Question 1 (10 Marks)

A Eurobond is a debt instrument that's denominated in a currency other than the

home currency of the country or market in which it is issued. Eurobonds are
frequently grouped together by the currency in which they are denominated, such
as Eurodollar or Euro-yen bonds.

Required

a. Identify the three most important determinants of the price of a bond. Describe the
effect of each. (4 marks)

b. Discuss the difference between a foreign bond (e.g., a Samurai) and a Eurobond
(e.g., a Euroyen issue). (3 marks)

c. Is it better to buy a high coupon bond or a low coupon bond? (3 marks)

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Question 2 (21 Marks)

Today’s date is 21 July 2023. Consider the following debt securities.

Official Cash Rate: is 1.01%

Bank Bill 1: A bank bill with a face value of $3.87 million, which has 15 days to maturity
and is trading at a yield of 0.98%

Bank Bill 2: A bank bill with a face value of $10.51 million which has 204 days to
maturity and is trading at a yield of 1.73%

Bond 1: A bond with a face value of $2.46 million with maturity of 13 August 2029,
paying coupons semi-annually at a rate of 2.15% and trading at a yield of 1.82% p.a.

Bond 2: A bond with a face value of $91.43 million, which matures on 14 December
2029, paying coupons semi-annually at a rate of 2.47% trading at a yield to maturity of
1.95% p.a.

Required

a. Describe the shape of the yield curve. (1 mark)

b. What is the fair market price for?

I. Bank bill 1 (1 marks)

II. Bank bill 2 (1 marks)

III. Bond 1 (4 marks)

IV. Bond 2 (4 marks)

c. If you sold bond 2 at 33 days later at a yield of 1.725% how much profit
would you make? What is your return over this period? What is your
annualised return? Compared with long term returns from cash, was this a
good return? Explain why? (6 marks)

d. If you sold bank bill 2 at 86 days later at a yield of 1.34%:

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i) What is your profit or loss? (1 marks)

ii) What is your return over the period? (1 mark)

iii) What is your annualised return? (1 mark)

iv) Compared with long term returns from cash, was this a good
return? Explain why? (1 mark)

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Question 3 (10 Marks)

The risk free rate is 1.75% and an asset has a sensitivity to the risk factors outlined in
the table below. Using the information provided, answer the following questions.

Factor Market return Size Value

Sensitivity β = 1.10 s = -0.46 h = -0.44
Risk premium ERP = 7.30% SMB = 2.15% HML = 7.10%

Required

a. An investor isn’t sure which model is appropriate to value stocks and uses
both CAPM and Fama-French to confirm the CAPM

i. What is the problem with this approach? (1 mark)

ii. What is the expected return of the stock using CAPM? (1 mark)

iii. What is the expected return of the stock using Fama-French? (1 mark)

iv. By how much does the asset’s expected return differ between the two models
and does CAPM overvalue or undervalue the stock? (1 mark)

b. Suppose the above asset is observed in the market trading at a price such that
its expected return was 6.75%. What strategy would you suggest profiting from
this situation, assuming:

i. The CAPM was the correct pricing model, and explain your reasoning (1 mark)

ii. The Fama-French three-factor model was the correct pricing model and
explain your reasoning (1 mark).

c. Suppose you are considering the purchase of shares in the XYZ mutual fund.
As part of your investment analysis, you regress XYZ’s monthly returns for the
past five years against the three factors specified in the Fama and French

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models. This procedure generates the following coefficient estimates: market
factor = 1.2, SMB factor = −0.3, HML factor = 1.4. Explain what each of these
coefficient values means. What types of shares is XYZ likely to be holding? (4
marks)

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Question 4 (11 Marks)

Consider that you have $3,800,000 to invest equally across four assets and that your
analysis of these four assets provides the information in the two tables below. To 2
decimal places answer the following questions

Asset A B C D
Beginning Price $5.52 $4.73 $17.05 $214.89
Expected Price $6.24 $4.91 $18.26 $217.82
Standard deviation 28.00% 14.00% 7.00% 5.00%

Correlation A B C D
A 1.0 0.7 0.6 -0.3
B 0.7 1.0 0.4 -0.3
C 0.6 0.4 1.0 -0.1
D -0.3 -0.3 -0.1 1.0

Required

a. What is the expected return on this portfolio, in percentage terms? (2 marks)

b. What is the value of this portfolio after 12 months in dollars and cents? (1
mark)

c. What is the standard deviation of this portfolio? (14 marks)

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Question 5 (11 Marks)

An investor buys an asset at an initial cost of $3,430,000. The investor believes that at
the end of one year, the asset could have four possible values. These values are
$3,275,000, $3,380,000, $3,760,000, and $3,025,000 with respective probabilities of
10%, 25%, 45% and 20%.

Required

a. What is the expected outcome with respect to the asset’s value? (1 marks)

b. What is the expected return on the asset? (1 mark)

c. What is the expected standard deviation of the return of the asset? (1 marks)

d. What is the coefficient of variation of the asset? (1 mark)

e. What is the fair value of a stock that has a dividend just paid of $2.04, which is
expected to grow indefinitely at 2.42% pa, and that stock has a cost of capital of
9.75%? (1 mark)

f. If the expected future dividend yield of a stock is 3.17% and the stock’s cost of
capital is 10.25%, what is its expected growth rate? (1 mark)

g. If a stock with an expected infinite growth rate of 2.41% pa is trading at

$98.45, what must its cost of capital be to justify the assumption of the next
dividend being $6.82? (1 mark)

h. What is the post-tax dividend per share received by an investor who pays
marginal tax at 25% where the company has earnings of $175 on which it pays
tax at 28%, has a 90% payout ratio and the dividend is franked at 80%? (1 mark)

i. In dollars and cents, what would you pay for a company that generated profits
of $1.85 per share on its 120 million shares from which it paid a dividend of $
0.87 per share and has equity capital of $2050 million if it’s cost of capital is
11.85%? (2 marks)

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Question 6 (7 Marks)

Consider the following after-tax cash flows for three mutually-exclusive projects.

Year Project A Project B Project C

0 -7,020,000 -10,350,000 -14,875,000
1 3,180,000 1,050,000 3,400,000
2 4,230,000 2,200,000 5,000,000
3 5,125,000 4,530,000 6,125,000
4 5,975,000 5,275,000 6,590,000
5 6,395,000 7,140,000
6 7,500,000

Clearly, the three projects have different scale (i.e., initial investment), as well as
differing lives. Assume a 15.00% p.a. discount rate applies to all projects

Required

a. Calculate the NPV for each project. (6 marks)

b. Which project will you accept? Why? (1 mark)

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Question 7 (8 Marks)

Consider the following table which provides a comparison of the returns for a portfolio
and its benchmark.

Year Portfolio Benchmark Portfolio Benchmark Difference Square of

Return Return Index Index Rp - Rb difference
(Rp) (Rb) (Rp - Rb)^2
0 1.0000 1.0000
1 8.75% 10.50%
2 7.25% 3.75%
3 17.50% 13.25%
4 -6.50% -6.75%
5 11.25% 7.50%
Annualized
Return (CAGR)
Portfolio Alpha
(α)
Sum
Tracking error
(σTE)
Information
Ratio (IRp)

Required

a. Calculate the annualised return of the portfolio and the benchmark (2 marks)

b. Calculate the portfolio alpha (1 mark)

c. Calculate the tracking error of the portfolio (2 marks)

d. Calculate the information ratio of the portfolio (1 mark)

e. If the risk free rate is 1.75%, the return of the market is 9.85%, the value risk
premium is 2.15%, the small cap premium is 2.03%, the momentum premium is
43.10% and the portfolio’s exposure to these three factors was -0.41, -0.58, and
0.23, respectively, as a percentage to 2 decimal places determine the amount of
Carhart’s alpha that was produced by the manager of the portfolio (2 marks)

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Question 8 (9 Marks)

Two parties wish to enter into a swap to take advantage of the other party’s comparative
advantage and approach you, an investment bank.

Party A wishes to borrow at a fixed rate, but if it went into the market, it could borrow
fixed at 11.75%. However, if it borrowed floating, it could borrow at BBSW + 2.35%

Party B wishes to borrow floating, and if it did so, it could borrow at BBSW +1.45%.
However, if it borrowed fixed, it could borrow at 9.35%

The investment bank charges 0.15% on each leg of the swap

Required

Determine the swap strategy that maximises the benefit of the swap for each party,
including your investment bank.

a. Specify the swap cashflows (6 marks)

b. Calculate the borrowing costs and the benefit to each party from entering into
the swap. (3 marks)

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Question 9 (7 Marks)

Consider the information for XYZ provided in the two tables below and answer the
following questions.

CONSOLIDATED BALANCE SHEETConsolidated Balance Sheet

2022 2021
ASSETS
Current Assets
Cash and cash equivalents 44.9 87.2
Trade and other receivables 274.7 348.7
Derivative financial instruments 2.7 1.1
Inventories 317.6 345
Current tax assets 3 13.3
Assets held for sales 60.5 0
Other current assets 26.9 37.9
Total Current Assets 730.3 833.2

Non-current assets
PPE 844 911.6
Intangible assets 588.1 589.5
Total non-current assets 1628.5 1673.9
Total assets 2358.8 2507.1

LIABILITIES
Current Liabilities
Trade and other payables 449.2 477.4
Other liabilities 16.5 42.8
Derivatives financial instruments 1.7 2.1
Lease liabilities 21 25.5
Current tax liabilities 10.3 18.4
provisions 107.3 119.8
Total current liabilities 606 686

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Non-current liabilities
Borrowings 308.5 391.9
Lease liabilities 93.3 79.1
other liabilities 0 0.5
provisions 16.9 24.6
deferred tax liabilities 71.7 58.5
Total non-current liabilities 490.4 554.6
Total liabilities 1096.4 1240.6

Net assets 1262.4 1266.5

EQUITY
Share capital 878.2 875.7
Reserves 26.9 25.9
Retained earnings 357.3 364.9
Capital and reserves attributable to 1262.4 1266.5
owners
Total equity 1262.4 1266.5

CONSOLIDATED COMPREHENSIVE INCOME STATEMENT

2022 2021
Revenues 2525.7 2317.8
Other Income 502.1 361.5
Expense -1836.4 -1612.7
EBITDA 1191.4 1066.6
Depreciation and Amortization -429.9 -373.0
EBIT 761.5 693.6
Interest -101.2 -102.3
NPBT 660.3 591.3
Tax 198.1 177.4
Net Profit After Tax 462.2 413.9

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Required

a. To 2 decimal places calculate the total assets turnover for XYZ in 2022 (1 mark)

b. In percentage terms and to 2 decimal places calculate the interest coverage ratio for
XYZ for 2022 (1 mark)

c. Calculate the gross profit margin for XYZ in 2022 in percentage terms to 2 decimal
places (1 mark)

d. Calculate the return on assets for XYZ over 2022 in percentage terms to 2 decimal
places (1 marks)

e. Calculate the return on equity for XYZ over 2022 in percentage terms to 2 decimal
places (1 marks)

f. Calculate the return on invested capital for XYZ over 2022 in percentage terms to 2
decimal places (2 marks)

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