Board paper

Fundamentals of Investment 2081 Board Question Paper

FIN 253 · Fundamentals of Investment

Programme
BBS
Academic year
Fourth Year
Exam year
2081 BS
Sitting
regular
Full marks
100
Duration
180 minutes

Tribhuvan University

Faculty of Management

Office of the Dean

2081 BS / Regular Examination

Course: FIN 253 · Fundamentals of Investment

Level: Bachelor of Business Studies (BBS) · Fourth Year

Full Marks: 100

Time: 3 hrs.

Candidates are required to give their answers in their own words as far as practicable. The figures in the margin indicate full marks.

Section A

Brief Answer Questions : Attempt All questions .

[10*2=20]

  1. State four money market vehicles.

    [2]
    View model solution

    Four Money Market Vehicles: T-bills, Commercial paper, Certificates of deposit, Bankers acceptances.

  2. Suppose you have a call option of Rs. 25 premium to buy share of Delta Company (DC) at Rs. 350 per share. Calculate value of call option (pay-off) and profits if the market price of Delta stock rises to Rs. 400 per share.

    [2]
    View model solution

    Call Payoff & Profit: Payoff = 400 - 350 = Rs 50; Net Profit = 50 - 25 = Rs 25.

  3. Assume that the risk-free rate is 6 percent and the market risk premium is 5 percent. What is the required rate of return on stock X with its beta of 1.30? Would you like to sell the stock X if its expected rate of return is 10 percent?

    [2]
    View model solution

    CAPM Return: 6% + 1.30(5%) = 12.5%. If expected is 10%, SELL (overvalued).

  4. State major sources of risk.

    [2]
    View model solution

    Sources of Risk: Business risk, financial risk, liquidity risk, exchange rate risk, default risk.

  5. Differentiate between open-end and closed-end funds.

    [2]
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    Open-End vs Closed-End Funds: Open-end buys/sells continuously at NAV; closed-end issues fixed shares traded on secondary exchange.

  6. What is the technical analysis of financial securities?

    [2]
    View model solution

    Technical Analysis: Forecasting price trends using historical price charts, moving averages, and volume.

  7. What are the major sources of investment information?

    [2]
    View model solution

    Sources of Information: Audited annual reports, SEBON notices, NEPSE disclosures, financial newspapers.

  8. Write the meaning of fixed income securities.

    [2]
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    Fixed Income Securities: Debt contracts providing specified, scheduled interest and principal return.

  9. What is term structure of interest rates?

    [2]
    View model solution

    Term Structure of Interest Rates: Relationship between bond yields and terms to maturity displayed on yield curve.

  10. Assume current market price of stock Y is Rs. 175, and constant growth rate is 10 percent. One convertible bond of Company Y can be converted into its 5 common stocks, what is the conversion value of the convertible present?

    [2]
    View model solution

    Conversion Value: 5 shares * Rs 175 = Rs 875.

Section B

Descriptive Answer Questions : Attempt any FIVE questions .

[5*10=50]

  1. Gautam short sells 2,000 stocks at Rs. 100 per share. The initial margin requirement is 60 percent and maintenance margin is 30 percent

    a. What would be Gautam’s amount of margin equity and margin loan if stock price rises to Rs. 115 per share?

    b. What is the margin call price of stock? Would Gautam receive margin call if the market stock price rises to Rs. 115 per share?

    c. What is Gautam’s rate of return from short sells of stock if stock price falls to Rs. 80 per share assuming no interest on margin?

    [10]
    View model solution

    Gautam Short Sale: Initial equity = 120k. At Rs 115, Equity = Rs 90k, Debt = Rs 230k. Margin call price = Rs 123.08; no call at Rs 115. Return at Rs 80 = 33.33%.

  2. The current dividend on common stock of Alpha Company (AC) is Rs. 12 per share. The required rate of return on common stock of the company is 16 percent.

    a. What is the present value of the Alpha’s stock if the constant growth rate of earnings is 9 percent per year forever?

    b. Suppose growth rates of earnings of the company are not constant. Growth rate of earnings of Alpha stock is 10 percent for the first three years and 6 percent thereafter. What would be the present value of the stock?

    [10]
    View model solution

    Alpha Company DDM: a. Constant growth: 12(1.09)/0.07 = Rs 186.86. b. Two-stage growth: D1=13.2, D2=14.52, D3=15.97, P3=169.30, V0 = Rs 140.24.

  3. The composition and information of shares and prices of Artificial Fund Portfolio are given below:

    Stocks Number of shares Price per share (Rs.)
    K 2,000 120
    L 3,000 140
    M 4,000 150
    N 5,000 110

    The fund has accrued management fee obligation of Rs. 100,000. There are 50,000 shares outstanding.

    a. What is the net assets value of the Artificial fund?

    b**.** What is the percentage of premium or discount if the fund is currently selling in the market at Rs. 32 per share?

    [10]
    View model solution

    Artificial Fund: Portfolio value = 240k + 420k + 600k + 550k = Rs 1,810,000. NAV = (1,810,000 - 100,000) / 50,000 = Rs 34.20. At Rs 32, discount = 6.43%.

  4. Consider the following three stocks given in the following Table. Q represents number of shares and P represents price of stock.

    Day 0 Day 1 Day 2
    Stocks Q₀ P₀ (Rs.) Q₁ P₁ (Rs.) Q₂ P₂ (Rs.)
    Alpha 200 80 200 90 200 110
    Beta 300 100 300 110 600 65
    Gamma 400 120 400 130 400 120

    Stock Beta splits two-for-one on day 2.

    a. Calculate price weighted indexes (PWI) for Day 0, Day 1 and Day 2.

    b. What would be return for the day 1 based on PWI?

    c. Calculate value weighted indexes (VWI) for Day 1 and Day 2, assume base index is 100.

    d. What would be rate of returns for day 2 based on value weighted index?

    [10]
    View model solution

    Stock Beta split PWI and VWI calculations across Day 0, Day 1, and Day 2.

  5. Consider the following information of portfolios A, B and C:

    Portfolios Average portfolio return (%) Standard deviations (%) Beta
    A 16 12 1.15
    B 14 5 1.05
    C 11 7 0.80

    Assume risk free rate is 5 percent.

    a. Estimate Sharpe’s indexes.

    b. Estimate Treynor’s indexes.

    c. Interpret your results.

    d. Would you prefer Treynor’s measures rather than Sharpe’s measures for portfolio performance evaluation?

    [10]
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    Portfolios A, B, C Sharpe and Treynor measures: Portfolio B achieves highest Sharpe (1.80) due to low volatility.

  6. Describe the investment processes for financial assets in Nepal.

    [10]
    View model solution

    Investment Process in Nepal: KYC, demat opening, broker registration, ordering via TMS, clearing through CDSC.

Section C

Analytical Answer Questions : Attempt any TWO questions .

[2*15=30]

  1. Describe present investment environment in Nepal. Discuss the different types of security markets in Nepal.

    [15]
    View model solution

    Investment Environment & Securities Markets in Nepal (Primary vs Secondary, NEPSE, SEBON).

  2. Consider the following probability distribution and returns of stock M and stock N:

    State of Economy Probability Return of stock M (%) Return of stock N (%)
    First 0.30 10 35
    Second 0.40 15 15
    Third 0.30 20 (5

    a. Calculate expected returns of stock M and stock N.

    b. Estimate standard deviations of stock M and stock N.

    c. Calculate coefficient of variations of stock M and stock N. Which stock would you prefer to invest?

    d. Compute the correlation coefficient between returns of stock M and stock N.

    e. If you form a portfolio with your investment of 45 percent funds in stock M and 55 percent funds in stock N, calculate the expected portfolio return and risk.

    [15]
    View model solution

    Stock M and N: Expected returns (M=15%, N=15%), SD (M=3.87%, N=15.49%), CV, correlation (-1.0), and 45/55 portfolio return (15%) and risk (6.77%).

  3. An 11 percent coupon bond of Rs. 1,000 par has 5 years maturity. The bond is currently selling in the market at Rs. 950 per bond. Assume coupon is paid annually.

    a. What is the current yield of the bond?

    b. What is the yield to maturity of the bond?

    c. What is the capital gain of the bond?

    d. Would you prefer to buy the bond at current prevailing price of Rs. 950 if your required rate of return is 12 percent?

    e. Differentiate between yield to maturity and yield to call of the bond.

    [15]
    View model solution

    11% 5-year bond selling at Rs 950: Current yield = 11.58%, YTM = 12.44%, Capital gain = 5.26%. Buy since YTM (12.44%) > required return (12.0%).