Institute of Chartered Financial Analysts of India (ICFAI) University 2006 Certification Finance Security Analysis - II - Question Paper

One of the kinds of duration is, replaced duration, a revised version of Macaulay’s duration, is commonly used as a measure of bond risk. replaced duration estimates the sensitivity of a bond’s price to change in market yield. A bond with a 6.00 replaced duration experiences approximately a 6% change in price for every 100BP change in market yield. A bond with a high duration has more market risk than a bond with a low duration. Graphically, replaced duration is the slope of the line tangent to the price-yield curve at the current combination of price and yield. Both replaced Duration and Effective Duration are the ratio of the proportional change in bond value to the parallel shift of the spot yield curve. The curvilinear price-yield relationship confirms that replaced duration serves only as an estimate of the actual underlying relationship ranging from price and yield. The accuracy of replaced duration is constrained by the assumption of a small, instantaneous parallel change in yield. replaced duration can estimate percentage change in prices only for small yield modifications. This will lead to unequal price modifications in 2 bonds of equal duration for large yield modifications. This is because of the differences in their convexity.

Caselet 2

learn the caselet carefully and ans the subsequent questions:

8. Enumerate the commonly seen characteristics of penny stocks. explain a few of the known ways of meddling with the market integrity.

(7 marks) < ans >

9. Discuss, how the launderers make manipulation by investing in the penny stocks.

(7 marks) < ans >

10. State a few of the risk containment measures that have been put in place to render the secondary market, fair and efficient.

(8 marks) < ans >

The bull run in the stock market hasn’t brought happy memories for all the investors. This is especially actual in the case of those who hastily bought shares of small companies that were suddenly showing signs of super growth. In terms of fundamentals, the economy is going strong from all fronts but 1 has to be stock specific and cautious about their portfolio items. Usually an investor with less knowledge of market enters when it has already reached its peak. They end holding junk stock in their portfolio. This has been seen in the previous bull runs, when companies having no track record and futile fundamentals have emerged with their prices at all-time highs and at great trading quantities. These stocks are mostly a outcome of manipulations made by operators to lure the investors. The entire process to luring the small investor is done via Circular trading. Circular trading comes in news during every rally and confers schooling to the small investor. It comes again and again with stronger force. Ketan Parekh scam, which ensues in the year 2000-01, clearly illustrates how circular trading takes place in such a strong regulatory framework prepared by SEBI. This time, the mechanism of circular trading is highlighted through IFSL, which ascended from a mere Rs.17.55 (Share price of Rs.10 each) in August 2004 to Rs. 33.60 in September 2005 (Share price of Re.1 each).

Earning:   Approval pending.