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

You are needed to:

a. obtain the current value per unit for Mehta Investment Trust (MIT) as per the dividend discount model.

b. compute per-unit book value and residual income for MIT for the next 4 years and use those outcomes to obtain the per unit value using the residual income model.

c. compute return on equity and use it as an input in the residual income model and compute the MIT’s per unit value.

(2 + three + three = eight marks) < ans >

2. Consider a 9% bond (face value Rs.1000) redeemable after five years at a premium of 6%. Currently the bond is available in the market at a price of Rs.1124.80.

You are needed to:

a. compute the interest on interest at reinvestment rate of 7% and 10% for different possible holding period.

b. compute expected market price for different possible holding period at the reinvestment rate of 7% and 10% and the capital gain that would arise, if the bond were sold at that price.

c. compute the total return from bond, classifying the every income on bond, for different possible holding period at the reinvestment rate of 7% and 10%.

d. Interpret the effect of reinvestment rate on the total return.

(2 + four + three + two = 11 marks) < ans >

3. Mr. Nandagopal Reddy is holding 2 bonds A and B with an annual coupon of 7% and 8.5% and their terms to maturity are four years and six years respectively. The face value and maturity value of the bonds is Rs.100. Spot rates prevailing in the market as indicated by the yield curve are:

Maturity (in years)
Spot rates (in %)

1

2

3

4

5

6
5.62

6.05

6.30

6.43

6.58

6.72


You are needed to:

a. compute the expected change in the prices of bonds A and B for a 0.75% change in yield to maturity, using the convexity concept.

b. compute the 1 year holding period return on the bonds assuming that spot rates will fall in twelve month’s time by 0.25% across the maturity spectrum.

(10 + two = 12 marks) < ans >

4. Mukesh Modi, an investor is planning to invest in a debenture issued by Shah Ltd. The company is coming up with an problem of partly convertible debentures (PCDs) to part finance its expansion program. Company has decided to problem the debenture of face value of Rs.1000 at Rs.970 only. The annual coupon payable by the company is 10%. The debenture has been divided into 4 various parts.

Earning:   Approval pending.