Shiv Das Delhi University Series CBCS B.Com (Hons) FUNDAMENTALS OF INVESTMENT PAST YEARS Examination Papers (Solved) Shiv Das & Sons Educational Publishers study material forthe college students. ‘Question patterns are ing to the ‘new CBCS pattern. | elso recommend ‘Shiv Das to every B.Com. students, a @ amazon customer detetetetls Good Book Reviewed on 28 November 2019 “ in exam and they are from books. Price is also low than other books. » M1 anktra sain Nice books! Realy Help Many stdents have taken for eres a @. muxesh cuPta RIOT Worthy Reviewed on 19 May 2018 “ @ very svsremaric By Neena Soha on 17 Dee 2019 “ eee ee arene a See Se » M1 suit KHURANA To: Info@shivdas.in Reviewed on August 11, 2019 “ I've received your books. Thanks a lot for this. Books are good, precise and ‘complete. All updated and based on the latest pattern a (@ secures exceLLent maRKS 8 Raj Kamar on 12 Dac 2019 “ Received your books today. ind it vety useful forthe exam preparation. 850d that you have given the latest syllabus in your ooks. Thank you so much fortis. ™ peerak BABU info@shivdas.in fee on Oct 25, 2019 “ | appeared for my DU ‘These bcoks helpedSyllabus Theory Unit 1, The Invesrexr ENVIRONMENT Unit 2 Fen Income Secunrres ‘Unit 3. Areroactes or Equrry ANALYsts Unit 4. Porrrouo ANaLysis ND Fivancian Derivarives Unit 5. Invesron Peorscrion Practical Problems (Unit Wise) Unit 1. Tne Iyvesrenr Exvironwent Unit IL. Feo Ixcome Srcurrries APPROACHES oF Eguiry ANALYSIS, ~ Portvouio ANALYSIS AND Fivanctat, Derivarives University Question Papers aaaa 98 129 ‘onwards Contents SYLLABUS B.Com. (Hons.) FUNDAMENTALS OF INVESTMENT ‘Course Objective: 1 COURSE CONTENTS Unit-l: The Investment Environment The investment decision process, Types Unit-V: Investor Protection tock exchanges in investor protection; Investor tion internal assessment purposes, aoaa in)univ THE INVESTMENT ENVIRONMENT wvestment refers to channelisation of funds to the assets which are some return in future either by way of their y which requires commitment ent with an expectation of recei 2 ‘SHIVA DELHI UNIVERSITY SERIES Investment and Speculation. Investment refers to channs to the ascets which ate likely to yield some return in future either by way capital appreciation or dite to accrual of income on them, The uncertainty factor ‘makes Investment a well-grounded and carefully planned speculation. Y le which isa least greater than the r the end of the period, enough funds are available to purchase goods/sorvices ‘which were sacrificed earlier at the time of investing money along with some due to accrual of income bonds ete. Thus, invest any financial/ physic ‘additional retums Distinction between Investment and Speculation Basis Investment ‘Speculation ‘Time Horizon Long-term time framework | Shorten planning — beyond — twelve | holding assets even for a dayUNIT 1: THE INVESTMENT ENVIRONMENT 3 Risk Limited ris Very high risk. Returns Consistent etums over long | High returns even though period even though it is | risk nay be high. “Hearsay, inside inf market rumors, et. are relied upon. ‘Own and may use borrowed Junds. Market behaviour infor market tps and rmous, complete loss of funds including the principal ammount. Gambliy Q.4, Briefly explain the different kinds of investment outlets investor. (2008) The investor has the option to inves ty market, He also has the ‘Q.5. Distinguish between Direct investi ‘Ans, Direct Investing, Di securities by the investo securities such as shares, debentures, or derivative products, or money market 4 inste such as SHIVA DELHI UNIVERSITY feasury Bills, Commerc Certificates of Deposit, etc. Difference between Direct Investing and Indirect Investing ivholders have ownership interest ths investment compa SERIES Bills, Commercial Papers, ‘manage the portfolio, Direct Investing Tuiirect Tavesting 1 Choice of Investment tructure or derivatives, Link In indirect investing, there Dependability of Return Decision Costs investing. The costs of direct invest ment include brokerage, fees for financial planning, advice and your own time. planning advice Regular small. investments, switching in an cash, and reinvestment of income are difficult and ex- pensive. it of iUNIT 1: THE INVESTMENT ENVIRONMENT real terms; this defeats the purpose of the investment. Safety of the principal. The investor is also interested in the safety of sstment. Bank deposits are more secure is regard. Invesiment in debentures is more secure than in preference shares which in tum is more secure than w He tries to eam highest possible return from available investment ‘opportunities with minimum risk. He is ready to assume a higher risk expected return is proportionately higher. Investment Decision Process Q. 7. Define investment. Diseuss briefly the steps involved in the investment decision process. (2007) Or 6 SHIVA DELHI UNIVERSITY SERIES What factors should an investor cansider while making investment decisi sacrifice of present consumption fo get ret invested funds grow at the rate which is at least greater than the rate of inflation lable to purchase goods/ © of investing money along with so that at the end of the period, enough funcis are services which were sacrificed earlier at the annelisation of funds to the assets which are 1d some return in future either by way of their cera of income on them. These assets are genet bonds te Is an activity which requires commitment of wm in present with an expectation of receiving additional Portfolio construction, and 1. Investment Policy. The invested and its objective, The funds to be invested may either be savings of the investor or they may have been borrowed ve of investment may include different required rates Further, the investor refess to various investmentUNIT 1: THE INVESTMENT ENVIRONMENT 7 Rate of ifabon nominal return R= 12% and rate of inflation i= 8% then the rate of 2008-09. He received dividend of {40 and finally sold it for 8270 in 2009-2010. Rate of inflation was 5%. What would his seturn be? Sol. Stage I. Normal rate of return: = [(@70 - 250) + 40]/250 = (20 + 40)/250 = 24% Stage II, Real rate of appraisal and revision. is commitment of funds for future income, Making sound 8 SHIVA DELHI UNIVERSITY SERIES eto be applied of te invewtnent se asset categories Concerr Or Risx-Return (Q. 9. Define Risk. Explain the various sources of risk. e011) ‘Ans. Risk is defined as a variation of actual return from the expected fdlual while investing his funds tris to estimate the risk a and make final decisions of investment only if rhe individual is grin value of security priced crease in interest rate would make debt lation. It arises when the change in price index for a given period is more than the change in retum earned on investment by the investor. view of this statement, write a note on the meaning and types of investment risk. (2014 func) ‘Ans. No Investment is risk-free. Most investors are risk averse but they expect ‘maximum retums from their investment, Every investment must be analysedUNIT 1: THE INVESTMENT ENVIRONMENT 9 ed preference shares, debentures and public deposits with companies. These have features of high risk. An investor isto make his investment decisions keeping in view his requirements of profitability not fulfill his objective of appreciation in his capital base. "The main concern while making an investment in any araa is defined as variation of actual return from the expected return, individual to estimate the amount of risk being undertaken by him investment decisions, “The factor ‘can Jead to deviation of actual returns from expected retums ccan be divided into Systematic Risk and Unsystematic Risk, The Systematic risk and enhanced product of some type. The process may involve a simple union w ‘SHIVA DELHI UNIVERSITY SERIES (0 products or make that provides benefits that 1 financial enginesring in the past few decades: Secured Premium Notes SPN) are[UNIT 1: THE INVESTMENT ENVIRONMENT u ‘ “Market Regulators. The sant to bring in discipline in the market by making certain laws, id regulations and procedures. SEBI is a ood example of the market regulator in Indi ‘Market Participants. Which include individuals, corporate organisations, government intermediaries and regulators. Q. 14. Distinguish between capital and money markets. Discuss briefly the functions performed by financial marks (2007, 2016 June) a Money Market? How is Instruments. Capital Market is a market fo ancial instruments such as shares, debentures and_mul 15. Name the important participants of security market. Explain any two of them in brief. i 2 ‘SHIVA DELHI UNIVERSITY SERIES and Exchange activities taking place within the securities market. () RBL The Reserve Bank of India keeps a watch over the activities relating to financing of play the market through banks. ‘These members execute customer's orders to buy and el onthe stock exchange ind thle Grin tecctve negated Gommnieion Oo tes kensactions ‘evidence of the fact that tor his client thas occurred 1 broker has executed a transaction ina given security ‘is contract note also contains the time st which the transaction ock exchange and the price at which the traUNIT 1: THE INVESTMENT ENVIRONMENT B For each trading day, a schedule 3, Settlement of Transaction on the Stock Exchan, here is pay-in and pay-out of securities and funds. issued by stock exchai particular day. The will ich take wing act ids. ed funds and shares for their xecount, Finally, the seller would im and the buyer would get shares purchased wokerage fees rom theit clients for services provided to them, ‘0. 17. Compare the following investments in terms of return, risk, liquidity and tax shelter: (2010) Equity shares Non-convertible debentures Residential house ic) Gold. Residential Gold ‘House Rent can| Iti quite high iF be saved/eamed| kept for along fom regular bss. | sme Shores and entre Riske | Risk is high, is why return relatively high No risk provided Tia ‘ealompton Tax | Capital shelter [to be pal Short-term oF taxable vested in. house ny (Resi sp (Bonds) for specified period Q. 18, Discuss briefly the following: (2083, 2015 June} (@) NIFTY (0) Sensex. u SHIVA DELHI UNIVERSITY SERIES NIFTY has emerged ecosys ‘Sensex was frst compiled in 1986 and its the most widely followed stock market index in India. It is market capitalisation-weighted index of the equity of 30 mespecified groups selected on the basis of ‘of major industries. Several global equity ir method. The base year chosen for Sensex was iges covered are Mumbai, Delhi, Kolkata, Al ost ten times from June 1980 to the present date, googunird FIXED INCOME SECURITIES Fixep Income Securrmies Q.1. What are the merits and domerite of having fixed income secur your portfolio? 0 ‘Ans, Fixed Income securities represent a claim on a periodic stream of incor ‘over a given period of time. The holder of fixed income security gets a fixed periodic income during the hol securities, From the which represent an ob loan. A fixed chargedt is assured after regular ‘+ encures steady income i intervals * helps keeping a gauge on retums so that future expenditures and investments can be planned, + Fixed income securities may attract premium on redemption. Demers: ‘+ Higher interest payments may lead 9 company to file for bankruptcy. Bono Features Q. 2. State the basic characteristic features uf bonds. s that ean range from three years or less), three to ten years) and long-term bonds ly offer some from of interest paymer fructure: “Fixed Rate Bonds” provi schedule for the life of the 16 SHIVA DELHI UNIVERSITY SERIES difference in price at which equity shares ar their prevailing mark rs acquire their bonds and automatically accept the indenture. The role of the trustee is mainly coordination between the Company and the ‘The Company does not directly enter into ar agreement with each of 1en copy of the Bond; iged property as security; (f) Endorsement; () Registration; (h) Restrictions;UNIT 2; FIXED INCOME SECURITIES. v Agreements; (2014 june) fing rate is also called variable vate, It is based ‘on the rate of interest on a financial asset, which may vary over the lifetime of the asset, The change occurs due te change in market rates, It consists of cap and ‘which the interest rate differs. The bond. which is issued by the ty period w uttable bonds, the bondholders have the right to redeem the bone! before the maturity. The company usually ‘oxercises its right of redemption when market rate of intorest is less than the ie and the bondholder exercises his right of seeking redemption when Noe: Cala table Bon 'Q. 6. Write a short note on callable bonds and junk bonds. (2013) ‘Ans. Callable bonds. The companies have the right to redeem the bonds before period. The company genecally exercises this right when market rate of interest i leas than the coupon rate k bonds. These are the bonds which have very high coupon rate but they are secured by an asset of the company. These bonds, therefore, ate subject to it risk, These are mainly subscribed by the speculators, wertible bond? Why do investors prefer a convertible boad over a non-coavertible one? (2008) “Ans. A bond ensures fixed payment of interest to its investors at pre-determined! ‘period of time. The company issuing bonds has to ensure that it generates enough, rity period whichev 6 SHIVA DELHI UNIVERSITY SERIES Q 9. "Markot interest rate and debenture prices are inversely related.” Comment (2010, 2016 june) ‘Ans. When the market price of the bond increases, the yield on the bonds Gasrent Market Price (CMP) @ Rate of laerest os 1364 | 1250 is observed that as the market price increases from ous that there is inverse relationship between the value of the bond and the market price.UNIT 2: FIXED INCOME SECURITIES w . 10. Examine the relationship between time to maturity and bond valuation, with the help of a diagram. the bond Discuss various kinds of risks ‘Ans, Risks invotwed it Bond Investment: (Inflation Risk. When the rate of return on investments is less than the ‘market price inflation, itis known as Inflation Risk. fe, Mr. R invested 7100 having return of 12% pa. So, after 1 year he means the commodity ‘which could be » purchased for £100 one year ago is worth 2115 now. terest or coupon ying interest rate which i lower than the market rate, 1 bond price of the company. ‘This rick may arise ‘when a company is under performing or during recession, etc. (©) Liquidity Risk. Most of the debis do not have much liquid market ‘because of which an invastar faces problems while selling the investment when he requires to. » ‘SHIVA DELHI UNIVERSITY SERIES (Creprr Rarine Q. 12. What do you mean by credit rating? Discuss its relevance for the investors at[UNIT 2: FIXED INCOME SECURITIES a image. High credit rating Investors about the company. There rates because they pi 3. Wider Audience for Borrowing. A company with high rating for its instruments can get a wider audience for borrowing, It can approach ing companies and general p develop confidence 6. Helps in Growth and Expa grow and expand. This company to get fi growth and expan: Q. 13. Explain the process of credit rating of debt instrum« credit rating agenc 2 ‘SHIVA DELHI UNIVERSITY SERIES review the rating on annual basis but situation warrants se. On review, rating could be ret (1d What do you mean by Credit Rating Agency? Explain the role played by these agencies in making an investment decision. ena) rating agency, A credit rating agency provides information and vestors and creditors. It helps in is from money market and the san opinion regarding the ability of borrowers to jons on time. sctment decision. Following services are py guaaunitd APPROACHES TO EQUITY ANALYSIS FUNDAMENTAL & TECHNICAL ANALYSIS Q.1. What is Technical Analysis? Explain line chart and bar chart with the help of suitable example. (Or, Explain the Tec! analysis? r, "Fundamental analysis is a more import prepared in a Bar charts. price of each | res which are traded at is a method of finding out the future price of a stock which an investor wishes to buy. The method for forecasting the future var of investments and the rate of then ileal though an Pn ‘SHIVA DELHI UNIVERSITY SERIES madea study company in which he wishes are both necessary bef “Analysis must precede the Tec Q. 2. Discuss the procedure and limitations of fundamental analysis with a prospective investor. e007) ‘Ans. Fundamental Analysis, It is a method of finding out the future price of a Line charts are drawn to predict future prices of the stocks. They are [prepared in a method that it connects the successive dayy’ closing prices.UNIT 3: APPROACHES TO EQUITY ANALYSIS 2% ed price targets ‘Line charts and Bar charts show the amour of shares Point and Figu prices, The points that are used for prese termediate trend mainly exists for charts are noted betwe represent what is called 0.5 points, .0 points and 3.0 and 5.0 points. These charts ‘The short-term trend are the movements which occur within a day. They are are related to time of particular day and cach column of the chart shows a also called oscillations fluctuations. significant reversal but does not take note of a trading day. Thus, it is obvious frou th te teclunical analyst explains that ‘Q. 4. What are the steps followed in fundamental analysis for analysing the future price of a stock asi Fundamental Any Technical Analysis ; eal analysis uses past HC framework 19 analyee [information of prices ‘and volume of stocks Aim —Teennique | HIC iramework and Account | Chars, Diagrams and Trends —amphasis | Type of indornation ogUNIT 3: APPROACHES TO EQUITY ANALYSIS a ese Figures do not nd technical analysis can help to time the lence on the basis of above differentiation, we can say that technical anal a better technique of equity analysis as compared to fundamental appron aguish between Support and Resistance Level, ‘Ans. A Support Level is that level of price of security beyond which the downward movement of stocks not possible as significant demand for the stock is expected at th: ‘Thus, at support level deman very high compared Resistance Level set of investors is not interested in purchasing, ’ \ the stock at that level and the one who already hhas the stock prefers to exit irom the stock. Thus, the supply of stock becomes vvery lazge in relation to demand and the chances of further rise in price of stock Geer peal iouller try eee peiems tad lnore hadicead ome In order to prepare the point and figure chart, the analyst has to decide as to Inge or price reversal 7100, a change of 75 may be considered 1d at 25,000, 0 change of 250 may be tical axis and though time ly shows time. SHIVA DELHI UNIVERSITY SERIES keep putting Xs till, stock decreases by €2, weUNIT 3: APPROACHES TO EQUITY ANALYSIS Fa “gle supporters of Eliot thon claim Pom m bas fot developing iapoctant marke rs anel security egies despite ils Be. ‘and miner five stage movernent, Q10. What is Dow theory? Explain its relevance in technical anal} Or, What is Dow theory? Exp! poenpy armen i enaeien pram tear diate movements will be in d mie ren EAE Get 1 Trend, Once the corporate res ings and ma anexit, Bays Beara 30 SHIVA DELHI UNIVERSITY SERIES 1d the third phase results due to pane sale in the upward dizection could be is decline in the market. for particular seeusity, how does he or she 2007) of a share i the earning per share HE he ening pa hare ecnne 1.25, etna! eo te han deed a 12% 1.25 ~ 13) value is to be compared with Value Faring Ratio iis, V/E. EPS ng decisions may be take ion ‘Mesi 1, P/E V/E | Stock is overpriced Tnvestor should sel t before price falls,UNIT 3: APPROACHES TO EQUITY ANALYSIS a 2. P/E os B B R= sty | &-2R) 03 5 14 i 02 7 ~ 38 Also advice, which ia bef investment of thet securities? 2 ula t 02 Sol, Security X 10 10 2 4 oa Retare ow | Esp Rete | Deine [Sq of devotion] P(A — 2 P 15 “30 3 % 95 Gy _| Ry = Pay) y- Fy) | FR? sure i me 70 3 23 329 i387 Expected Return (R) = 8% 2 as. | 3 08 0036 8 43 a7 | 720 2187 Standard Dew ik (6) ~ JSPR-ER) = V202 ~ 449 3, = 33 381 Wiss = Coeticient of Variation (C.¥) = $= 735 = 15.5% Expected Retum (Ry) =123 Q. 3. The rate of return of securities of ABC Ltd. and XYZ Ltd. in different Standard Deviation of X («,) = JS P(R, -EReP = VAT = 195 market conditions is as follows: 438 Market Conition | Probabilly Coeticient of Variation (CV) = > Tag = 1585 Security earch O30 “Probutitny) Return on ¥| Expctad Retara| Deciation |S. of deviation] Py = Ry P oy y= TRF Fin Tm 7 7 If an investor invests €3,00,000 in ABC Li u i a will he the expected return of the investor? (e010) 03 1 03 Sol ABC Ltd 06 R= PAR | Deviation [k= 22] UR 2" (ER) Expected Rotum (Ry) = 13, Standard deviation of ¥ (a) = /TP(Ry ERP = VO6 = 077 ois | 0.075 | onmse25 | nom6srs 9.060 | 0.025 | o.con825 | 0001875 oaz0 | 0.075 | ouse25 | v.oaz2s00 Expected Rets Risk of ABC Ltd, (o) =UNIT &: THE INVESTMENT ENVIRONMENT 59 « SHIVA DELHI UNIVERSITY SERIES __XYZ Ltd. _ _ State Probability & R= Pak [Devinn [R ERP] PR ERP Boom cn 10% Nocinal 40 8s om coat | 0.00865 050 58 om ooo, | 0.00008 Compute risk & return of stocks A & B. Which security would you 040 a6 0s 52 recommend? TER = 031 Expected Return af XYZ Ltd, (R) = 010 oF 51% Re] @ xh] Px [Ral RP |e zke] Px ai a wy \-2RaP| ay Gy 3ReP = JEPIR-ERy = 0700 = 04 6) > PIRI nfl 00es 0 aw] 1 | tae fas) 1s) 52 | rot 8 | 32 | oo |12| a8 | 22 | 1006 525 | 1s [7] 35 | 28 | ae 67] _ 321 98 856 Q/4. Compute the expected SE: Ee securities? (2013) Risk or Standard deviation of Stock A (0,) = JEP(R,-EiRa)® = V1 = 1.79 Shi Prsaiy & & eh =e = = = Expected Return of Stock A Ry = 6.7% 020 18% 15% eh 19 172 50 25E 20%, CCoofciont of Variation (CV) = $A *100= 377 x tn = 26:76 Risk and Return of Security X _ Probiiy] Retin | Ry=P*Ry] Dev. [OBER FPR Risk or Standard deviation of Stock B (o,) = JEP(R, ER)? = v856 | ey Ce) -2KyP =293 ugof=10 | 300 | -2310 160.08 Expected Retum of Stock B, Ry = 9.8% om |i 360 | 490 ‘ux aos as0_| 25 | 1250 | 1190 asi = 28100-23109 = 29.99 Coefficient of Variation (CY. 100 = 29.9% I [ER = 1510) 235.68 (Va Rp 98 a. Decision: Stock B showld be selected as its cooficiont of variation is less than Expected Return of X, Ry = 13.40% waren te) « FER EH « (6. The return on to securities X and Z are given below. Which security Risk of Security X (Gy) = JEP(Ry=ZRy)* = V235.69 ~ 15.35% would you select for an investor who has an appetite for a high risk and Return of Security Y return? (207) Probab] B= PaRy] Dew. URERP] Ry Return on Security: ® y-5Rr) =sfiP) z 10 ~ | 2 | m | as % 2a 3 s si | “tam % 30, 10 | 1 | sts0 3% [ERy = 700 31600 Sol. Security X: Expected Return of Y, Ry = 7% y= Pry oa ‘i 0D Risk of Security ¥ (oy) = YEP(Ry -ERy =v516 = 17.78% ine a oomiesi 000209 Q. 5. Orange Cap Limited provides you the following information with 0 xegard to fo stocks, A and Bs (20%) TR = 001 PAR ER)UNIT I: THE INVESTMENT ENVIRONMENT a Expected Return, Ry = 0.081 oF 4.1% es X= JEP(R, —ERx)? ~ VOGOORDY = 101446 or 1.45% Retina) [Ra = PR Pi Shay 001 ous = 1.00005 ons ou = ooo 003 ones = toe ERz =002 | E(R,- ERP 0.00010 Expected Return, B, = 002 or 2% Risk of Security Z 6, ~ JEP(R, -ER2) = VOOHO ~ 001 or 1% Analytical Table x [2z Tapected Retum | 41) 2 oof Rerum vats | Variance of Return | 209 | 1 Decision: Security X is Better for an investor having an appetite for high risk and etutn, Q.7, The following two securities have been shortlisted by an investor: ‘Which security should be selected and why? (2012) seca ‘Return (X) Probubiity (P) Rx=PxX | (X-ERx) PK-ERxP om ce icin of Variation (CV)_ = $= EH = 096 Somme 7 as TS os Sager e a =] ee | Ge ERy= 0056) (0.005080 a SHIVA DELHI UNIVERSITY SERIES Expected Return, Ry = 0.056 or 5.6% Risk, oy = (EPQY= Ry) = VOOIRDE = 0.02045 Retwn on A Go) | Return on BO) 16 20 2 b 3 5 ‘Which of the following two sec ‘good for investment? In terms of return In terms of risk (x ‘State of | Probability] Return Economy] (2) | on AC) (ERA) | Re ERAP | PR ERA eo Goo | 040 | 16 a2 | i768 756 Far | oso | 2 02 vs uote Bad | oan | 3 oss | ri a5a8 [2256 EPR, -ERaY =VB56 = 4.75 Jao Bia $F cams a29% ‘Expected | (Ry- ERp) [(G-ERy) | PURER ket. (B) apm 7 7a] war 336 Sa | os | “net | “tase | nd | ste sot Ei = 129 7 Expected Rotumn Ry = 122% Standard deviation of B, o,= JEP(Ry—ZRp)* = J8576 = 9.15 op _ 815 = Ry 7 12d = 075 or 75% Coefficient of Variation, CV,UNIT I: THE INVESTMENT ENVIRONMENT « ase of Security B, therefore Security terms of tisk, Q. 9. The return on two securities under four possible states of nature are sven: 2012) Shree Nature Proallty | Reara on Seawlan | Return Securlay ac B(x) 7 oT 7 * 2 oa w 3 03 18 4 01 28 Expected Return on Security A. iculation of Return & Risk: and Security B Risk (in terms of S.D.) on Secusity A and B. Covariance between the returns on Security A and B. ‘efficient of correlation between the returns on Security A and B, beaker? Voviance (aj]= 124 Risk“ SD.(0,)= JfH" 382 Peo,e0, =a? 72 2a 08 The Covariance a0 =248 _ . Covance ofA and B ” Couticient of Cotelation, r= Sp qe 2 =099 (0 Expected Return of Security A, Ky = 11% Expected Return of Secuity Bz = 138% o ‘SHIVA DELHI UNIVERSITY SERIES Risk (in terms of SD. Security A, 6, ~ 352; Security B, 0, ~ 7.06 ‘State of Probability of ‘Rate of Return Cecmene | era ag — 03 oo 0 03 Fy 30 02 a5 20 Based on this information, calculate expected risk and return on both the proposals. Which investment proposal is better? ‘Sol, Security X: State of] Probabiiy | ‘Ry | _Rxyetad [ra 28 Exnony o 8) | Retum 0%) Ry= (PR) Boom 03 © 8 8 3675 Normal 05 20 410 5 125 Depression | 02 as hs 40 3200 Ry = 7000 Expected Return of X Ltd, (i) = 25% Expocted Risk of X Led (,) = JERR ERs ~ vF00 ~ 2646 Standard Deviation(ag) _ 2646 1 Variation (CV) = “peed Remi = 10584 or 105.8% Probvaiy |_—“Ry*Y_Bxweted | GER) [PUR = ERP ®) @) | Rewm em) y= (Ry) a3 a B ° 23 a5 3 15 1 05 02 2 " a 242 TR <3 190 Expected Risk of ¥ Lid. (oy) = JEP(Ry Standatd Ds . Variation (CN) = “tapecediem ty” 3 = 0.2258 or 22.58% (0) terms of return, ¥ Ltd. yields more return (1%) than X Ltd. (25%) ‘Therefore, Y Ltd, should be preferred. CoetficUNIT I: THE INVESTMENT ENVIRONMENT « Overall, according to C. accepted because Condition Bullish Normal Bearish Gupta makes an investment at 850. The year end price of under different market conditions measured by SD is more in case of X Ltd. (26.46) therefore, ¥ jerms of iment proposal for Y Ltd. should be is less variation, equal probabilities is as Year end Price (®) (i) Find out the expected value of return for one year period and risk (@) Roieof [RoP*R] -=ER) | R-ER)| PR- ERP Return (8) 05 | O16? | O2mR OOS | _O.DIR6 02 | o0s67 | amo | aoo00 | o.ono00 =0a | -oons3 | 05am] o.os006 | o3002 D200 0.05958 (@ Expected Return = 0.2001 = 0.2001 x 100 = 20.01% —, (Risk) o = JEPIR=ERY = 0.05908 ~ 0.2449 or 24.49% i) Inflation Adjusted Return, r = 14R_,_1+02001 Toi) 7008 unit [[ FIXED INCOME SECURITIES Bono Vatuation Q. 1. An investor is considering the purchase of a8 year bond with face redeemed in two equal instalments starting from fourth year If investor's required rate of return is 11%, what price he should be to pay for it. 1[T2[s [Tats door | ona | orm [069 | os ‘Ascertainment af Price of the Band ‘The investor should be willing to pay 103.394. Q. 2 A company is contemplating to issue bonds having face value of bond carries a coupon interest rate of 7%, Find the value at wl bonds shall be issued to the investors having expected rate of return at 1 he yor) 2000 20 20 20 zoo | 4o_| 20 | 0593 | 1290.02 ‘Sum of PL. of Amount Redeem 0s cs 2270UNIT Ik: FIXED INCOME SECURITIES o ‘So, the company shall issue Bond of the Face Value of €10,000 @ €9,051.98, Q.3..A Company is contemplating a Debenture Issue on the following terms: Face Value = 110.000 per debenture Term to Maturity =7 years Coupon Rate of Interest: ‘SN, Time (i Years) " @ PE Tris Valve “Amount @) ons fe. 1 70 0398 6251 2 70 0797 5579 5 70 ora 984 4 0 036 5088 5 500 0.367 4536 6 300 0307 $563 z 900 = 1,000 = 10,500, 0.52 49293 “Total = 80269 ‘Therefore, the issue price of the debenture for an investor having required rate of return of 12% is 8,026.90. |. A Company proposes to sell 15% debentures of 210,000 each, What should be the price if the company decides to repay C1000 at the fend of each year ( instead of redeeming the whole amount after 10 years) and to pay interest annually at the rate of 1 fon the (2015 June) Redemption Value = {10,000 restor may be fou To provide the investors a yield of 16%%, debentures should be issued @ 5195 6 ‘SHIVA DELHI UNIVERSITY SERIES Yor PVF@I6% | PV ofamount T 25s 2 17464 3 4 1IBL6 5 6 7 8 9 10 ihc ent ofeach year and Yop iret annually a Ue ral 15% agasskg ual e100 1% 3 yrs of 13%, what is the maximum price he should be Expected Rate of Return: 13% () Year| iterestetemption | Discount | Percentage of tterest! of Principal Amount (2) | Becton 19% | Principal Arwount @) 1-3 2361 25971 ea 0683 68.300 ‘95271 “Maximum Price payable ~ €95.271 n ac 100 = 11.27% = (@120 « 2400) + (81.000 « 0.712) = 228824 + 2712 = R100028UNIT IL FIXED INCOME SECURITIES « +2708 = €1000.02 Q.7. A company issue debentures carrying a coupon rate of 6% pa. (face value: €1000) which will be redeemed after 3 years at its par value. Ifthe investors’ required rate of return is 10%%, what should be the value of the debentures ift payable annually Interest Ie payable sem-annally. (2015) = XUS228 + 1746 = 280828 Q. 8 Mr. Sharma is considering purchase of a bond which is currently ‘quoting at 800, The bond has a face value of 21,000, It carries coupon rate of 114% and has § years to maturity. Mr. Sharma's required rate of return of 18%. ‘Advise Mz. Sharma whether the bond is worth buying. Would your answer change if interest income is subject to 30% rate of tax and capital gain is subject to 10% rate of tax? (2016 june) Sol, Given: By = 2800, EV = 21,000, ‘Coupon sate = 14% = 140 « Pval = t140 » 3.127 + 21,000 « 0437 = UUS778 + 8437 = W778 Ms = F980 Now, the Yield may be caleulated as follows: = 898 PVAF ys, «) + £980 * PVF, = eas 3197 680 * 0437 tax and be less est itcome is subject to 30% rate capital gain is subject to 10% rate of tax, ter the yield 7 SHIVA DELHI UNIVERSITY SERIES ‘than the market value of Bond (iy, €734.706 < € 800), Hence we w ot suggest Mr. Sharma to buy this bond. each security to achieve the target rate of return shares be (1-2) per cent as Mr A im > 01Se +020 - 020" = 016 compute the is bond. What would be your answer if the current selling price is €110 instead of ®97. (ota) Sol Givens RV = 2100; SV =897; First Part: Approximate = 26 * 7.360 + T100 * 0.558 = TAA.16 + F558 = 299.96 B= 26 % 71024 + 2100 * 0.508 = 242.144 + 850.8 = 292.9 9% and 7% VE, = 86% 8111 + F100 % 1676 = 86382 + 8.66 + 67.6 = 111625 = 867722 4 F100 x O61 = 16.3 + BLA 107722 es between 4% and 5%UNIT IL FIXED INCOME SECURITIES ihr se Make a, (04 ter eae Lower rae) e104 (838) oa r07s0470% At 15%, Value of Bond B, = 14 * 3.352 + 2100 * 0.497 = 26.028" 97 = 796.628 Af 16%, Value of Bond, B, = €14 x 3.274 + 2100 x 0.476 = 245,806 + 147.6 = 93.436 of the bond lies between 15% and 16% lation, oor Interest Rate 215+ [ORPPO) a os + (2%) - ana YIM = 15 + | 5.628 -93.438)| *1= 15 + [5 499 )= 15.20% (i) When current selling price is €105 205 = 814 x PVAF yp, 5) £100 * PVF yang 5) Approximate YTM is computed Interest BY =8V x YIM = —_RVa8v. 2 14 005108) ‘a00 +105) 2 = 0.1268 or 12.68% Af 12% = 8d x 3,605 + £100 % 0.567 = E5047 + 856.7 = C1077 Al 13% = €1d x 3517 + $100 x 0.543 = £49,238 + 254.3 = €103.538 So, YIM of the bond lies between 12% and 13%. SHIVA DELHI UNIVERSITY SERIES Approximate YIM is computed as terest BV SS) 12 120-98) 124" eee =e RVSSY Taso 183 “or = 17.28% 16 + 864.08 = 205,996 296.995 —94) vote ares [EES] cairns @. 13. The bond (ofthe face value of €1,00) is available inthe market for ‘Coupon rate of and Matuity period of 8 years. Ic the bond fe If the required rate of return of an investor is 12% should he purch the bond? eons ven: N= 8 years; Interest = 11,000 x '/,,,= 260 Approximately, YIM is ealeulated as: