Quant - Time Value of Money in Finance Flashcards
Grupo Ignacia issued 10-year corporate bonds two years ago. The bonds pay an annualized coupon of 10.7 percent on a semiannual basis, and the current annualized YTM is 11.6 percent.
The current price of Grupo Ignacia’s bonds (per MXN100 of par value) is closest to:
A.MXN95.47.
B.MXN97.18.
C.MXN95.39.
Method 1: Bond Function
[10.7] [PMT]
[11.6] [i]
[1.012024] [ENTER]
[1.012032] [F][PRICE]
Result is 95.39
Method 2: TVM
[5.35] [PMT]
[5.80] [I]
[100] [FV]
[16] [n]
[PV]
Result is -95.39
Grey Pebble Real Estate seeks a fully amortizing fixed-rate five-year mortgage loan to finance 75 percent of the purchase price of a residential building that costs NZD5 million.
The annual mortgage rate is 4.8 percent.
The monthly payment for this mortgage would be closest to:
A.NZD70,424.
B.NZD93,899.
C.NZD71,781.
[3750000] [PV]
[0.40] [i]
[60] [n]
[0] [fv]
[PMT]
Result is -$70,424
Mylandia Corporation pays an annual dividend to its shareholders, and its most recent payment was CAD2.40.
Analysts following Mylandia expect the company’s dividend to grow at a constant rate of 3 percent per year in perpetuity.
Mylandia shareholders require a return of 8 percent per year. The expected share price of Mylandia is closest to:
A.CAD48.00.
B.CAD49.44.
C.CAD51.84.
B is Correct.
Suppose Mylandia announces that it expects significant cash flow growth over the next three years, and now plans to increase its recent CAD2.40 dividend by 10 percent in each of the next three years.
Following the 10 percent growth period, Mylandia is expected to grow its annual dividend by a constant 3 percent indefinitely. Mylandia’s required return is 8 percent.
Based upon these revised expectations, The expected share price of Mylandia stock is:
A.CAD49.98.
B.CAD55.84.
C.CAD59.71.
[Calculate C1]
[2.4] [ENTER]
[1.1] [X]
(Screen shows 2.64)
(.: C1 = 2.64)
[Calculate C2]
[Enter] //to place 2.64 in reg-y
[1.1] [X]
(Screen shows 2.90)
(.: C2 = 2.90)
[Calculate C3a]
[Enter] //to place 2.90 in reg-y
[1.1] [X]
(Screen shows 3.19)
(.: C3a = 3.19)
[Calculate Stock Price, or C3b]
[Enter] //to place 3.19 in reg-y
[1.03] [X]
(Screen shows 3.29)
[Enter] //to place 3.29 in reg-y
[0.05]
(Screen shows 65.80)
(.: C3b = 65.80)
[Calculate Payout at T = 3]
[3.19] [Enter]
[65.80] [+]
(Screen shows 68.99)
—— Enter in uneven series of cash flows —
[0] [G] [CF0]
[2.64] [G] [CFJ]
[2.90] [G] [CFJ]
[68.99] [G] [CFJ]
[8] [i]
[PV]
(Screen shows 59.70)
Consider a Swiss Confederation zero-coupon bond with a par value of CHF100, a remaining time to maturity of 12 years and a price of CHF89. In three years’ time, the bond is expected to have a price of CHF95.25. If purchased today, the bond’s expected annualized return is closest to:
A.0.58 percent.
B.1.64 percent.
C.2.29 percent.
C is Correct.
[89] [CHS] [PV]
[0] [PMT]
[3] [N]
[95.25] [FV]
[i]
(Screen shows 2.29%)
Grupo Ignacia issued 10-year corporate bonds four years ago. The bonds pay an annualized coupon of 10.7 percent on a semiannual basis, and the current price of the bonds is MXN97.50 per MXN100 of par value. The YTM of the bonds is closest to:
A.11.28 percent.
B.11.50 percent.
C.11.71 percent.
A is Correct.
97.50 [PV]
10.70 [PMT]
1.012024 [ENTER]
1.012030 [F] [YTM]
(Screen shows 11.28%)
Mylandia Corporation stock trades at CAD60.00. The company pays an annual dividend to its shareholders, and its most recent payment of CAD2.40 occurred yesterday. Analysts following Mylandia expect the company’s dividend to grow at a constant rate of 3 percent per year. Mylandia’s required return is:
A.8.00 percent.
B.7.00 percent.
C.7.12 percent.
C is the answer.
Step 1. Find future dividend payment
[2.4] [ENTER] [1.03] [x]
(screen shows 2.47)
Step 2. knowing the following:
60 =
2.47 / (r - g)
where g = 3%, find r.
[2.47] [Enter] [60] [ / ]
(screen shows 0.04117)
[Enter] to lock that into X register
[.03] [+]
(Screen shows 0.07117)
An analyst observes the benchmark Indian NIFTY 50 stock index trading at a forward price-to-earnings ratio of 15. The index’s expected dividend payout ratio in the next year is 50 percent, and the index’s required return is 7.50 percent. If the analyst believes that the NIFTY 50 index dividends will grow at a constant rate of 4.50 percent in the future, which of the following statements is correct?
A.The analyst should view the NIFTY 50 as overpriced.
B.The analyst should view the NIFTY 50 as underpriced.
C.The analyst should view the NIFTY 50 as fairly priced.
B is correct.
Knowing:
Price-to-Earnings =
Price / Net Income
AND
Dividend Payout Ratio =
Dividend / Net Income
AND
Stock Price = Dividend / (R - G)
Price = Net Income * (P-to-E)
= Net Income * 15
and Price = Dividend / (R-G)
= Net Income * Dividend Yield / (R-G)
Then
Net Income * 15 = Net Income * 0.50/(0.075-0.045)
Since 15 != 16.667, the stock is undervalued.
If you require an 8 percent return and must invest USD500,000, which of the investment opportunities in Exhibit 1 should you prefer?
Opportunity 1
B.Opportunity 2
C.Indifferent between the two opportunities.
C is Correct.
Q. Italian one-year government debt has an interest rate of 0.73 percent; Italian two-year government debt has an interest rate of 1.29 percent. The breakeven one-year reinvestment rate, one year from now is closest to:
A.1.01 percent.
B.1.11 percent.
C.1.85 percent.
C is Correct.
The current exchange rate between the euro and US dollar is USD/EUR1.025. Risk-free interest rates for one year are 0.75 percent for the euro and 3.25 percent for the US dollar. The one-year USD/EUR forward rate that best prevents arbitrage opportunities is:
A.USD/EUR1.051.
B.USD/EUR1.025.
C.USD/EUR0.975.
A is correct. To avoid arbitrage opportunities in exchanging euros and US dollars, investors must be able to lock in a one-year forward exchange rate of USD/EUR1.051 today. The solution methodology is shown below.
In one year, a single unit of euro invested risk-free is worth EUR1.0075 (=e0.0075).
In one year, a single unit of euro converted to US dollars and then invested risk-free is worth USD1.0589 (=1.025*e0.0325).
To convert USD1.0589 into EUR1.0075 requires a forward exchange rate of USD/EUR1.051 (=1.0589/1.0075).
A stock currently trades at USD25. In one year, it will either increase in value to USD35 or decrease to USD15. An investor sells a call option on the stock, granting the buyer the right, but not the obligation, to buy the stock at USD25 in one year. At the same time, the investor buys 0.5 units of the stock. Which of the following statements about the value of the investor’s portfolio at the end of one year is correct?
A.The portfolio has a value of USD7.50 in both scenarios.
B.The portfolio has a value of USD25 in both scenarios.
C.The portfolio has a value of USD17.50 if the stock goes up and USD7.50 if the stock goes down.
A is correct.
A consultant starts a project today that will last for three years. Her compensation package includes the following:
she expects to invest these amounts at an annual interest rate of 3%, compounded annually until her retirement 10 years from now, the value at the end of 10 years is closest to:
A.
$618,994.
B.
$566,466.
C.
$460,590.
B is the correct answer.
An individual wants to be able to spend €80,000 per year for an anticipated 25 years in retirement. To fund this retirement account, he will make annual deposits of €6,608 at the end of each of his working years. He can earn 6% compounded annually on all investments. The minimum number of deposits that are needed to reach his retirement goal is closest to:
A.
28.
B.
40.
C.
51.
B is Correct.
A financial contract offers to pay €1,200 per month for five years with the first payment made immediately. Assuming an annual discount rate of 6.5%, compounded monthly, the present value of the contract is closest to:
A.
€61,330.
B.
€61,663.
C.
€63,731.
B is the correct answer.
A consumer purchases an automobile using a loan. The amount borrowed is €30,000, and the terms of the loan call for the loan to be repaid over five years using equal monthly payments with an annual nominal interest rate of 8% and monthly compounding. The monthly payment is closest to:
A.
€608.29.
B.
€626.14.
C.
€700.00.
A is correct.
