Professional Documents
Culture Documents
1. The markets in which new securities are issued by corporations to raise funds are termed as
A. Secondary Market
B. Stock Market
C. Commodity Market
D. Primary Market
2. Adam, a retail investor purchased a share of cadila at $340 and sold it at $400 after holding on the
stock for one year. During this one year he received a dividend of $25. Calculate this rate of return
(RoR).
A. 17.64%
B. 25%
C. 21.25%
D. None of above
3. Inflationary risk is more associated with which of the following investment options?
A. Real estate
C. Common stocks
D. Mutual funds
4. Ashoka enterprises ltd. has sold an entire lot of 2,00,000 equity shares each of 10/- to catholic
bank. The bank in turn will offer those shares to general public at 12/- per share. Which of the
following floatation is using in the process of share issue?
B. private placement
A. A bank loan
B. A bank overdraft
7.
A. 16.57%
B. 17.16%
C. 16.75%
D. 17.65%
8. Price and absolute spreads are ________ related, whereas, price and proportionate spreads are
_________related.
A. positively, negatively
B. negatively, positively
C. positively, not
D. not, negatively
9. The following table provides the market values of stocks in one’s portfolio and their expected
rates of return. What is the expected rate of return for the portfolio?
A. 0.5421
B. 0.1126
C. 0.2356
D. 0.2467
10. ____ orders adds to price pressure i.e. buying when price is rising and selling when price is
falling while ____orders does the opposite i.e. buy when price is falling and selling when price is
rising.
A. Stop, limit
B. Limit, stop
C. Margin, stop
D. Limit, margin
Section B (+1, -0.5) 8Q - 8M – 25 min
1. The weights, returns, standard deviation of returns of three stocks (P, Q and R) along with the
correlation matrix of returns of such stocks are as below. Find the portfolio return and risk.
2. Chetana owns a portfolio of stocks that have a market value of Rs. 50,000, and an estimated
CAPM beta of 0.90.
(a) If the market risk premium is 9%, and the risk-free rate is 6%, what is the expected
equilibrium return on this portfolio?
A. Rs. 5867
B. Rs. 7142
C. Rs. 7050
D. Rs. 6940
a) Using CAPM model we can derive the expected return on the portfolio as the information
provided to us include:
Beta = 0.9
(b) If Chetana decides to sell one of her holdings that has a market value of Rs. 10,000 and a
beta of 0.75, and invest the proceeds in another stock having a beta of 1.3, what is the new
equilibrium expected return on her portfolio?
A. Rs. 7158
B. Rs. 7234
C. Rs. 7654
D. Rs. 7854
Sol: b) In the second question, we need to calculate the expected return if one of the securities
worth
Rs. 10000 is sold and another security of different beta is purchased.
.9 = .75* W1 + β2 * W2
.9 = .75*1/5 + β2 * 4/5
β2 = .83
Now, we can calculate the beta of the new portfolio with β1 as 1.3 and β2 as .83.
This beta can be used for calculating the expected return rate,
Therefore, the expected return on the portfolio now comes out to be .14316* Rs. 50000 = Rs. 7158.
4. A bond with a coupon rate of 8% makes semiannual coupon payments of $40 on January
15 and July 15 of each year. The Wall Street journal reports the ask price for the bond on
January 30 at 100:07. What is the invoice price of the bond? Assume par value as $1000.
A. $1005.48
B. $1009.18
C. $1008.18
D. $1007.48
Sol: The semi-annual interest payment is $40 and there were 15 days since the last interest
payment on January 15. If the settlement date fell on a interest payment date, the bond price
would equal the listed price: 100.2188% × $1,000.00 = $1,002.19 (7/32 = 1/4 = .2188, so 100-
08 = 100.2188% of par value). Since the settlement date was 31 days after the last payment
date, accrued interest must be added. Using the above formula, with 184 days between coupon
payments, we find that:
Therefore, the actual purchase price for the bond will be $1,002.19 + $3.29 = $1,005.48.
5. Consider a 9% coupon bond selling for Rs.980.20 with 3 years until maturity making annual
coupon payments. The interest rates in the next 3 years will be, with certainty, R1 = 8%, R2 =
10% and R3 = 12%. Calculate the yield to maturity and realized compound yield of the bond.
Sol:
Solution 1 (b) 6.6 96.6 990.1
0.097566
Year Coupon PV
1 90 81.99708 81.9926
2 90 74.7058 74.69763
3 1090 824.3169 824.1817
981.0198 980.872
YTM 9.766
6. Pension fund pay lifetime annuities to recipients. If a firm will remain in business
indefinitely, the pension obligation will resemble perpetuity. Suppose, therefore, that you are
managing a pension fund with obligations to make perpetual payments of $5 million per year
to beneficiaries. The yield to maturity on all bonds is 16%.
a. If the duration of 5-year maturity bonds with coupon rates of 12% (paid annually)is 4 years
and the duration of 20-year maturity bonds with coupon rates of 6% (paid annually) is 11 years,
how much of each of these coupon bonds (5 year bond and 20 year bond) will you want to hold
to both fully fund and immunize your obligation?
b. If the duration of 5-year maturity bonds with coupon rates of 12% (paid annually)is 4 years
and the duration of 20-year maturity bonds with coupon rates of 6% (paid annually) is 11 years,
What will be the par value of your holdings in the 20-year coupon bond?
A. $45.64 million
B. $35.64 million
C. $33.64 million
D. $43.64 million
8. Pension fund pay lifetime annuities to recipients. If a firm will remain in business
indefinitely, the pension obligation will resemble perpetuity. Suppose, therefore, that you are
managing a pension fund with obligations to make perpetual payments of $5 million per year
to beneficiaries. The yield to maturity on all bonds is 16%.
c. How will these values in both the bonds (5 year and 20 year) will change next year if yield
to maturity drops to 15%.
1. Intel Inc. expects to earn $9.5 per share for each of the future operating periods (beginning
at time 1), today if the firm makes no investments and returns the earnings as dividends to the
shareholders. However, CEO of the co. has discovered an opportunity to retain and invest 25%
of the earnings beginning 3 years from today. This opportunity to invest will continue for each
period indefinitely. He expects to earn 10% on this new investment, the return beginning one
year after each investment is made. The firm’s equity discount rate is 12%.
a) What is the price per share of stock without making any investments?
A. 75.123
B. 79.167
C. 77.869
D. 73.246
Sol:
EPS1 9.5
R 12%
Return on new investment 10%
NPVGO at t = 0 -3.322
Price of share 75.845
2. Intel Inc. expects to earn $9.5 per share for each of the future operating periods (beginning
at time 1), today if the firm makes no investments and returns the earnings as dividends to the
shareholders. However, CEO of the co. has discovered an opportunity to retain and invest 25%
of the earnings beginning 3 years from today. This opportunity to invest will continue for each
period indefinitely. He expects to earn 10% on this new investment, the return beginning one
year after each investment is made. The firm’s equity discount rate is 12%.
b) If new investment is expected to be made, what would the price of the stock be?
A. 73.589
B. 72.356
C. 77.879
D. 75.845
3. The BMC Corp. has a 8 percent coupon bond outstanding. The Simon Company has a 12
percent bond outstanding. Both bonds have 12 years to maturity, make semi-annual payments,
and have a YTM of 10 percent.
a) If interest rates suddenly rise by 2 percent, what is the percentage change in the price of the
BMC Corp bond?
A. -13.11%
B. -11.11%
C. -14.36%
D. -12.36%
Sol:
ytm (new2) 8% 8%
ytm per period (new2) 4% 4%
P0(new2) 1000 1304.94
4. The BMC Corp. has a 8 percent coupon bond outstanding. The Simon Company has a 12
percent bond outstanding. Both bonds have 12 years to maturity, make semi-annual payments,
and have a YTM of 10 percent.
b) If interest rates suddenly fall by 2 percent, what is the percentage change in the price of the
Simon Company bond?
A. 12.67%
B. 16.50%
C. 14.67%
D. 15.78%
5. The risk-free rate in a given economy is 5%, and the expected rate of return on the market
is 10%. I am buying a firm with a perpetual annual cash flow of Rs. 2,000. If I think the beta
of the firm is 0.8, when the beta is in fact 1.6, how much more will I offer for the firm than it
is really worth?
A. Rs.7738 more
B. Rs.6838 more
C. Rs.5838 more
D. Rs.8738 more
Sol: The question requires me to calculate the amount which I am willing to pay more for which the
stock is worth.
This information can be used to get the expected return on the stock which will help us get the
discount rate for deriving the current price.
The same steps can be followed while calculating returns when beta is 1.6
Therefore, when beta is 1.6 the expected return turns out to be 13%.
This shows that the actual price is less than the calculated price and thus is undervalued. We can
give Rs.6838 more.
6. Suppose you have the following investment options available: (a) Risk-free asset with a rate
of return 8%, and (b) Risky asset earning an expected return 20%, and standard deviation
40%. If you construct a portfolio of the above two instruments with a standard deviation of
30%, what will the expected return of your portfolio be?
A. 11%
B. 13%
C. 17%
D. 19%
Sol: Given :
30% = 40%*w
.°. w = 30%/40% = 0.75
This implies that the investment is to be made as: 75% in the risky asset and 25% in risk free asset.
Thus, the expected return can be calculated using the following formula:
Expected return(p)= W1 *expected return (a1) + W2* expected return(a2) = .75*20% + .25*8% = .17
Therefore, the expected return on the portfolio with 30% standard deviation is 17%.
7. ABC Co. earned $16 million for the fiscal year ending yesterday. The firm paid out 25% of
its earnings as dividends yesterday. The firm will continue to pay out 25% of its earnings as
annual, end of year dividends. Retained earnings = 75% for use in projects. The co. has $1.5
million of shares outstanding. The current stock price is $90. The historical return on equity
of 13% is expected to continue in the future. What is the required rate of return on the stock?
A. 11.579%
B. 12.498%
C. 14.634%
D. 10.765%
Sol:
g 9.750%
Dividend today 1.64625
R 11.579%
8. Sapient technologies is growing quickly. Dividends are expected to grow at a rate of 15% for
the next three years, with the growth rate falling off to a constant 3% thereafter. If the required
return is 14% and the company just paid a $1.8 dividend, what is the current share price?
A. 23.45
B. 26.12
C. 29.89
D. 27.05
Sol:
R 14%
Div0 1.8
g1 15%
g2 3%
Div1 2.07
g1 for t years t = 3
PV of growing annuity for 3 years(AT T = 0) 5.50
Div at t =4 2.87445375
g2 5%
PV of growing perpetuity (at t= 3) 31.938375
Total PV 27.05
1. A newly issued bond has a maturity of 10 years and pays a 7% coupon rate (with coupon
payments coming once annually). The bond sells at par value.
A. 62.344
B. 64.933
C. 67.235
D. 68.764
Sol:
2. A newly issued bond has a maturity of 10 years and pays a 7% coupon rate (with coupon
payments coming once annually). The bond sells at par value.
a) What is the duration of the bond?
A. 7.515 years
B. 6.515 years
C. 6.675 years
D. 7.975 years
3. A newly issued bond has a maturity of 10 years and pays a 7% coupon rate (with coupon
payments coming once annually). The bond sells at par value.
b) If the yield to maturity increases to 8%, the bond price will fall to 93.29% of par value, a
percentage decrease of 6.71%. What percentage price change would be predicted by the
duration rule?
A. -6.07%
B. -5.67%
C. -7.02%
D. -6.67%
4. A newly issued bond has a maturity of 10 years and pays a 7% coupon rate (with coupon
payments coming once annually). The bond sells at par value.
b) If the yield to maturity increases to 8%, the bond price will fall to 93.29% of par value, a
percentage decrease of 6.71%. What percentage price change would be predicted by the the
duration-with-convexity rule?
A. -6.70%
B. -5.67%
C. -7.02%
D. -6.07%