Nptel Assignments

NPTEL ONLINE COURSE
JULY 2022
SECURITY ANALYSIS & PORTFOLIO MANAGEMENT
SOLUTIONS TO ASSIGNMENT NO 1
1 Consider the following information pertaining to XYZ Ltd., a company

registered under the Indian Companies Act 2013:
Capital Structure:
Equity Shares: INR 300 million
10% participating preference shares: INR 100 million
The preferences shareholders are entitled to participate in the surplus after

payment of preference dividend at the fixed rate on prorate basis with
equity shareholders.
The profit after tax of the company for the year ended March 31, 2022 is
INR 90 million.
Assuming that the company decides to distribute the entire amount of

profits after tax, the total amount out of profit after tax that would be
distributed to preference shareholders works out to (in million INR):
(A) 30
(B) 24
(C) 10
(D) 14
Solution:
Profit after tax: 90.00

Less preference dividend (10%) 10.00
Profit after preference dividend (X): 80.00
Total capital: 400.00
Preference capital: 100.00
Proportion of X distributed to preference capital: 20.00
Total profit allocated to preference shareholders: 30.00
2 XYZ Ltd is a limited company registered under the Indian Companies Act
2013. Since the company has been incurring losses over the past few years
and the future for the company also appears bleak, the shareholders have
resolved to wind up the company. As on the relevant date for settlement of
dues on account of winding up, the following information is available:
Realizable value of its assets (net of current liabilities): INR 50 million

Long term debt: INR 55 million
Fully paid preference capital: INR 7.50 million.
Fully paid equity capital: INR 50 million
The amount that would be allocated to the long term lenders against their
lending of INR 55 million on settlement of liquidation dues and distribution
of resources would be (in million INR):
(A) 50
(B) 30
(C) 55
(D) 25
Solution:
Since the shares are fully paid up, the concept of “limited liability” will
operate and the shareholders will not be required to bring in further funds
notwithstanding the fact that the claims of creditors are not fully satisfied.
Hence, the creditors will be paid only out of the resources realized by the
liquidation of the assets even if these are not adequate to meet their claims
completely.
3 Which of the following is a feature of futures contracts:
(A) Futures are customized through negotiation between parties.

(B) Futures have default risk.
(C) Futures are not tradeable.
(D) Taking positions in futures contracts entails deposit of margin.
Solution:
Taking position in futures contracts entails deposit of margin in line with

the requirements and specifications of the exchange at which the contracts
are listed for trading.
4 XYZ Ltd is a company that is incorporated and registered under the

provisions of the Indian Companies Act 2013. Since the company was
accumulating losses, the shareholders resolved to liquidate the company.
The following information is available as on the date of settlement of claims
of various stakeholders in the liquidation proceeds (All figs are in millions):
Realizable value of existing assets (net of current liabilities): INR 500

Long term debt outstanding: INR 550
Equity capital: INR 250
The equity capital consists of 50 million equity shares of nominal (face)

value INR 10 each with INR 5 paid up on each share.
The amount that would be recoverable by the long term lenders against
their claim of INR 550 million on the distribution of liquidation resources
would be (in million INR):
(A) 500
(B) 300
(C) 550
(D) 250
Solution:
When a company limited by shares goes into liquidation and the realization
from the assets is inadequate to pay off the debts, the holders of partly paid
shares in the company (if any) are required to contribute to the maximum
extent of the unpaid amount on the shares for paying off the creditors.
Hence, in the given situation, the shareholders will bring in additional
capital to pay off the creditors in full.
5 XYZ Ltd is an Indian company incorporated under the Companies Act 2013.
Its capital structure is as follows:
Capital Structure (INR in millions)
Equity Capital (1 million equity shares of INR 10 each fully paid): 10.00
10% long term loan (Taken on April 1,2022): 10.00
Its EPS for the year ended March 31,2022 was INR 14 per share. It expects
its EBIT (Earnings before interest & taxes) to increase by 25% for the year
ended March 31, 2023. The tax rate is expected to remain at 30%. The
projected EPS for the year ended March 31, 2023 (in INR) is:
(A) 16.80
(B) 10.00
(C) 14.40
(D) 20.50
Solution:
21-22 year profit (EPS x No of shares): 14.00

Tax rate: 30%
Profit before tax: 20.00
Interest for the year: 0.00
21-22 year EBIT: 20.00
Hence, 22-23 year EBIT: 25.00
Interest (22-23): 1.00
PBT: 24.00
Tax: 7.20
PAT: 16.80
No of shares: 1.00
EPS (22-23): 16.80
6 For a given corporate entity, the source of capital that enjoys the highest
risk premium in the market is:
(A) Preference shares
(B) Long term secured loans
(C) Equity shares
(D) Short term unsecured loans
Solution:
The equity shareholders of a company take the maximum risk i.e. the
substantive business risk. Hence, they will command the highest return.
7 A European call option is the right to buy an asset at a predetermined price

(called exercise price) on a predetermined date called maturity date).
Consider a call option on XYZ stock written at an exercise price of 1,000

with a maturity on October 1, 2022. The call price is 30. You buy the call
option on this date. If the stock price on October 1, 2022 turns out to be
900, the net profit (P) or loss (L) you make on the investment after
accounting for the call price is:
(A) (L)20
(B) (L)30
(C) (P)20
(D) (P)30
Solution:
A call option is a right to buy the underlying asset at the exercise price on
the maturity date. It will be exercised only if the market price of the asset
on the maturity date exceeds the exercise price whence the holder can buy
the asset at the exercise price (which is lower) and sell the asset in the
market at the market price (which is higher). If the market price is lower
than exercise price, then the holder will simply let the option lapse.
However, he will lose the premium that he had paid upfront for buying the
option.
8 An implicit cost of adding debt capital in a company is:
(A) The tax liability would increase

(B) The EPS (Earnings per share) will definitely decrease
(C) Cost of equity would increase
(D) All of the above
Solution:
Addition of debt to the capital of a firm increase its financial risk since debt
carries a fixed charge by way of interest. Hence, the shareholders who are
the owners of the firm will demand a higher return for investment.
9 A European put option is the right to sell an asset at a predetermined price

(called exercise price) on a predetermined date called maturity date).
Consider a put option on XYZ stock written at an exercise price of 1,000

with a maturity on October 1, 2022. The put price is 30. You buy the put
option on this date. If the stock price on October 1, 2022 turns out to be
900, the net profit (P) or loss (L) you make on the investment after
accounting for the put price is:
(A) (L)20
(B) (P)70
(C) (P)20
(D) (P)30
Solution:
A put option is a right to sell the underlying asset at the exercise price on
the maturity date. It will be exercised only if the market price of the asset
on the maturity date is lower than the exercise price whence the holder
can buy the asset in the market at the market price and sell the asset at the
exercise price (which is higher). Thus, the profit from the put would be
max(K-ST,0)-p=100-30=70.
10 The futures price at the expiration date of the futures contract:
(A) Equals the price of the underlying asset on that date.

(B) Equals the price of the counterparty on that date.
(C) Equals the value of the hedged asset.
(D) None of the above.
Solution:
This is required by the principle of no-arbitrage.

NPTEL ONLINE COURSE
JULY 2022
1 You are given the following information with respect to a level coupon bond:
Coupon Rate: 30% p.a.

Frequency of coupons: Annual
Term to maturity: 2 years
Face Value: 1,000
Redemption Value: 1,500
One Year Spot Rate S(0,1): 8% p.a. annually compounded
Two-Year Spot Rate S(0,2): 12% p.a. annually compounded
The intrinsic value (in INR) of the bond is closest to:
(A) 1,101
(B) 1,214
(C) 1,928
(D) 1,713
Solution:
T
Ct 300 1800
IV =  = + = 277.78 + 1434.95 = 1712.73
(1 + S0t ) 1 + 0.08 ( 1 + 0.12 ) 2
t
t=1
YEAR 0 1 2
FACE VALUE 1000 1000
COUPON 0.3 0.3
COUPON CASH FLOW 300 300
PRINCIPAL REDEMPTION 0 1500
TOTAL CASH FLOW 300 1800
SPOT RATES 0.08 0.12
DISCOUNT FACTOR 0.92593 0.79719
DCF 277.778 1434.95
DCF VALUE 1712.73
2 We define yield to maturity as the single discount rate that equates the present value
of all future cash flows from the bond to the current market price. Consider a bond with
the following features:
Face Value: 1,000
One Year Spot Rate S(0,1): 8% p.a. annually compounded
Two-Year Spot Rate S(0,2): 12% p.a. annually compounded
Assuming that the current market price of the bond equals its intrinsic value, its yield
to maturity (in % p.a.) is closest to:
(A) 9.33
(B) 11.65
(C) 11.82
(D) 10.15
Solution
T
Ct 300 1800
IV =  = + = 277.78 + 1434.95 = 1712.73
( 1 + S0t ) 1 + 0.08 ( 1 + 0.12 ) 2
t
t=1
T
Ct 300 1800
IV = 1712.73 = P0 =  = + whence y = 0.1165 or 11.65%
(1 + y ) 1 + y (1 + y )2
t
t=1
YEAR 0 1 2
COUPON 0.3 0.3
COUPON CASH FLOW 300 300
PRINCIPAL REDEMPTION 0 1500
TOTAL CASH FLOW 300 1800
CURRENT MP 1712.73
CASH FLOW STREAM -1712.73 300 1800
YTM 0.11647
3 Consider two securities A & B in risk-return space with risk along the X axis and expected
return along the Y axis. The security B lies below and to the right of A. Which of the
following statements is true:
(A) A is more risky than B on a standalone basis
(B) There is equilibrium between A & B in an efficient market
(C) There would be greater demand for A with consequential demand-supply
realignment with price correction.
(D) There would be greater demand for B with consequential demand-supply
realignment.
Solution:
Clearly, asset A has a lower risk and higher expected return than B. Thus, the two assets
cannot be in equilibrium. There would be buying pressure on A and selling pressure on
B. This disequilibrium will result in price correction whence A’s price will rise and its
expected return will decrease with the converse for B.
4 For the following T-bill investment, the banker’s discount yield (in % p.a.) is closest to:
Face Value of bill: 1,00,000

Price of acquisition: 98000
Days to maturity: 60
(A)12.55
(B) 12.60
(C) 12.00
(D) 11.88
Solution:
P1 − P0 360 100000 − 98000 360

BDY =  =  = 0.12
P1 n 100000 60
5 For the following T-bill investment, the difference between the effective annual yield
on a 365 day basis and the banker’s discount yield (in % p.a.) is closest to:

Price of acquisition: 98000
(A) 0.55
(B 1.42
(C) 1.08
(D) 1.02
Solution:
P1 − P0 360 100 − 98 360

BDY =  =  = 0.12
P1 n 100 60
365 n
P 
365 60
 100 
EAY =  1  −1=   − 1 = 0.1308
 P1   98 
Difference = 1.08%
PURCHASE PRICE OF T BILL 98

REDEMPTION VALUE 100
HOLDING PERIOD 60
ANNUAL DAY COUNT 365
DAY COUNT FRACTION 6.08333333
EFFECTIVE YIELD 0.13077112
DISCOUNT YIELD 0.12
DIFFERENCE 0.01077112
6 For the following T-bill investment, the effective annual yield (in % p.a.) is closest to:

Bankers’ Discount Yield at acquisition: 12% p.a.
Holding Period: 30 days
Bankers’ Discount Yield at disposal: 6% p.a.
(A) 20.29
(B) 16.00
(C) 16.30
(D) 15.50
Solution:
 n   60 
P0 = F  1 − d 0 0  = 100  1 − 0.12  = 98.00
 360   360 
 n   30 
P1 = F  1 − d1 1  = 100  1 − 0.06  = 99.50
 360   360 
365 n
P 
365 30
 99.50 
EAY =  1  −1=   − 1 = 0.2029 or 20.29%
 P1   98.00 
DISC YIELD AT ACQUISITION 0.12

REMAINING TENURE 60
ANNUAL DAY COUNT (MM) 360
PURCHASE PRICE 98
DISC YIELD AT ACQUISITION 0.06

REMAINING TENURE 30
ANNUAL DAY COUNT (MM) 360
SELLING PRICE 99.5
HOLDING PERIOD 30
ANNUAL DAY COUNT 365
INVERSE DAY COUNT FRACTION 12.1666667
EFFECTIVE YIELD 0.20299428
7 Suppose we have six assets, A,B,C,D,E,F which pay off according to the roll of a fair die.
If the die roll is equal to the asset's position in the above sequence (i.e. 1 corresponds
to A, 2 corresponds to B and so on), it pays INR 100 and zero otherwise. The amount
that the set of all the assets will trade for is closest to:
(a) 100
(b) 100/6
(c) 0
(d) 600
Solution:
A long position in the set of all the assets will guarantee the holder a payoff of INR 100
on the toss of the die, whatever may be the outcome of the toss. Hence, it will trade for
INR 100.
8 Consider a portfolio X consisting of one call option C and a put option. P. The call option
C pays INR 100 if the spot price of the underlying at maturity finishes equal to or above
its exercise price of INR 1,000. The put option P pays INR 100 if the spot price at maturity
of the same underlying finishes below the exercise price of INR 1,000. Both options have
maturities of one year from now. If risk free interest rate is 12% p.a. compounded
continuously, the arbitrage free value (in INR) in an efficient market of the portfolio X
will be closest to:
(A) 200.00
(B) 177.38
(C) 115.50
(D) 88.69
Solution:
Payoff of call C: 0 if S<1,000 and 100 if S>1,000 or S=1,000

Payoff of put P: 100 if S<1,000 and 0 if S>1,000
Payoff of combination: 100 if S<1,000, 100 if S>1,000 and 100 if S=1,000

Thus, the combination will trade for the present value of 100.
9 Consider a portfolio X consisting of one call option C and a put option. P. The call option
C pays INR 100 if the spot price of the underlying at maturity finishes above its exercise
price of INR 1,000. The put option P pays INR 100 if the spot price at maturity of the
same underlying finishes below the exercise price of INR 1,200. Both options have
maturities of one year from now. Ignoring time value of money, the arbitrage free value
(in INR) in an efficient market of the portfolio X will be closest to:
(A) less than INR 100

(B) not less than INR 100 but not greater than INR 200
(C) greater than INR 200
(D) equal to INR 100
Solution:
Payoff of call C: 0 if S<1,000 and 100 if S>1,000

Payoff of put P: 100 if S<1,200 and 0 if S>1,200
Payoff of combination 100 if S<1,000 or S=1,000, 200 if 1,000<S<1,200 and 100 if S=1,200
or S>1,200
Thus, the combination will trade for the present value of not less than 100 and not
greater than 200.
10 Bond X is a level coupon bond of maturity 20 years whose payments of interest &
repayment of principal are guaranteed by the Government of India i.e. it is a treasury
bond. Bond Y is also a level coupon bond of same maturity & face/redemption value as
Bond X except that it is a corporate bond issued by XYZ Ltd. Both the bonds are trading
at the same price. Which of the following is true at equilibrium if the market in which
these bonds are traded is perfectly efficient?
(A) Bond Y has a coupon rate at least equal to that of Bond X

(B) Bond X has a coupon rate at least equal to that of Bond Y
(C) The coupon rates of both bonds will be equal
(D) The required return of Bond X is higher than that for Bond Y
Solution:
Clearly, bond Y has a higher risk of default than bond X. Hence, bond Y must deliver a
higher expected return to the holder. Because both bonds are trading at the same price,
it follows that bond Y’s coupon must be higher than that of X.
NPTEL ONLINE COURSE
JULY 2022
1. The following information is available in respect of a bond:
Face Value: 1,000

Coupon Rate: 8%
Coupon Frequency: Annual
Term to Maturity: 3 years
Redemption Value: 80% of Face Value
(Redemption in two equal instalments at the end of second year & third year
respectively)
Yield to maturity (Annual compounding): 15% p.a.
The current market price of the bond is closest to:
(A) 735.15
(B) 721.82
(C) 727.95
(D) 697.15
Solution:
YEAR 0 1 2 3
COUPON 80 80 40
RV 0 400 400
TOTAL CF 80 480 440
YTM 0.15 0.15 0.15 0.15
PVIF 0.869565 0.756144 0.657516232
DCF 0 69.56522 362.949 289.3071423
PRICE 721.8213
2. You are given the following information with regard to a level coupon bond:
Face Value of the bond: 1,00,000

Traded Price: 1,00,000
Redemption Value 1,00,000
One Year Spot Rate S(0,1), annual compounding 10% p.a.
Two Year Spot Rate S(0,2), annual compounding: 20% p.a.
The YTM of the bond (in % p.a. with annual compounding) is closest to:
(A) 18.90
(B) 18.26
(C) 19.06
(D) 20.02
Solution:
The bond is an annual level coupon bond quoting at par

x x + 1, 00, 000
1, 00, 000 = + gives x = 19055.82.
1.10 1.202
19, 055.82 1,19, 055.82
Solving for YTM y : 1, 00, 000 = +  y = 19.06%
(1 + y ) (1 + y )
2
TIMELINE YTM 0 1 2
SPOT RATE (P.A.) 10% 20%
YTM 0.1905582 -100000 19056 119055.8
3. You are given the following information with regard to an annuity bond:
Face Value of the bond: 1,00,000

Traded Price: 1,00,000
Equal Annuity Payments (over a two year period) Annual
One Year Spot Rate S(0,1), annual compounding 10% p.a.
Two Year Spot Rate S(0,2), annual compounding: 20% p.a.
The bond makes equal annual payments to the holder of the bond over a two year
period. The YTM of the bond (in % p.a. with annual compounding) is closest to:
(A) 16.08
(B) 16.32
(C) 15.96
(D) 15.51
Solution:
Bond is an annuity bond quoting at par
A A
1, 00, 000 = + gives A = 62361.85.
1.10 1.202
62361.85 62361.85
Solving for YTM y : 1, 00, 000 = +  y = 16.08%
(1 + y ) (1 + y )2
TIMELINE YTM 0 1 2
SPOT RATE (P.A.) 10% 20%
YTM 0.1608388 -99999 62362 62362
4. Consider a bond portfolio X comprising of one bond Y and one bond Z. Both bonds are
annual level coupon bonds redeemable at par value of 1,000. They are also trading at
par. Bond Y is a three year bond trading at a YTM of 20% p.a. annually compounded.
Bond Z pays an annual coupon of 25% and has two years to maturity.
The YTM of the portfolio X (in % p.a.) based on the aggregate cash flows from the
portfolio is closest to:
(A) 21.90
(B) 22.75
(C) 22.11
(D) 22.25
Solution:
PORTFOLIO YTM 0 1 2 3
A 0.2 -1000 200 200 1200
B 0.25 -1000 250 1250 0
PORTFOLIO 0.221108604 -2000 450 1450 1200
5 Consider the following data in respect of a bond investment:
Face Value of bond: 1,000

Coupon Rate: 10%
Redemption Value (Par): 1,000
Term to Maturity at purchase: 5 years
YTM at purchase: 12% p.a. annually compounded
Holding Period: 2 years
YTM at sale of bond: 11% p.a. annually compounded
The investor does not reinvest the coupons received by him during his holding period
of two years. The effective annual yield earned by the investor (in % p.a. annually
compounded) is closest to:
(A) 12.92
(B) 11.98
(C) 12.82
(D) 12.56
Solution:
YEAR 0 1 2 3 4 5
YTM 0.12 0.12 0.12 0.12 0.12 0.12
DF 1 0.892857 0.797194 0.7117802 0.635518 0.567427
CF 100 100 100 100 1100
DCF 927.9045 89.28571 79.71939 71.178025 63.55181 624.1695
YEAR 0 1 2 3
YTM 0.11 0.11 0.11 0.11
DF 1 0.900901 0.811622 0.7311914
CF 100 100 1100
DCF 975.5629 90.09009 81.16224 804.31052
COUPON RECEIPTS 200
TCF 1175.563
EAY 0.125567
6 Consider the following data in respect of a bond investment:

Coupon Rate: 10%
Holding Period: 1 year
YTM at sale of bond: 10% p.a. annually compounded
The total cash flow received by the investor including the coupon on liquidation of the
investment at the end of the holding period is closest to:
(A) 1152
(B) 988
(C) 1132
(D) 1099
Solution:
Acquisition Price of the bond: P0= 100xPVIFA(12%,5)+1,000xPVIF(12%,5)=928
Selling Price of bond:P2= 100xPVIFA(10%,4)+1,000xPVIF(10%,4)=1000
Coupon Received = 100
Total Cash Proceeds on Investment Liquidation: 1100
7 Consider the following data in respect of a level coupon bond investment:

Current Price: 1,000
Coupon Rate: 10%
The investor expects that the market interest rates would shift upwards by 1% p.a. at
the end of one year from now so that he would be able to reinvest all his coupons at
the revised rate. Assuming that he holds the bond to maturity, the effective annual yield
expected by the investor (in % p.a.) is closest to:
(A) 10.17
(B) 10.28
(C) 10.52
(D) 9.78
Solution:
YEAR 0 1 2 3 4 5
REINV RATE 0.11 0.11 0.11 0.11 0.11 0.11
DF 1 1.51807 1.367631 1.2321 1.11 1
CF 100 100 100 100 1100
TCF 1622.78 151.807 136.7631 123.21 111 1100
PURCHASE PRICE 1000
EAY 1.101671
8 Consider the following data in respect of a level coupon bond investment:

Current Price: 1,000
Coupon Rate: 10%
An investor expects that the market interest rates would shift upwards by 1% p.a. at
the end of one year from now. Assuming that he holds the bond for two years, the
effective annual yield expected by the investor (in % p.a.) is closest to:
(A) 10.12
(B) 8.93
(C) 9.11
(D) 9.19
Solution:
YEAR 0 1 2 3
YTM 0.11 0.11 0.11 0.11
DF 1 0.900901 0.811622 0.7311914
CF 100 100 1100
DCF 975.5629 90.09009 81.16224 804.31052
COUPON PROCEEDS 211
TOTAL 1186.563
EAY 1.089295
9 At t=0, X invests in a 10% annual level coupon bonds of ABC Ltd of the face value of INR
1,000 each with a maturity of 5 years at a YTM of 15% p.a. The carrying amount (in INR)
of the bond at the end of the first year will be:
(A) 918.00
(B) 928.15
(C) 857.25
(D) 903.00
Solution:
FV = 1, 000; Coupon : 10%; Coupon Amount : 100; Life : 5 years
100 100 100 100 1100
Price = + + + + = 832.39; Disc on Issue : 167.61;
2 3
1.15 1.15 1.15 1.154 1.155
First Year Return : 832.39× 0.15 = 124.86; Coupon: 100.00;
Amortization :24.86; Discount Carried Forward :167.61 - 24.86 = 142.75
Closing Carrying Value of Inv : 1, 000 - 142.75 = 857.25
100 100 100 1100
= + + +
2
1.15 1.15 1.153 1.154
10 A bond promises to give 15,000 at the end of one year from now and 75,000 at the end
of two years from now. Its remaining term to maturity is 2 years. The bond is trading at
a YTM of 30% p.a. compounded annually. The traded price of the bond is closest to:
(A) 55,917
(B) 58,232
(C) 59,002
(D) 58,005
Solution:
YEAR 0 1 2
DISCOUNT RATE 0.3 0.3 0.3
DISCOUNT FACTOR 1 0.7692308 0.591715976
CASHFLOW 15000 75000
DCF@30% 11538.462 44378.69822
PRICE 55917.16
NPTEL ONLINE COURSE
JULY 2022
1 Consider an annual level coupon bond with the following parameters:
Face Value: 1,000

YTM: 10% p.a. annually compounded
The Macaulay’s duration for the bond (in years) is closest to:
(A) 1.9130
(B) 1.9107
(C) 1.9091
(D) 1.9781
Solution:
LET FACE VALUE BE 1000

YEAR 1 2
COUPON PAYMENT 0.1 100 100
REDEMPTION VALUE 1 1000
TOTAL CASH FLOWS 100 1100
YTM 0.1 0.1 0.1
DISCOUNT RATE 0.909090909 0.826446281
CURRENT PRICE 1000 90.90909091 909.0909091
TIME WEIGHTED CASHFLOWS 1909.090909 90.90909091 1818.181818
DURATION 1.909090909
Face Value: 1,000

The bond’s convexity (in years2) is closest to:
(A) 2.8030
(B) 2.7921
(C) 2.7333
(D) 2.8182
Solution:
YEAR 1 2
YTM 0.1 0.1 0.1
DISCOUNT RATE 0.909090909 0.826446281
CURRENT PRICE 1000 90.90909091 909.0909091
t(t+1) WEIGHTED CASHFLOWS 5636.363636 181.8181818 5454.545455
CONVEXITY 2.818181818
Face Value: 1,000

On the basis of the value of duration & convexity, the price change (in %) corresponding
to a 5% increase in the ytm from the above figure, is closest to:
(A) (-) 7.35

(B) (-) 7.75
(C) (-) 7.41
(D) (-) 7.56
Solution:
YEAR 1 2
YTM 0.18 0.18 0.18
DISCOUNT RATE 0.8475 0.72
CURRENT PRICE 874.74864 84.746 790
TIME WEIGHTED CASHFLOWS 1664.7515 84.746 1580
DURATION 1.9031199
t(t+1) WEIGHTED CASHFLOWS 4909.5088 169.49 4740
CONVEXITY 2.8062397
GIVEN YTM (y) 0.18
CHANGE IN YTM (dy) 0.05
HENCE, dy/(1+y) 0.042372881
% CHANGE IN PRICE DUE TO DURATION -0.08064067
% CORRECTION DUE TO CONVEXITY 0.005038494
TOTAL PRICE CHANGE -0.07560218
ACTUAL PRICE CHANGE
YEAR 1 2
YTM 0.23 0.23 0.23
CURRENT PRICE 808.3812545 81.3008 727.08
% PRICE CHANGE -0.0759
4 Consider an annuity bond. It is contracted to pay 1,000 at the end year 1 and a like
amount at the end of year 2. It has a term to maturity of 2 years. It is quoting at a price
of 1,625.71. The proceeds received from the investment at the end of the first year can
be reinvested in an account that offers 10% p.a. continuously compounded. The
effective annual yield over the two-year investment horizon quoted on annually
compounded basis (in % p.a.) is closest to:
(A) 13.66
(B) 13.79
(C) 13.90
(D) 14.43
Solution:
YEAR 1.0000 2.0000
CASH FLOW 1000.0000 1000.0000
YTM 0.1500 0.1500 0.1500
CURRENT PRICE 1625.7089 869.5652 756.1437
REINVESTMENT RATE (C.C) 0.1000
REINVESTMENT PROCEEDS 1105.1709
TOTAL PROCEEDS AT T= 2YEARS 2105.1709
REALIZED YIELD 0.1379
5 Bond A is a zero coupon bond of face value 1,000 with a term to maturity of two years.
It is presently selling at 730.51. Bond B is a 18% annual level coupon bond of face value
1,000 and term to maturity of two years. Both bonds will be redeemed at face value.
Bond B has a YTM that is 1% less than that of bond A. The price of bond B is closest to:
(A) 1033.56
(B) 1031.10
(C) 1031.03
(D)1032.10
Solution:
FACE VALUE 1000

PRICE OF BOND A 730.51
YTM OF BOND A 0.170002844
YTM OF BOND B 0.160002844
PRICE OF BOND B
YEAR 1 2
CASH FLOW 0.18 180 1180
YTM 0.160002844 0.160002844 0.160002844
PVIF 0.862066852 0.743159258
DCF 155.1720334 876.927924
PRICE 1032.099957
6 Consider the following information in context of a bond X:
Face Value: 1,000

Coupon Rate: 10%
Date of purchase: January 1, 2021
Maturity Date: December 31, 2023 (3 yrs from purchase)
Date of sale: January 1, 2022 (1 year from purchase)
YTM at sale: 10% p.a. annually compounded
Date of last coupon: December 31, 2021
The return (in % p.a.) earned on the investment over ths one year investment period is
closest to:
(A) 24.17
(B) 24.44
(C) 23.95
(D) 23.38
Solution:
YEAR 0 1 2 3
CF 100 100 1100
YTM 0.15 0.15 0.15 0.15
PVIF 0.869565217 0.756143667 0.6575162
DCF 86.95652174 75.61436673 723.26786
PRICE 885.8387441
YEAR 0 1 2
CF 100 100 1100
YTM 0.1 0.1 0.1 0.1
PVIF 1 0.909090909 0.8264463
DCF 100 90.90909091 909.09091
PRICE 1100
RETURN 0.241760995
7 Consider the following information in context of an annual level coupon bond X:
Face Value: 1,000

Coupon Rate: 10%
The bond’s Modified duration (in years) is closest to:
(A) 1.6568
(B) 1.6137
(C) 1.6831
(D) 1.6381
Solution:
YEAR 1 2
YTM 0.15 0.15 0.15
DISCOUNT RATE 0.869565217 0.756143667
CURRENT PRICE 918.7145558 86.95652174 831.758034
MODIFIED DURATION 1.656825908
Face Value: 1,000

Macaulay Duration: 1.8276 years
The coupon rate (in % p.a.) of the bond is closest to:
(A) 20.00
(B) 19.25
(C) 19.60
(D) 20.20
Solution:
YEAR 1 2
YTM 0.25 0.25 0.25
CURRENT PRICE 928 160 768
TIME WEIGHTED CASHFLOWS 1696 160 1536
Face Value: USD 1,000

Macaulay Duration: 1.8276 years
The sensitivity of the bond to interest rate changes measured in terms of DV01 (Dollar
Value per basis point) is:
(A) 1.3570
(B) 0.1357
(C) 13.5700
(D) 135.7000
Solution:
YEAR 1 2
YTM 0.25 0.25 0.25
CURRENT PRICE 928 160 768
TIME WEIGHTED CASHFLOWS 1696 160 1536
MODIFIED DURATION 1.46207
PRICE CHANGE PER BP 0.13568
10 You are given the following information in respect of investment in a level coupon bond:
Date of investment: March 11, 2022

Coupon Rate: 18%,
Frequency of coupon: Semi-annual, final coupon at maturity
Maturity of bond: July 10, 2026,
Current quoted price: USD 95.50.
Most recent coupon date: January 10, 2022,
Next coupon date: July 10, 2022 (181 days).
Given that January 10, 2022 -Mar 11, 2022 =60 days, the dirty price of the bond (in USD)
is closest to:
(A) 98.48
(B) 97.32
(C) 98.40
(D) 98.23
Solution:
Days: Jan 10, 2021 -Mar 11, 2021 (Actual Period) =60
Days: Jan 10, 2021 –July 10, 2021 (Ref Period) = 181
Coupon payment for reference period: 9.00
Using Actual/Actual convention:
Accrued Interest= 60 X 9.00/181 = 2.98.
The cash price per $100 face value for the bond is therefore
USD 95.50 + USD2.98 : USD 98.48
NPTEL ONLINE COURSE
JULY 2022
1 Consider the following information in respect of a bond:

Yield to Maturity: 10% p.a. compounded annually
Redemption: Redemption at face value will be made in two equal
instalments at the end of first year and second year
respectively.
The bond’s Macaulay’s duration (in years) is closest to:
(A) 1.5130
(B) 1.5137
(C) 1.4545
(D) 1.4732
Solution:
YEAR 1 2
REDEMPTION VALUE 1 500 500
YTM 0.1 0.1 0.1
DISCOUNT RATE 0.909090909 0.826446281
CURRENT PRICE 1000 545.4545455 454.5454545

respectively.
The bond’s convexity (in years2) is closest to:
(A) 1.9430
(B)1.7979
(C) 1.8062
(D) 1.9091
Solution:
YEAR 1 2
YTM 0.1 0.1 0.1
DISCOUNT RATE 0.909090909 0.826446281
CURRENT PRICE 1000 545.4545455 454.5454545
t(t+1) WEIGHTED CASHFLOWS 3818.181818 1090.909091 2727.272727
CONVEXITY 1.909090909

respectively.
The bond’s modified duration (in years) is closest to:
(A) 1.3222
(B) 1.3137
(C) 1.4372
(D) 1.4545
Solution:
YEAR 1 2
YTM 0.1 0.1 0.1
DISCOUNT RATE 0.909090909 0.826446281
CURRENT PRICE 1000 545.4545455 454.5454545
DURATION 1.32231405
Face Value: USD 1,000,000

respectively.
The bond’s dollar value per basis point (DV01) is closest to:
(A) 132.22
(B) 13222.00
(C) 132220.00
(D) 13.22
Solution:
YEAR 1 2
YTM 0.1 0.1 0.1
DISCOUNT RATE 0.909090909 0.826446281
CURRENT PRICE 1000000 545454.5455 454545.4545
YEAR 1 2
YTM 0.1001 0.1001 0.1001
DISCOUNT RATE 0.909008272 0.826296039
CURRENT PRICE 999867.7844 545404.9632 454462.8212
DV01 132.2156291

Redemption: Redemption at face value at the end of fifth year
Coupon Reinvestment Rate: Current YTM
The bond will be sold after receipt of the third year’s coupon. The income from
reinvestment proceeds at the end of the holding period (in INR) is closest to:
(A) 60.00
(B) 62.00
(C) 59.28
(D) 59.56
Solution:
YEAR 0 1 2 3
REINVESTMENT RATE 0.1 1.21 1.1 1
FACE VALUE 1000
COUPON RATE 0.2 200 200 200
FV 662 242 220 200
INVESTMENT 600
REINVESTED INTT 62
6 Consider an instrument that pays a perpetual coupon of 10% on a face value of 10,000
at the end of each year. It is quoting at a YTM of 10% p.a. The Macaulay’s duration of
the instrument (in years) is closest to:
(A) 10.00
(B) 11.00
(C) 10.67
(D) 16.43
Solution:
1 + y 1 + 0.10
Duration of perpetuity = = = 11
y 0.10
7 You are given the following information in respect of a corporate bond.
Face value of the bond: 1,000

Coupon rate: 10% p.a.
Term to maturity: 1 year
Current market price: 990
Benchmark spot rate S(0,1): 10% p.a. annually compounded
The Z-spread of the bond (in % p.a.) is closest to:
(A) 1.21
(B) 1.11
(C) 1.67
(D) 1.54
Solution:
Let the Z spread be 

1100
Then, 990 = or  = 1.11%
(1 + 0.10 +  )
Face value of the bond: 5,000,000

Spot rate S(0,1): 10% p.a. annually compounded
Spot rate S(0,2): 20% annually compounded
The par yield (in % p.a.) of the bond under consideration is closest to:
(A) 19.00
(B) 18.90
(C) 16.67
(D) 19.05
Solution:
YEAR 0 1 2
INTEREST RATE 0.1 0.2
DISC FACTOR 1.6035 0.90909 0.6944
PV OF RV 694.44
PV OF COUPONS 305.56
COUPON AMT 190.55
COUPON RATE 19.055
9 The spot rates for a one year deposit S(0,1) is 12% p.a. while that for a two year deposit
S(0,2) is 20% p.a., both annually compounded. The arbitrage free forward rate f(1,2) in
% p.a. on annual compounding basis for a deposit of one year, one year hence, is closest
to:
(A) 29.25
(B) 28.90
(C) 28.57
(D) 29.05
Solution:
YEAR 0 1 2
INTEREST RATE 0.12 0.2
REQUIRED FORWARD RATE 0.28571
10 You are given the following information in respect of XYZ Ltd:
Equity Capital (10.00 million shares of INR 10 each fully paid): 100 million
Preference capital: Nil
Profit after tax: 100 million
Payout Ratio: 60%
Expected growth rate in dividend: 3% p.a.
Return required by equity shareholders: 18.45% p.a.
The current market price per share is closest to:
(A) 48.00
(B) 40.00
(C) 38.67
(D) 30.00
Solution:
D0 ( 1 + g ) 6 ( 1 + 0.03 )
P0 = = = 40
ke − g 0.1845 − 0.03
NPTEL ONLINE COURSE
JULY 2022
Equity Capital (10 million shares of 10 each): 100 million

Profits for the year under consideration: 50 million
Amount of dividend declared per share: 3
Preference Shares: Nil
XYZ’s retention ratio (in %) is:
(A) 60.00
(B) 33.33
(C) 66.67
(D) 40.00
Solution:
Amount of equity capital: 100,000,000

DPS: 3
Hence, amount of dividend: 30,000,000
Amount of after tax profits: 50,000,000
Payout Ratio: 60%
Retention Ratio: 40%
2 Consider the following information in respect of XYZ Ltd
Equity Capital (1.00 million fully paid equity shares of 10 each): 10.00 million
Dividend recently paid (at t=0): 1.00 million
Projected Next Dividend Payment (at t=1 year): 1.10 million
Projected market price per share at t=1 year after dividend payment: 18.00
Risk adjusted rate of return from this stock: 15% p.a.
The intrinsic value of this stock is closest to:
(A) 16.61
(B) 14.34
(C) 15.25
(D) 12.80
Solution:
D1 + P1 1.10 + 18.00
V0 = = = 16.61
1 + ke 1 + 0.15
3 Consider the following information in respect of XYZ Ltd
Equity Capital (1.00 million fully paid equity shares of 10 each): 10.00 million
Dividend recently paid (at t=0): 1.50 million
Projected Dividend Growth Rate: 8% p.a.
Projected market price per share at t=3 years after dividend payment: 54.00
Risk adjusted rate of return from this stock: 12% p.a.
The value of this stock now is closest to:
(A) 41.80
(B) 42.62
(C) 42.86
(D) 42.25
Solution:
D1 D2 D + P3
V0 = + + 3
( 1 + ke ) ( 1 + ke ) ( 1 + ke ) 3
2
1.50  1.08 1.50  1.08 2 1.50  1.08 3 + 54

= + +
1 + 0.12 ( 1 + 0.12 ) ( 1 + 0.12 )
2 3
= 1.4464 + 1.3948 + 39.781 = 42.62
4 XYZ Ltd has just (at t=0) declared a dividend of INR 1.00 per share. The dividend is
expected to grow at 15% for the next two years (t=1,2) and thereafter @ 5% p.a.
perpetually. The required rate of return is 11% p.a. The intrinsic value per share (in INR)
is closest to:
(A) 21.96
(B) 22.74
(C) 20.89
(D) 18.82
Solution:
D1 D + P2 D3 1.00  1.152  1.05

V0 = + 2 where P = = = 23.1438
( 1 + ke ) ( 1 + ke ) 2 2
ke − g 0.11 − 0.05
D1 D + P2 1.00  1.15 1.00  1.152 + 23.1438
V0 = + 2 = +
( 1 + ke ) ( 1 + ke ) 2 1 + 0.11 ( 1 + 0.11)
2
= 1.0360 + 19.8574 = 20.8934
5 You are given the following information in respect of XYZ Ltd
Average Return on Equity: 25% p.a.

Average Payout Ratio: 40%
The company’s sustainable growth rate (in %) is closest to:
(A) 24.00
(B) 12.00
(C) 10.00
(D) 15.00
Solution:
Payout Ratio: 40%

Retention Ratio: 60%
ROE: 25%
Sustainable Growth Rate: RR x ROE=15%
Free Cash Flow to the firm (t=0): 1.70 million

Weighted Average Cost of Capital: 11% p.a.
Growth Rate of FCFF (Perpetual): 7% p.a.
The value (in millions) of XYZ (Debt + Equity) using the FCFF Growing Perpetuity
valuation approach is closest to:
(A) 45.4750
(B) 30.4750
(C) 31.2500
(D) 31.4500
Solution:
FCFF1 1.7  1.07

Firm Value = = = 45.475
kw − g 0.11 − 0.07
Free Cash Flow to the firm (t=0): 1.70 million

Free Cash Flow to equity (t=0): 1.30 million
Weighted Average Cost of Capital: 11% p.a.
Required rate of return on equity: 13% p.a.
Growth Rate of FCFF (Perpetual): 7% p.a.
Growth Rate of FCFE (Perpetual): 7.50%
Market Value of Debt: 15 million
The value (in millions) of XYZ (Debt + Equity) using the FCFE Growing Perpetuity
valuation approach is closest to:
(A) 39.4752
(B) 40.4091
(C) 45.2520
(D) 46.4550
Solution:
FCFE1 1.3  1.075
Equity Value = = = 25.4091
ke − g 0.13 − 0.075
Firm Value = Equity Value + Debt Value = 25.4091 + 15.00 = 40.4091
8 You are given the following information about XYZ Ltd
Net Income for the year: 350 million,

Depreciation for the year: 90 million,
Capital expenditures: 170 million,
Increase in working capital: 40 million.
Interest Expenses: 150 million
Tax Rate: 30%
XYZ will finance 40 percent of the increase in net fixed assets (capital expenditures less
depreciation) and 40% of the increase in working capital with debt financing.
The free cash flow to the firm (FCFF) of XYZ Ltd (in million) is:
(A) 342.00
(B) 325.00
(C) 335.00
(D) 331.25
Solution:
FCFF=NI+Dep+Int(1-Tax Rate)-CAPEX-∆NWC
=350+90+150(1-0.30)-170-40=335
9 You are given the following information about XYZ Ltd
Net Income for the year: 350 million,

Depreciation for the year: 90 million,
Capital expenditures: 170 million,
Increase in working capital: 40 million.
Interest Expenses: 150 million
Tax Rate: 30%
XYZ will finance 40 percent of the increase in net fixed assets (capital expenditures less
depreciation) and 40% of the increase in working capital with debt financing.
The free cash flow to equity (FCFE) of XYZ Ltd (INR in million) is:
(E) 250.50
(F) 225.50
(G) 278.00
(H) 241.55
Solution:
FCFE=NI+Dep-CAPEX-∆NWC+∆Debt
=350+90-170-40+48=278
10 you are given the following information in respect of XYZ Ltd as on April 1, 2022:
Projected Sales for the year 2022-23: 11 million

Net income: 32% of sales
Gross investment in fixed assets: 35% of sales
Investment in working capital: 6% of sales
Depreciation: 9% of sales
Interest Expenses: 2% of sales
Tax Rate: 10%
Out of the total net investment in assets, 20% will be financed with debt. The FCFE of
XYZ Ltd for the year (in thousands) will be:
(I) 680.00
(J) 614.00
(K) 632.00
(L) 704.00
Solution:
Sales: 11,000,000
Net Income (32% of sales): 3.520,000
Depreciation (9% of sales): 990,000
CAPEX (35% of sales): 3,850,000
Further investment in WC (6% of sales): 660,000
Additional debt (20% of (CAPEX-Dep+NWC)): 704,000
FCFE(NI+D-CAPEX-∆NWC+∆Debt): 704,000
NPTEL ONLINE COURSE
JULY 2022
1 Consider the following cash flow stream:
Amount of each payment: 1,000,000

Frequency of payment: Annual
No of payments Perpetual
First payment of the perpetuity at: t=0
Uniform growth rate of each payment over preceding payment: 5%
Required rate of return (annually compounded): 11% p.a.
The present value of the perpetuity (in INR) is closest to:
(A) 18,500,000
(B) 18,475,200
(C) 18,625,400
(D) 18,125,000
Solution:
1, 000, 000  1.05 1, 000, 000  1.05 2
PV of perpetuity : 1, 000, 000 + + + ...
1.11 1.112
 
 1.05 1.052   1 
= 1, 000, 000   1 + + 2
+ ...  = 1, 000, 000    = 18, 500, 000
 1.11 1.11   1 − 1.05 
 1.11 
2 The capital structure of XYZ Ltd at t=0 comprises of the following:
15% Debt: 60.00 million

Equity: 40.00 million
Cost of Equity: 20% p.a.
Income Tax Rate: 50%
The project to be implemented by the company has a two year existence with the
following free cash flows (FCFF) for the respective years:
Year 1 FCFF: 50.00 million

Year 2 FCFF: 110.00 million
The FCF based discounted value of the firm (in millions) is closest to:
(A) 142.26
(B) 121.45
(C) 127.94
(D) 123.00
Solution:
6 4
Post tax WACC = 15 ( 1 − 0.30 )  + 20  = 6.3000 + 8.0000 = 14.30
10 10
50, 000, 000 110, 000, 000
FCFF value of firm VFCFF = +
1.1430 1.14302
= 43744500 + 84197700 = 127, 942, 200 = 127.94m
3 Assume that XYZ Ltd is purely equity financed with no debt. The free cash flows
expected from the company business over the two year life span are 5 million in year
t=1 and 11 million in year t=2. The PV of these cash flows works out to 12.00 million.
The cost of equity of XYZ (in % p.a.) is closest to:
(A) 17.21
(B) 16.68
(C) 18.32
(D) 18.82
Solution:
Let the CoE = x
5000000 11000000
Then 12000000 = + or x = 18.82%
(1 + x ) (1 + x )2
4 You are given the following information about XYZ Ltd:

Post tax WACC: 15% p.a.
Levered Cost of Equity: 21% p.a.
Debt: Equity Ratio (Debt/Equity): 2:1
Tax Rate: 30%
The pre-tax WACC (in % p.a.) of XYZ Ltd is closest to:
(A)18.02
(B) 18.45
(C) 17.14
(D) 18.12
Solution:
2 1
Post tax WACC = 15 = kd ( 1 − 0.30 )  + 21  or kd = 17.14%
3 3
2 1
Pr e tax WACC = 17.14  + 21  = 18.45%
3 3
5 The following information is provided in the context of XYZ Ltd for the year ended
March 31,2022:
(INR in million)
Sales: 100.00
Variable Costs: 50% of sales
Fixed Operational Costs (excluding depreciation) 10.00
Depreciation: 7.00
Interest on borrowings: 5.00
Tax Rate: 30%
CAPEX for the year: 15.00
Decrease in NWC 5.00
The Capital Cash Flow (INR in million) for the year is:
(A) 21.60
(B) 23.20
(C) 21.00
(D) 22.20
Solution:
CCF = EBDIT (1 – T ) + DT + IT – CAPEX – ΔNWC
= (100 - 50 - 10 )(1 - 0.30 ) + 7 × 0.30 + 5× 0.30 - 15 + 5
= 28.00 + 3.60 - 10.00 = 21.60
6 You are given the following information in respect of XYZ Ltd for the financial year
ended March 31, 2022:
(in million)
Earnings before depreciation, interest & taxes: 40.00
Depreciation: 7.00
Interest on short term borrowings: 2.00
Interest on long term borrowings: 5.00
Tax Rate: 30%
You believe that interest on short term borrowings should not form part of free cash
flow to the firm and the valuation process. The free cash flow to the firm (FCFF) (in
millions) for the year is:
(A)19.60
(B)19.20
(C)19.00
(D)18.70
Solution:
FCFF = EBDI Long Term T (1 – T ) + DT – CAPEX – ΔNWC
= ( 40 - 2 )(1 - 0.30 ) + 7 × 0.30 - 15 + 5
= 26.60 + 2.10 - 10.00 = 18.70
(in millions)
Profit after tax & preference dividend: 40.00
Depreciation: 7.00
Tax Rate: 30%
Preference dividend for the year: 1.00
The free cash flow to the firm (FCFF) (in millions) for the year is:
(A) 41.40
(B) 41.30
(C) 41.50
(D) 40.40
Solution:
FCFF = PAT + I (1 - T ) + D – CAPEX - ΔNWC

= ( 40 + 1) + 5 (1 - 0.30 ) + 7 - 15 + 5 = 41.50
(in million)
Earnings before depreciation, interest & taxes: 40.00
Depreciation: 7.00
Interest on short term borrowings: 2.00
Tax Rate: 30%
Preference dividend for the year: 1.00
Fresh issue of debt in the year: 6.00
The free cash flow to equity (FCFE) (in millions) for the year is:
(A) 20.20
(B) 21.10
(C) 20.15
(D) 21.50
Solution:
FCFE = PAT - DP + D – CAPEX - ΔNWC + ΔDebt
= ( 40 - 7 - 2 - 5 )(1- 0.30 ) -1 + 7 -15 + 5 + 6 = 20.20
Book value (in INR) per share at t=0: 45.00

Return on equity: 18% p.a.
Cost of equity: 12% p.a.
Residual income growth rate: 8% p.a
The intrinsic value per share (in INR) by the constant growth perpetuity model based on
residual income works out to:
(A) 102.25
(B) 112.25
(C) 112.75
(D) 112.50
Solution:
ROE − CoE 0.18 − 0.12
V0 = BV0 + BV0 = 45 +  45 = 112.50
CoE − g 0.12 − 0.08
Expected life of the company: 2 years

Projected Free Cash Flows
Year 1: 10,000,000
Year 2: 3,000,000
Pretax Cost of Debt: 17.14% p.a.
Levered Cost of Equity: 21.00% p.a.
Debt:Equity Ratio (Debt/Equity): 2:1
Tax Rate: 30%
The present value of the interest tax shields (in context of the Capital Cash Flows
Model) (in INR) is closest to:
(A) 181,432
(B) 155,544
(C) 176,525
(D) 154,000
Solution:
2 1
Post tax WACC = 17.14 ( 1 − 0.30 )  + 21  = 15.00%
3 3
2 1
Pr e tax WACC = 17.14  + 21  = 18.45%
3 3
1000000 3000000
Hence , FCFF value of firm VFCFF = + = 3137996
1.15 1.152
1000000 3000000
CCF value of firm VCCF = + + VITS = 2982452 + VITS
1.1845 1.18452
Hence PV of ITS VITS = VFCFF − VCCF = 155544
NPTEL ONLINE COURSE
JULY 2022
1. You are given the following information in respect of a piece of plant & equipment:
Cost of acquisition: 15,000

Useful life: 10 years
Scrap value at the end of useful life: 1,500
The WDV rate of depreciation (in % p.a.) is closest to:
(A) 20.57
(B) 23.10
(C) 21.33
(D) 16.67
Solution:
1 10
V 
1 10
 1500 
V5 = V0 ( 1 − d )
10
or d = 1 −  5  = 1−   = 20.57%
 V0   15000 
2 XYZ Ltd had started business at t=0. It has reported an EBDIT of INR 5,000,000 for the
first year. It has no interest bearing funds. Its depreciable assets at t=0 were valued at
INR 10,000,000. The life of the assets is 5 years, after which they will command a salvage
value of Rs 1,000,000. The company uses SLM depreciation for its financial accounts.
The tax laws allow WDV depreciation with the same parameters. The tax rate is 30%.
The amount (in million INR) that XYZ Ltd will show as deferred tax liabilities in the
Balance Sheet at the end of the first year is closest to:
(A) 0.26
(B) 0.66
(C) 0.57
(D) 0.72
Solution:
YEAR 1.00
EBDIT 5.00
LESS SLM 1.80
PBT 3.20
EBDIT 5.00
LESS WDV 3.69
TAX PROFIT 1.31
IT PAYABLE 0.39
DTL 0.57
3 Unrealized changes in the fair value of financial assets held by a company for the
purpose of trading should be accounted for by:
(A) Transferring directly into the Statement of Changes in Equity

(B) Transferring to the OCI Account
(C) Transferring to the Profit & Loss Account
(D) Unrealized changes in fair value are not to be accounted for since these represent
unrealized gains & losses.
Solution:
Changes in fair value of all financial instruments held as assets for the purpose of trading
are to be accounted at FVTPL.
4 Consider the following set of transactions during April 2022 in respect of a trading good:
Opening Balance: Nil

April 1: Purchase 50 units @ INR 1000.00 per unit
April 15: Purchase 50 units @ INR 1200.00 per unit
April 18: Sell 40 units @ INR 2000.00 per unit
April 21: Sell 20 units @ INR 2250.00 per unit
The value of the closing inventory as on April 30. 2022 (in thousands) if the FIFO method
is followed for inventory valuation is:
(A)40.00
(B) 48.00
(C) 42.00
(D) 46.00
Solution:
April 1: Purchase 50 units @ INR 1000.00 per unit: 50,000

April 15: Purchase 50 units @ INR 1200.00 per unit: 60,000
April 18: Sell 40 units issued at @ INR 1000.00 per unit 40,000
April 21: Sell 20 units, 10 units issued @ 1200.00 per unit 12,000
10 units issued @ 1000 per unit: 10,000
April 30: Closing Stock 40 units @ 1200 per unit: 48,000
5 Consider the following data in respect of a plot of land owned by XYZ Ltd:
Carrying value as on March 31, 2020: 10,000,000

Revaluation as on March 31, 2021: 12,000,000
Further, revaluation as on March 31, 2022: 9,000,000
The amount that needs to be transferred to the Profit & Loss Account for the year ended
March 31, 2022 due to the revaluation of March 31, 2022 (in millions) is:
(A) 1.00
(B) 3.00
(C) 2.020
(D) None of these
Solution:
The downward revaluation as on March 31, 2022 will be accounted for as follows:
Amount adjusted against the existing revaluation reserve created due to the earlier
upward revaluation (to the extent of the aggregate of the upward revaluation):
2,000,000. The balance of the downward revaluation (12,000,000-9,000,000=3,000,000)
is to be debited to the income Statement: 1,000,000= 1m
6 There occurred an unanticipated decline in the production capacity of a production line

of XYZ Ltd due to short supply of a consumable item. This caused a reduction in the
future earning capacity of the plant. Which of the following statement is FALSE in
respect of the impairment loss caused as a result of the above?
(A) The impairment loss will reduce the carrying amount of the asset on the balance
sheet.
(B) The impairment loss will reduce net income on the income statement.
(C) The impairment loss will reduce cash from operations in the cash flow statement
(D) None of the above
7 You are given the following information in respect of a piece of plant & equipment:
Cost of acquisition: 15,000

Scrap value at the end of useful life: 1,500
Accounting Method of Depreciation: Straight Line Method
Tax Method of Depreciation: 25% p.a. WDV
The excess of the carrying value over the tax base immediately after the end of the
second year (in INR) is closest to:
(A) 736.50
(B) 831.50
(C) 812.25
(D) 1162.50
Solution:
SLM rate of depreciation: (15,000-1,500)/5=2700 = 18%

Hence, carrying value at the end of two years=9,600
WDV rate of depreciation = 25%
Hence, tax base at the end of two years: 15,000*0.75*0.75=8,437.50
Hence, excess of carrying amount over tax base:1162.50
Balance of Deferred Tax Liabilities as on April 1, 2021: 6,000,000

Income Tax Payable for the year ended March 31, 2022: 9,000,000
Income Tax Expense for the year ended March 31, 2022: 6,750,000
The amount of deferred tax liabilities (in millions) carried forward as on March 31, 2022
to the year 22-23 is:
(A) 3.50
(B) 3.75
(C) 2.50
(D) 1.50
Solution:
Income tax expense= Income tax payable+(Closing DTL-Opening DTL)

6.75=9.00+(x-6.00) or x=3.75
9 Consider the following information in respect of XYZ Ltd:
Depreciable asset base at commencement of operations (t=0): 20,000,000
Salvage value at the end of useful life: 2,000,000
Amount of borrowings in the capital structure: Nil
Projected EBDIT
First year (t=1 year): 20,000,000
Second year (t=2 years): 25,000,000
Third year (t=3 years): 32,000,000
Accounting depreciation: 18% p.a. SLM
Tax depreciation: 25% p.a. WDV
Tax rate: Year 1: 30%; Year 2: 30%; Year 3: 30%
The amount that XYZ Ltd will show as income tax expense for the third year (in million
INR) is closest to:
(A) 8.91
(B) 6.45
(C) 0.23
(D) 8.52
Solution:
DEPRECIATION CHART STRAIGHT LINE

YEAR OPENING DEPRECIATION DEPRECIATION CLOSING
BALANCE RATE AMOUNT BALANCE
1 20 0.18 3.6 16.4
2 16.4 0.18 3.6 12.8
3 12.8 0.18 3.6 9.2
4 9.2 0.18 3.6 5.6
5 5.6 0.18 3.6 2
DEPRECIATION CHART WDV 0.75

1 20 0.25 5 15
2 15 0.25 3.75 11.25
3 11.25 0.25 2.8125 8.4375
4 8.4375 0.25 2.109375 6.328125
5 6.328125 0.25 1.58203125 4.746094
YEAR 1 2 3
EBDIT 20 25 32
LESS SLM 3.6 3.6 3.6
PBT 16.4 21.4 28.4
EBDIT 20 25 32
LESS WDV 5 3.75 2.8125
TAX PROFIT 15 21.25 29.1875
IT PAYABLE 4.5 6.375 8.75625
DTL 0.42 0.045 -0.23625
DTL C/F 0.42 0.465 0.22875
IT EXPENSE 4.92 6.42 8.52
10 Consider the following information in respect of XYZ Ltd:

Depreciable asset base at commencement of operations (t=0): 20,000,000
Salvage value at the end of useful life: 2,000,000
Amount of borrowings in the capital structure: Nil
Projected EBDIT
First year (t=1 year): 20,000,000
Second year (t=2 years): 25,000,000
Third year (t=3 years): 32,000,000
Accounting depreciation: 18% p.a. SLM
Tax depreciation: 36.9043% p.a. WDV
Tax rate: Year 1: 30%; Year 2: 30%; Year 3: 23%
The amount that XYZ Ltd will show as income tax expense for the third year (in million
INR) is closest to:
(A) 0.891
(B) 5.457
(C) 0.961
(D) 6.193
Solution:
DEPRECIATION CHART STRAIGHT LINE

1 20 0.18 3.6 16.4
2 16.4 0.18 3.6 12.8
3 12.8 0.18 3.6 9.2
4 9.2 0.18 3.6 5.6
5 5.6 0.18 3.6 2
DEPRECIATION CHART WDV 0.630957

1 20 0.369042656 7.38085311 12.61915
2 12.61915 0.369042656 4.657003479 7.962143
3 7.962143 0.369042656 2.938370548 5.023773
4 5.023773 0.369042656 1.853986478 3.169786
5 3.169786 0.369042656 1.169786385 2
YEAR 1 2 3
EBDIT 20 25 32
LESS SLM 3.6 3.6 3.6
PBT 16.4 21.4 28.4
EBDIT 20 25 32
LESS WDV 7.38 4.66 2.94
TAX PROFIT 12.62 20.34 29.06
IT PAYABLE 3.786 6.102 6.6838
DTL 1.134 0.318 -0.490824735
DTL C/F 1.134255933 1.451356977 0.960532242
IT EXPENSE 4.920255933 6.419101044 6.192975265
NPTEL ONLINE COURSE
JULY 2022
1. You are given the following information in respect of a portfolio AB consisting of

securities A & B:
Composition (by value of investment): 1:1

Expected return of A: 6% p.a.
Expected return of B: 12% p.a.
Standard deviation of A’s returns: 6% p.a.
Standard deviation of B’s returns: 10% p.a.
Correlation coefficient between returns of A & B: 0.50
The expected return (in % p.a.) of the portfolio AB is:
(A) 9.00
(B) 5.00
(C) 7.75
(D) 8.25
Solution:
n
RP =  X i Ri = 0.50  6 + 0.50  12 = 9
i =1
2 You are given the following information in respect of a portfolio AB consisting of

securities A & B:
Composition (by value of investment): 1:1

Correlation coefficient between returns of A & B: 0.50
The standard deviation (in % p.a.) of the portfolio is closest to:
(A) 14.26
(B)126.66
(C) 14.00
(D)14.72
Solution:
n
 P2 = 
i , j =1
ij X i X j i j = 0.502  122 + 0.502  202 + 2  0.50  0.502  12  20
= 36 + 100 + 60 = 196 so that  P = 14
3 You are given the following information in respect of securities A & B:

Correlation coefficient between returns of A & B:: (-)1.00
The return (in %) on the risk free portfolio consisting of A & B is closest to:
(A) 14.20
(B) 16.06
(C) 15.15
(D)15.69
Solution:
R + R1 12  20 + 14  12
RF = 1 2 2
= = 15.69
1 + 2 12 + 14
STD DEVIATION 12 14
EXPECTED RETURN 12 20
CORRELATION -1
X(A)=(B)/[(B)+(A)] 0.5384615
X(B)=1-X(A) 0.4615385
SD(P) 0
R(P) 15.692308
4 You are given the following information in respect of two independent securities A & B:

The expected return (in % p.a.) on the minimum variance portfolio M of these two
securities is closest to:
(A) 14.88
(B) 15.35
(C) 14.40
(D)14.60
Solution:
2
− 64
X m1 = 2 1 2
= = 0.64; X m2 = 0.36
2
1 + 2
2 −2 1 2 36 + 64
Rm = 0.64  12 + 0.36  20 = 14.88

(i) No riskfree lending and borrowing is allowed.

(ii) Long/short positions in A & B are allowed.
An efficient portfolio W is constructed consisting of A and B with a standard deviation

of 12%. The content of A per unit of portfolio value is closest to:
(A) (-) 0.35

(B) (-) 0.12
(C) (-)0.46
(D) (+)0.48
Solution:
= X A2 62 + (1 − X A ) 82
2
P = XA + X B2 +2 XAXB
2 2 2 2
A B A B
144 = 36 X A2 + 64 + 64 X A2 − 128 X A or 100 X A2 − 128 X A − 80 = 0

X A = −0.4598

(i) No riskfree lending and borrowing is allowed.
An efficient portfolio W is constructed consisting of A and B with a standard deviation

of 12%. The expected return on W (in % p.a.) is closest to:
(A)12.35
(B) 23.68
(C) 15.46
(D) 18.48
Solution:
= X A2 62 + (1 − X A ) 82
2
2
P = X A2 2
A + X B2 2
B +2 XAXB A B
144 = 36 X A2 + 64 + 64 X A2 − 128 X A or 100 X A2 − 128 X A − 80 = 0

X A = −0.4598
RP = X A RA + X B RB = −0.4598  12 + 1.4598  20 = 23.6784

(i) Riskfree lending and borrowing is allowed @ 9.00% p.a.

Formulate and solve the optimization equations for the above problem and obtain the
composition of the security A per unit of investment in the tangent portfolio. The
composition of A in the tangent portfolio is closest to:
(A) 0.23
(B) 0.67
(C) 0.56
(D) 0.33
Solution:
We find the composition of the tangency portfolio by solving the optimization

equations. We have
n
Ri − RF = Z i 2
i +Zj ij gives 12 − 9 = 36 Z1 ; 20 − 9 = 64 Z 2
j =1
j i
1 11
so that Z1 = = 0.0833; Z2 = = 0.1719
12 64
0.0833 0.1719
giving X 1 = = 0.3264; X 2 = = 0.6736
0.2552 0.2552


composition of the tangency portfolio. The return (in % p.a.) on the tangency portfolio
is closest to:
(A) 16.23
(B) 16.92
(C) 17.39
(D) 17.97
Solution:
We find the coordinates of the tangency portfolio by solving the optimization
equations. We have
n
Ri − RF = Z i 2
i +Zj ij gives 12 − 9 = 36Z1 ; 20 − 9 = 64 Z 2
j =1
j i
1 11
: so that Z1 = = 0.0833; Z2 = = 0.1719
12 64
0.0833 0.1719
giving X 1 = = 0.3264; X 2 = = 0.6736
0.2552 0.2552
RT = 0.3264  12 + 0.6736  20 = 3.9168 + 13.472 = 17.3888


composition of the tangency portfolio. The standard deviation (in % p.a.) on the
tangency portfolio is closest to:
(A) 6.23
(B) 6.92
(C) 5.73
(D) 7.97
Solution:
We find the coordinates of the tangency portfolio by solving the optimization

equations. We have
n
Ri − RF = Z i 2
i +Zj ij gives 12 − 9 = 36 Z1 ; 20 − 9 = 64 Z 2
j =1
j i
1 11
so that Z1 = = 0.0833; Z2 = = 0.1719
12 64
0.0833 0.1719
: giving X 1 = = 0.3264; X 2 = = 0.6736
0.2552 0.2552
T = 0.3264  6 + 0.6736  8 = 3.8353 + 29.0392 = 32.8745
2 2 2 2 2
T = 5.7336


(ii) No short positions in A & B are allowed.
An efficient portfolio W is constructed with a standard deviation of 12%. The expected

return of W (in %) is:
(A) 23.40
(B) 25.55
(C) 25.50
(D) None of these
Solution:
The desired portfolio will be a combination of the riskfree asset F and the security B.
Hence, we have: σP=XBσB or 12=8XB or XB=1.50. Hence, RP=1.50*20-0.50*9=25.50.
NPTEL ONLINE COURSE
JULY 2022
1 You are given the following information regarding the shares of XYZ Ltd:
Expected return: 12% p.a.

Standard deviation of returns: 10% p.a.
Beta: 1.20
The market standard deviation is 5% p.a. Its unsystematic risk (in %2) measured as the
residual variance under the single index model is:
(A) 32.00
(B)64.25
(C) 64.00
(D) 36.00
Solution
A
EXP RETURN 12
SD 10
TOTAL RISK (VAR) 100
BETA 1.2
MARKET VAR 25
SYS RISK 36
UNSYS RISK 64
2 You are given the following information about the shares of XYZ Ltd & PQR Ltd.
Expected returns on shares of XYZ Ltd: 12% p.a.

Expected returns on shares of PQR Ltd: 20% p.a.
Standard deviation of returns on shares of XYZ Ltd: 8% p.a
Standard deviation of returns on shares of PQR Ltd: 12% p.a
Beta of shares of XYZ Ltd: 1.20
Beta of shares of PQR Ltd: 2.00
The market standard deviation is 5% p.a.

A portfolio ABC is constituted comprising of the shares of XYZ Ltd and those of PQR Ltd
in the ratio of 3:1 (by investment value). The systematic risk (in %2) of ABC measured as
the systematic variance under the single index model is:
(A) 46.50
(B) 36.50
(C) 49.00
(D) 17.00
Solution:
ABC = X XYZ XYZ + X PQR PQR = 0.75  1.20 + 0.25  2.00 = 1.40; 2
sys = 2
ABC
2
m = 49
3 You are given the following information about the shares of XYZ Ltd & PQR Ltd.
Expected returns on shares of XYZ Ltd: 12% p.a.

Expected returns on shares of PQR Ltd: 20% p.a.
Standard deviation of returns on shares of XYZ Ltd: 8% p.a
Standard deviation of returns on shares of PQR Ltd: 12% p.a
Beta of shares of XYZ Ltd: 1.20
Beta of shares of PQR Ltd: 2.00
The market standard deviation is 5% p.a.
A portfolio ABC is constituted comprising of the shares of XYZ Ltd and those of PQR Ltd
in the ratio of 3:1 (by investment value). The unsystematic risk (in %2) of ABC measured
as the residual variance under the single index model is:
(A) 32.50
(B) 16.50
(C) 24.25
(D) 18.50
Solution:
A B
EXP RETURN 12 24
SD 8 12
TOTAL RISK (VAR) 64 144
BETA 1.2 2
MARKET VAR 25
SYS RISK 36 100
UNSYS RISK 28 44
COMPOSITION (Xi) 0.75 0.25
(Xi)^2 0.5625 0.0625
UNSYS RISK OF PORTFOLIO 18.5
4 You are given the following information in respect of the shares of XYZ Ltd:
Expected return: 12% p.a.

Standard deviation of returns: 10% p.a.
Correlation coefficient between the returns on XYZ’s shares and the returns on the
market index is 0.80.The market standard deviation is 5% p.a. The systematic risk (in
%2) measured as the systematic variance under the single index model is:
(A) 64.00
(B) 40.96
(C) 25.96
(D) 25.60
Solution
10
XYZ = XYZ , m
XYZ
= 0.80 = 1.60; 2
sys = 2
XYZ
2
m = 1.602  25 = 64.00
m 5
5 The closing value of the portfolio of Mr X as on March 31, 2021 was 1,00,000 and its
closing value on March 31, 2022 was 1,20,000. The continuously compounded yield
earned by X for the year 2021-22 (in % per annum) is closest to:
(A) 9.71
(B) 18.58
(C) 18.45
(D) 18.23
Solution
120000
LR = ln = 0.1823
100000
6 You are given the following information about the shares of XYZ Ltd:
α(A) = 2% p.a. ;
β(A)=1.5
σ(A)=8.0777% p.a.
σ(market)=5.00% p.a.
The percentage of variance unexplained by the market index (assuming that the single
index model holds) is closest to:
(A) 10.00
(B) 16.00
(C) 12.00
(D) 14.00
Solution:
 A2 −  A2 m2 65.25 − 1.52  52
Un exp lained Variance ( %) = = = 0.1379
 A2 65.25
7 Consider two securities A & B with respective beta values of 1.20 & 2.00 respectively.
The market variance is 25%2. Under the assumptions of the single index model, the
covariance between A & B (in %2) is:
(A) 60
(B)42
(C) 30
(D)12
Solution:  AB =  A  B m2 = 1.2  2.0  25 = 60
8 A market consists of a risky asset A with coordinates (8,12) in (σ, R) space and a riskfree
asset, F with RF=9.00%. The investor is allowed to take long/short positions in both the
assets. You advise your broker to construct a portfolio with INR 7,500 being invested in
A and INR 2,500 in F respectively. However, your broker, due to a misunderstanding in
communication does INR 7,500 worth of short selling of A and invests the short selling
proceeds together with INR 2,500 originally allocated in F to form portfolio W. The
coordinates of W in risk-return space are:
(A) (18,0)
(B) (12,24)
(C) (24,0)
(D) (8,12)
Solution:
NET AMT INVESTED BY

THE INVESTOR 2500
AMT INVESTED IN
RISKFREE ASSET 10000
AMT INVESTED IN RISKY
ASSET -7500
SD OF PORTFOLIO 24
EXPECTED RETURN 0
9 The following information has been extracted about a security A with the objective of
using the single index model of stock returns: α(A) = 2% p.a. ; β(A)=1.5 and
σ(A)=8.0777% p.a. The expected return on the market index is 8% p.a. with a standard
deviation of 5% p.a. The expected return on A (in % p.a.) is:
(A) 14.00
(B) 12.00
(C) 18.00
(D) 10.00
Solution:
E ( RA ) =  A +  A E ( Rm ) = 2 + 1.5  8 = 14
10 Consider three securities A, B & C with the following features:
Expected returns:
A: 14% p.a.
B: 8% p.a.
C: 20% p.a.
Standard deviation of returns:
A: 6% p.a.
B: 3% p.a.
C: 15% p.a.
Correlation between returns of pairs of securities:
A & B: 0.50
B & C: 0.40
C & A: 0.20
(i) Both long & short positions are allowed.

(ii) Riskfree lending & borrowing are both allowed @ 5% p.a..
The content of security A (by investment value) per unit of total investment in the
tangent portfolio T obtained by solving the optimization equations is closest to:
(A) 0.83
(B) 0.17
(C) 0.22
(D) 0.78
Solution:
Refer to the example in the text book by Elton & Gruber & the PPTs.
NPTEL ONLINE COURSE
JULY 2022
SOLUTIONS TO ASSIGNMENT 11
Earnings per Share: 10.00

Dividend Payout Ratio: 0.60
Return on Equity: 10% p.a.
Beta of the company’s shares: 1.50
Average Market Return: 15% p.a
Riskfree Rate of Return: 9% p.a.
The intrinsic value of XYZ's shares using Dividend Discount Model (DDM) & the CAPM is
closest to:
(A) 42.99
(B) 44.57
(C) 48.22
(D) 48.05
Solution:
EPS 10
PAYOUT RATIO 0.6
ROE 0.1
BETA 1.5
RISKFREE RATE 0.09
MARKET RETURN 0.15
DPS 6
COST OF EQUITY 0.18
GROWTH RATE 0.04
NEXT DIVIDEND 6.24
INTRINSIC VALUE 44.57142857
2 The correlation coefficient between the returns on the stock of XYZ Ltd and market
returns is 0.625. The stock’s standard deviation of returns is 23.0939% p.a. while the
market standard deviation is 8.6603% p.a. The equity risk premium is 10% p.a. while
the riskfree rate is 2% p.a. The expected return on the security (in %) is closest to:
(A) 19.17
(B) 18.18
(C) 18.67
(D) 19.27
Solution:
RISKFREE RATE 0.02
EQUITY RISK PREMIUM 0.1
CORRELATION COEFF 0.625
SD MARKET 8.6603
SD SECURITY 23.0939
COVARIANCE 125.0000639
BETA 1.666667518
EXPECTED RETURN 0.186666752
18.66667518
3 You are given the following information in respect of a CAPM efficient portfolio P:
Standard Deviation of P: 30% p.a.
Current Market Value of P: 50,000
You are also given that:
Market Standard Deviation: 10% p.a.

Riskfree Rate: 6.00% p.a.
Expected Equity Market Risk Premium: 12%.
The expected market value of P six months (i.e. 0.50 year) from now is closest to:
(A) 60,500
(B) 64,500
(C) 55,250
(D) 55,175
Solution:
MARKET SD 0.1
RISKFREE RATE 0.06
EQUITY MARKET PREMIUM 0.12
PORTFOLIO SD 0.3
CURRENT MV OF PORTFOLIO 50000
MATURITY 0.5
SINCE THE PORTFOLIO IS EFFICIENT IT WILL LIE ON CML
EQUATION OF CML R(P) 0.06 1.2 SD(P)
RETURN ON GIVEN PORTFOLIO 0.42
APPRECIATION OF GIVEN PERIOD 0.21
HENCE REQUIRED VALUE 60500
4 Let us assume that the CAPM market portfolio consists of two securities A & B in the
ratio of 2:3 by value. The standard deviation of returns of A is 12% p.a. while that of B
is 18% p.a. The coefficient of correlation between the returns of A & B is 0.80. The beta
of security A is closest to:
(A) 0.83
(B) 0.72
(C) 0.59
(D) 0.89
Solution:
MARKET PORTFOLIO A B
COMPOSITION 0.4 0.6
VARIANCES 144 324
SD 12 18
CORRELATION 0.8
COVAIANCE 172.8
COV (A,M) 161.28

COV (B,M) 263.52
VAR(M) 222.624
BETA (A) 0.724450194
ratio of 2:3 by value. The standard deviation of returns of A is 12% p.a. while that of B
is 18% p.a. The coefficient of correlation between the returns of A & B is 0.80. The
market standard deviation (in % p.a.) under the assumptions of the CAPM is closest to:
(A) 14.92
(B) 21.25
(C) 22.50
(D) 16.64
Solution:
COMPOSITION 0.4 0.6
VARIANCES 144 324
SD 12 18
CORRELATION 0.8
COVAIANCE 172.8
COV (A,M) 161.28

COV (B,M) 263.52
VAR(M)/SD(M) 222.624 14.92059
ratio of 2:3 by value. The expected returns and standard deviation of returns of A are
respectively 10% p.a. and 12% p.a. while those of B are 15% p.a. and 18% p.a. The
coefficient of correlation between the returns of A & B is 0.80. The risk-free rate is
5%p.a. The slope of the Capital Market Line under the assumptions of the CAPM is
closest to:
(A) 0.36
(B) 0.39
(C) 0.31
(D) 0.54
Solution:
COMPOSITION 0.4 0.6
VARIANCES 144 324
SD 12 18
CORRELATION 0.8
COVAIANCE 172.8
COV (A,M) 161.28

COV (B,M) 263.52
VAR(M) 222.624 14.92059
EXPECTED RETURNS 10 15
EXPECTED MARKET RETURN 13
RISKFREE RATE 5
SLOPE OF CML 0.536171834
7 You are given the following information:
Expected Return on Market Portfolio: 15% p.a.

Standard Deviation of Market Returns: 21% p.a.
Riskfree rate: 7% p.a.
A well diversified CAPM portfolio P with no unsystematic risk is constructed with an

expected return on 16.60% p.a. The standard deviation (in % p.a.) of P is closest to:
(A) 24.33
(B)25.20
(C) 23.59
(D) 21.87
Solution:
Equation of CML
R − RF 15 − 7
R p = RF + m P =7+ P = 7 + 0.381 P
m 21
For R p = 16.6%, P = 25.20
8 You are given the following information in respect of the stock of XYZ Ltd & the CAPM
market portfolio :
Beta of stock of XYZ Ltd: 2.00

Expected Return of Market Portfolio: 10% p.a.
Riskfree Rate of Return: 6% p.a.
The equilibrium expected return on stock A (in % p.a.) within the CAPM framework is
closest to:
(A) 12.20
(B)12.40
(C) 14.00
(D) 12.60
Solution:
Equation of SML
Rp = RF + P ( Rm − RF ) = 6 + 2.00 (10 − 6 ) = 14.00
9 You are given the following information in respect of the stock of XYZ Ltd & the CAPM
market portfolio :
(i) When the equilibrium expected market returns are 6% p.a., expected returns on stock
of XYZ Ltd are 2% p.a.
(ii) When the equilibrium expected market returns are 20% p.a., expected returns on stock
of XYZ Ltd are 30% p.a.
The beta of the stock of XYZ Ltd is:

(A) 2.00
(B) 1.20
(C) 2.25
(D) 1.50
Solution:
Equation of SML : R p = RF + P ( Rm − RF )
Hence, 2 = RF + P ( 6 − RF ) and 30 = RF + P (20 − RF )
30 − 2
= = 2, RF = 10
20 − 6
P
10 The CAPM based equilibrium expected returns on two securities A & B with respective
CAPM betas of 2.00 & 3.00 are 15% p.a. & 20% p.a. The equilibrium expected return (in
% p.a) on a security C with a beta of 1 is:
(A) 4.00
(B) 8.00
(C) 10.00
(D) 5.00
Solution:
Equation of SML : R p = RF + P ( Rm − RF )
Hence, 15 = RF + 2 ( Rm − RF ) and 20 = RF + 3 ( Rm − RF ) ,
RF = 5, ( Rm − RF ) = 5
NPTEL ONLINE COURSE
JULY 2022
SOLUTIONS TO ASSIGNMENT 12
Spot Price: 5,000 per share

Riskfree Interest Rate: 6% p.a. compounded continuously
The company is not expected to pay any dividends during the next six months. The
forward price of the stock that envisages delivery at the end of six months from now is
closest to:
(A) 5,170.47
(B) 5,110.20
(C) 5,152.27
(D) 5,190.52
Solution:
TIME 0 6
STOCK PRICE 5000
INTEREST RATE(6%) 0.06 0.03
NET STOCK PRICE AT T=0
FORWARD PRICE AT T=6 5152.27
Spot Price: 5,000 per share

Riskfree Interest Rate: 12% p.a. compounded continuously
The company is not expected to pay any dividends during the next six months.
The premium on a six month European call with an exercise price of INR 5,500 is Rs
1,250. The arbitrage free premium on a corresponding European put option with the
same exercise price and maturity is closest to:
(A) 1,529.90
(B) 1,200.80
(C) 1,612.80
(D) 1,429..70
Solution:
DIVIDENDS 0
INTEREST 0
DISCOUNT FACTOR 1
PV OF DIVIDENDS 0
TOTAL PV 0
EXERCISE PRICE 5500
PV OF EXERCISE PRICE 5179.7
CURRENT STOCK PRICE 5000
CALL PREMIUM 1250
PUT PREMIUM 1429.7
3 The excess of the spot price over the futures price of a commodity at a given instant is
called:
(A) the hedge difference at that instant

(B) the basis at that instant
(C) the hedge ratio at that instant
(D) the futures difference at that instant
4 The mechanism of hedging may be used to:
(A) manage price risk

(B) manage interest rate risk
(C) manage stock market risk
(D) All of the above
5 Which of the following is the primary mechanism to manage the default risk of a futures
contract?
(A) Credit checks for both buyers and sellers

(B) Flexible delivery arrangements
(C) Margining & marking to market
(D) High liquidity
6 A call option has an exercise price of 350. The price of the underlying stock is 342. The
call is:
(A) In the money

(B) Out of the money
(C) At the money
(D) None of these
7 You are from India. You have been offered admission in a US university. For
confirmation of admission, you need to pay the first instalment of fee at the end of 3
months from now in USD. You want to protect yourself against currency risk. Which of
the following procedure may be adopted by you to hedge your risk?
(A) By taking contracts to buy USD at a pre-agreed forward price.

(B) By taking contracts to buy INR at a pre-agreed forward price.
(C) By taking contracts to sell USD at the spot price.
(D) By taking contracts to buy USD at the spot price.
8 If the BSE S&P Sensex futures is undervalued relative to the spot BSE S&P Sensex, an
arbitration should:
(A) Sell short all the stocks in the BSE S&P Sensex and buy the BSE S&P Sensex futures
(B) Buy the BSE S&P Sensex futures
(C) Sell short all the stocks in the BSE S&P Sensex and buy call options on the BSE S&P
Sensex
(D) Sell the BSE S&P Sensex futures and buy all the stocks in the BSE S&P Sensex
9 If an investor anticipates a significant fall in the stock market in future, the investor
should:
(A) sell a put option on the BSE S&P Sensex

(B) buy a call option on the BSE S&P Sensex
(C) long the BSE S&P Sensex futures contract
(D) short the BSE S&P Sensex futures contract
10 the performance of both sides of a futures trade is guaranteed by:
(A) State Government

(B) Exchange Clearing House
(C) Securities & Exchange Board of India
(D) Futures Commission Merchant

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NPTEL ONLINE COURSE

1 Consider the following information pertaining to XYZ Ltd., a company

The preferences shareholders are entitled to participate in the surplus after

Assuming that the company decides to distribute the entire amount of

Profit after tax: 90.00

Realizable value of its assets (net of current liabilities): INR 50 million

3 Which of the following is a feature of futures contracts:

(A) Futures are customized through negotiation between parties.

Taking position in futures contracts entails deposit of margin in line with

4 XYZ Ltd is a company that is incorporated and registered under the

Realizable value of existing assets (net of current liabilities): INR 500

The equity capital consists of 50 million equity shares of nominal (face)

Capital Structure (INR in millions)

21-22 year profit (EPS x No of shares): 14.00

7 A European call option is the right to buy an asset at a predetermined price

Consider a call option on XYZ stock written at an exercise price of 1,000

(A) The tax liability would increase

9 A European put option is the right to sell an asset at a predetermined price

Consider a put option on XYZ stock written at an exercise price of 1,000

(A) Equals the price of the underlying asset on that date.

This is required by the principle of no-arbitrage.

Coupon Rate: 30% p.a.

The intrinsic value (in INR) of the bond is closest to:

Face Value of bill: 1,00,000

P1 − P0 360 100000 − 98000 360

Face Value of bill: 1,00,000

P1 − P0 360 100 − 98 360

PURCHASE PRICE OF T BILL 98

Face Value of bill: 1,00,000

DISC YIELD AT ACQUISITION 0.12

DISC YIELD AT ACQUISITION 0.06

Payoff of call C: 0 if S<1,000 and 100 if S>1,000 or S=1,000

Payoff of combination: 100 if S<1,000, 100 if S>1,000 and 100 if S=1,000

(A) less than INR 100

Payoff of call C: 0 if S<1,000 and 100 if S>1,000

(A) Bond Y has a coupon rate at least equal to that of Bond X

1. The following information is available in respect of a bond:

Face Value: 1,000

The current market price of the bond is closest to:

Face Value of the bond: 1,00,000

The bond is an annual level coupon bond quoting at par

SPOT RATE (P.A.) 10% 20%

DISCOUNT FACTOR 0.9091 0.694444

YTM 0.1905582 -100000 19056 119055.8

Face Value of the bond: 1,00,000

SPOT RATE (P.A.) 10% 20%

DISCOUNT FACTOR 0.9091 0.6944

YTM 0.1608388 -99999 62362 62362

5 Consider the following data in respect of a bond investment:

Face Value of bond: 1,000

6 Consider the following data in respect of a bond investment:

Face Value of bond: 1,000

7 Consider the following data in respect of a level coupon bond investment:

Face Value of bond: 1,000

8 Consider the following data in respect of a level coupon bond investment:

Face Value of bond: 1,000

1 Consider an annual level coupon bond with the following parameters:

Face Value: 1,000

LET FACE VALUE BE 1000

Face Value: 1,000

The bond’s convexity (in years2) is closest to:

Face Value: 1,000

(A) (-) 7.35