VERBAL QUESTIONS must be answered concisely and in no less than 300 but no more than 500 words.
QUANTITATIVE QUESTIONS require that all work be shown so in case of errors partial credit can be awarded.
Verbal
Carefully think about the question before answering. Structure your response to insure you take into account all the main points raised.
A well written answer will be concise, and both easy to read as well as understand. The following components will be considered for verbal questions.
Quantitative
Show all work from basic formula to final answer.
While maximum points will be awarded for correct answers, partial credit can be awarded if an intermediate result caused the wrong answer.
1) The modern global economic system
In finance we learn that while the future is always uncertain there are ways we gain insight and make the best possible investment decisions possible. Currently the developed economies are in deep recession while the so-called "BRIC Economies" seem to be doing well.
You will be making a single investment, your life savings, in either the developed economies or the BRIC economies. Pick one and justify your choice.
2) Fixed income instruments
2A)When a bond is purchased the buyer is acquiring a set of cash flows.
What considerations must be undertaken by the purchaser before undertaking a trade? What are the possible risks the buyer is exposed to? What risks do the sellers incur when offering debt to the public?
2B)Calculate the price of the following instruments, showing all work:
|
Nominal
|
2500
|
100
|
1000
|
|
Coupon(%)
|
6%
|
6%
|
10%
|
|
Maturity (years)
|
4
|
3
|
2
|
|
Payment frequency
|
ANN
|
SEMI ANN
|
ANN
|
|
Discount rate
|
3%
|
6%
|
|
Which bond trades at par?
Having identified the appropriate bond, use it's parameters to answer the following questions:
What will be the price of this bond if the discount rate increases by 1%?
What will be the price of this bond if the discount rate decreases by 1%?
3) Investments
3A)What are the two components to total return? What does expected value measure? What does standard deviation measure? How can each result be used to help us purchase securities?
3B)Calculate the total return:
From Jan 2000 to Jan 2010
From Jan 2000 to Jan 2003
From Jan 2003 to Jan 2004
Calculate the standard deviation of price
From Jan 2001 to Jan 2002
From Jan 2002 to Jan 2008
4) Equities
4A)Why is a healthy equity market important for a country?
What alternatives exist for funding if companies can't raise money in the equity markets?
4B)Calculate the share price of a company the pays a fixed dividend of £2.30 pa when the required rate of return demanded by equity investors is 3%. What will the price be if investors demand 12% to hold these same shares? What will be the price if investors demand 3% to hold these same shares?
What will the share price be under all three scenarios if dividends grow by a rate of 1.5% pa?
5) Commodities
5A)It is well documented that commodity prices are very volatile when compared to other asset classes. Discuss factors that cause volatility in the commodity markets.
5B)For the following questions assume the risk free rate of return is 2.50%
Your company imports large quantities of oil. On January 1st 2011 the spot price of oil is $70. You are concerned that recent events will drive the price of oil higher in 90 days time when you will need to purchase a large quantity. Under these circumstances calculate the price of a forward contract. In 90 days time the spot price of oil is $125; calculate the profit or loss of your forward position.
What is the 10 month forward price of a dividend security based on the following information: