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

(e)
Both (II) and (III) above.


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END OF part A









part B : issues (50 Marks)

· This part consists of ques. with serial number one – 6.

· ans all ques..

· Marks are indicated against every ques..

· Detailed workings should form part of your ans.

· Do not spend more than 110 - 120 minutes on part B.



1.
Consider the subsequent zero-coupon curve:

Maturity (years)
Zero-coupon rate (%)

1
5.00

2
5.50

3
5.75

4
5.90

5
6.00


An investor is interested in purchasing a 5-years bond with a face value of Rs.100, which delivers coupons in the subsequent manner:

Years
Coupon (%)

1 - 2
8.0

3 - 4
8.5

5
9.0


You are needed to

a. calculate the price and YTM of this bond at the current term structure and when the zero-coupon curve increases instantaneously and uniformly by 0.5%. Indicate the impact of this rate rise for the bondholder in both absolute and relative terms.

b. calculate the investor’s annual rate of return considering that the zero-coupon curve remains stable over time and the investor holds the bond until maturity and reinvests the coupons at the zero-coupon rates.

c. calculate the rate of return earned by the investor, if he purchases a one-year, two-year and a three-year zero coupon bond and sell all bonds after a year. The investor expects the yield curve to shift to left by 25 basis point across the zero coupon bonds after 1 year.

(3 + two + three = eight marks)
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2.
Indo Medical Labs designs, manufactures and markets all the necessary equipment for mid range and super specialty hospitals. The company had reported earnings per share of Rs.1.50 in 2005, on which it paid no dividends. It had revenues of Rs.7.89 per share in 2005. It had capital expenditures of Rs.0.38 per share in 2005 and depreciation of Rs.0.16 per share in the identical year. Earnings and revenues are expected to grow 20% a year during the high growth period. The earnings growth rate is expected to decline linearly over the subsequent 5 years to a rate of 5% in 2015 and then stabilize at that rate. During the high growth and transition periods, capital spending and depreciation are expected to grow at the identical rate as earnings, but are expected to offset every other when the firm reaches steady state. The working capital was 65% of revenues in 2005 and is expected to remain the identical till 2015. The debt ratio for the company is 10%.

Earning:   Approval pending.