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

Caselet 3

learn the caselet carefully and ans the subsequent questions:


11.
According to the caselet, Bond ETFs differs from Bond Ladders. explain. Also state the disadvantages attached with Bond ETFs.

(7 marks)
< ans >

12
Bond ETFs are provided priority over Index Funds. explain.

(7 marks)
< ans >

In India, ETFs were 1st introduced by Benchmark, an asset management company on January 8, 2002. The 1st fund launched by the company was Nifty BeEs (Benchmark Exchange Traded Scheme), Which is the 1st ETF product in Asia, excluding Japan and 3rd in the emerging markets. An ETF is a kind of Investment Company whose investment objective is to achieve the identical return as a particular market index. An ETF is similar to an index fund in that it will primarily invest in the securities of companies that are included in a opted market index. Be sure to compare your options before investing.

Now, Bond ETFs are also becoming popular among the investor community especially those who immunize their liabilities. But bond ETFs differ from bond ladders. Unlike stock trading - for which automation has leveled the playing field for retail and institutional investors - the bond market lacks liquidity and price transparency other than for the most liquid of bonds. For the self-directed bond investor, for whom it may make little sense to invest in expensive actively managed bond funds, exchange-traded funds (ETFs) which track bond indices may offer a good option.

The suppliers of bond ETFs get around the liquidity issue by using representative sampling, which simply means tracking only a sufficient number of bonds to represent an index. The bonds used in the representative sample tend to be the largest and most liquid in the index. Bond ETFs are provided priority over index funds. Also, provided the liquidity of government bonds, tracking errors will be less of a issue with ETFs that represent government bond indices. However, bond ETFs are suitable for particular strategies. If, for instance, you are looking to create a specific income stream, bond ETFs may not be for you.




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Suggested Answers
Security Analysis-II (212) : July 2006

part D : Case Study

1.
SWOT Analysis

Strength

· Abundant availability of raw materials: India is 1 of the largest producers of natural and man-made fibers. Abundant raw material availability allows the sector to control costs and decrease overall lead times across the value chain.

Earning:   Approval pending.