debt over equity

Explain interest tax shield

A

Debt is less informational sensitive to avoid information asymmetry and adverse selection problem, which is likely to impact the company.

Interest tax shield is the tax payment over and above the principal.

17
Q

Foreign exchange spot rate

Arbitrage opportunity - steps

A
18
Q

Premium and exercise price

A
19
Q

Variance of N securities

A
20
Q
A
21
Q

**Option in practice

A
22
Q

Binomial option pricing model

A
23
Q

Risk neutral probability

A
24
Q

Binary option vs straight bond

A
25
Q

Currency arbitrage

A
26
Q

Put value

A
27
Q

Higher Sharpe ratio is better?

(2017 q3b)

A

Yes. Higher return given same risk

28
Q
A
29
Q

Spot rates and forward rates

A
30
Q

Relationship between sharpe ration of market portfolio and CML

A

The slope of the CML is the sharpe ratio of the market portfolio.

31
Q

Interest rates for borrowers and lenders

A
32
Q

Bond Price and yield to maturity

A
33
Q

Forward exchange rate

A
34
Q

B-S Formula

(2015)

A
35
Q

Informational efficiency (2019)

A

FM213 Finance (19 decks)

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