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Mid-Term Test
20th Oct 2007
FNCE102
INSTRUCTIONS TO CANDIDATES
There are a total of Ten (10) pages including this instruction sheet.
SECTION 1: MCQ
Please choose the correct answer from choices (A) to (E). (1 mark each)
Question 1
Due to an internal crisis, an FI is going to liquidate some of its assets. The chosen assets are
listed below, with their face values, current sale values and 1 year sale values. What is the 1 year
liquidity index for these assets?
Asset Face Value ($) Current sale value ($) 1 year sale value ($)
Stock A 15,000 9,000 10,500
Bond B 1,000 3,000 3,500
T-bills 4,000 10,000 11,500
A) 0.06
B) 0.16
C) 0.26
D) 0.56
E) 0.86
Solution: E
Question 2
Bank A pays 8% pa interest, compounded quarterly, on its money market account. The managers
of Bank B want its money market account to equal Bank A’s effective annual rate, but interest is to
be compounded on a monthly basis. What nominal, or quoted, rate must Bank B set?
A) 1.24% pa
B) 2.34% pa
C) 5.84% pa
D) 7.94% pa
E) 10.54% pa
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Solution: D
EAR = (1 + iNom/m)m - 1
= (1 + 8%/4)4 – 1
= 8.24%
EAR = (1 + iNom/m)m - 1
= (1 + iNom /12)12 – 1
= 8.24%
iNom = 7.94% pa
Question 3
Assume that it is now January 1, 2004 and you will need $1,000 on January 1, 2008. To help you
reach your $1,000 goal, your father offers to give you $400 on January 1, 2005. You will get a
part-time job which makes 6 additional payments of equal amounts each 6 months thereafter. If
all of this money is deposited in a bank which pays 8% pa, compounded semiannually, how large
must each of the 6 payments be? (Assume payments in arrears.)
A) $34.56
B) $39.56
C) $74.46
D) $90.90
E) $150.90
Solution: C
Since the payments are at the end of each period, use 6 periods,
FV = $X (FVIFA 8/2%,6)
= $493.87
$X = $74.46
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Question 4
A) $626.53, $700
B) $626.53, $750
C) $326.53, $800
D) $626.53, $850
E) $326.53, $700
Solution: A
Question 5
A) Initial public offerings (IPOs) are usually underwritten by a bank, which also advises
on the IPO.
B) Every shareholder is entitled to a claim on the firm’s liquidated assets, after
employees of the firm are paid.
C) Share investment carries a risk of capital loss.
D) Raising funds through a private placement is faster than a public offering.
E) Shareholders must vote in person so as to ensure the firm is managed by capable
personnel.
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Solution: E
E is false because:
Voting can be done through proxy too.
Question 6
Solution: D
D is false because:
Figure (b) is a wedge pattern, not a head & shoulders reversal pattern.
The rest are true because:
A) Figure (a) is a continuation pattern.
C) A bear flag is a flag in a downtrend.
E) A downtrend breakout is when the share price penetrates the resistance line, showing
the end of a downtrend. (resistance line = the price level that is difficult for prices to
penetrate upwards; downtrend resistance line = connects successively lower tops)
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Question 7
Solution: B
B is false because:
Offshore corporate bonds are also inactively traded, as most are held till maturity.
Question 8
Today, you would like to invest in a zero-coupon T-bill, which has a face value of S$20,000. If it is
maturing on Jan 20, 2006 and offers a 6.7% yield, how much would you be paying for it? Assume
today is Nov 6, 2005.
A) S$5,720.83
B) S$9,727.76
C) S$11,810.76
D) S$29,921.88
E) None of the above.
Solution: E
Where:
Id = 6.7%
P1 = S$20,000
P0 = ask price = S$19,724.66
h = 75 days to maturity = 24 + 31 + 20
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Solution: D
D) is right because yield curves will slope downwards & upwards when expected ST
i/r are lower & higher respectively in the future.
Question 10
Assume today is Mar 2, 2001. Calculate the ask price of a zero-coupon T-bill with face value of
S$20,000 with maturity on Apr 21, 2001, by referring to the Table (a) above.
A) S$13,939.18
B) S$14,959.30
C) S$19,939.18
D) S$25,332.20
E) S$28,332.20
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Solution: C
Where:
Question 11
Your ownership interest in Company A, which has 4 million shares outstanding, is 0.1%. The
company announces a rights offering, through which it plans to sell another 2 million shares.
Each shareholder will receive 0.5 right for each share owned. 1 share of the company is selling
for $10 before the rights offering, and selling at a 30% discount after that. Assume you do not
wish to exercise your rights, how much could you sell them for? (Assume 1 right can be
exchanged for 1 share in the new issue).
A) $2
B) $20
C) $2,000
D) $3,000
E) $4,000
Solution: E
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Question 12
A) Technical analysts develop trading rules from observations of past price movements
of the stock market and individual stocks.
B) Fundamental analysis involves making investment decisions based on examination of
fundamental economic and company variables.
C) Technical analysts believe that “The market is not its own best predictor”.
D) Under technical analysis, trends of stock prices change in reaction to fear and greed.
E) Technicians are also chartists.
Solution: C
C) Technical analysts believe that “The market IS its own best predictor”.
Question 13
Which of the following is false regarding the upcoming revamp of SGX’s listing rules.
(A) SESDAQ will be transformed into a “New Board”, which will be a sponsor-supervised board.
(B) There is no admission criteria for a sponsor.
(C) Sponsors will determine the suitability of companies for listing on “New Board” and review
IPO admission.
(D) The focus of the Main Board will be “Size” and “Quality”.
(E) The “New Board” will aim to attract both local and foreign small and growing companies to list.
Solution: B
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Question 14
(A) In Singapore, when you sell shares, there must be shares available in your CDP
(Central Depository Pte Ltd) securities account for debiting on or before the due
date.
(B) Assume Saturday is a public holiday, if you contract to buy shares on Friday, you
must pay for them by Tuesday.
(C) XYZ share is quoted at $2.20/$2.30. A broker who received a buy market order from
his client will book the market seller at $2.30.
(D) Placing a limit order is risky for the investor because negative information on the
share may result in a loss to the investor.
(E) A stop order allows market trends to trigger a trade.
Solution: B
B is false because:
You must pay for the shares by Wednesday, not Tuesday.
Question 15
(A) Shares on the Main Board of SGX have high price volatility because they are all of
large companies in the electronics sector.
(B) Trading in any quantity less than 1 board lot is called odd lot trading.
(C) SESDAQ was set up to help companies with paid-up capital of at least S$15mil list
shares.
(D) In Singapore, all share transactions must be conducted through a broker.
(E) Share price indices such as The Straits Times Index is a good market indicator
because it comprises a fixed composition of companies which cannot be changed.
Solution: B
(A) Shares on SESDAQ of SGX have high price volatility because they are of small
companies in the electronics sector.
(C) Companies on Main Board have a paid-up capital of at least S$15mil.
(D) In Singapore, investors in shares can also walk in to any authorized trading centre
located in selected branches of local banks, and special counters operated by SGX
stock brokerage firms to buy and sell shares without going through a broker.
(E) Share price indices such as The Straits Times Index is a good market indicator
because it represents different performing industries in the economy.
The composition of companies can change and are not fixed.
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Question 1
What is a “sinking fund” condition for a bond indenture and how does it work?
Solution:
What is it?
This provides for a systematic retirement of a bond issue. This requires the issuing company to
call and retire a portion of its bonds each year. This is designed to protect the bondholders by
assuring that the issue is retired in an orderly manner. This type of bond is considered to be safer
& typically carry a lower interest rate.
How it works?
Firm deposits money with bond trustee periodically, who invests and uses the accumulated
sum to retire the entire bond issue at maturity.
Firm handles sinking fund payments itself:
- Funds used to retire bonds periodically by the firm itself are pegged to the firm’s
earnings or sales, or
- A mandatory fixed amount is used periodically by the firm itself to retire bonds.
Question 2
Suppose riskfree rate decreases to 9% and the slope of the Security Market Line remains
constant, how will this affect kM and kA?
Solution:
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Question 3
ABC Company needs to raise $25mil to construct new production facilities. The firm’s straight
nonconvertible debentures currently yield 14% pa. Today, its stock sells for $30 per share; the last
dividend was $2; and the expected growth rate is a constant 9%. Investment bankers have
tentatively proposed that the firm raise the $25mil by issuing convertible debentures. These
convertibles would have a $1,000 par value, carry a coupon rate of 10%, have a 20-year maturity,
and be convertible into 20 shares of stock. The bonds would be non-callable for 5 years, after
which they would be callable at a price of $1,075; this call price would decline by $5 per year in
Year 6 and each year thereafter.
Solution:
Step 1:
Calculate straight bond value.
Straight bond value = $100 (PVIFA 14%, 15) + $1,000 (PVIF 14%, 15)
= $754.31
Step 2:
Calculate conversion value at end of year 5.
Step 3
Floor price of bond = higher of (straight bond value, conversion value)
= $923.17
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Question 4
Happy Food company is experiencing a rapid growth period. For the next 2 years, dividends are
expected to grow at a rate of 15% pa. In the 3rd year, the growth is 13% pa. Thereafter, a
constant growth rate of 6% pa is expected. Recently, Happy Food paid dividends of $1.15. What
is the stock price today if we assume a required rate of return of 12% pa?
Solution:
Step 1: Calculate the sum of the PVs of the dividends in the supernormal growth period.
D0 = $1.15
D1 = $1.15 (1.15) = $1.3225
D2 = $1.3225 (1.15) = $1.5209
D3 = $1.5209 (1.13) = $1.7186
P3 = D4 / (r – g) = [D3 (1 + g)] / (r – g)
= [$1.7186 (1 + 6%)] / (12% - 6%)
= $30.36
PV of P3 = $21.61 (B)
Question 5
Solution:
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Question 6
A 3 year Treasury Note has face value of $1,000. It pays semiannual 10% pa coupons and sells
at par. How would the use of the Duration model differ from the Time value of money bond
valuation model if interest rate increases by 5% pa?
Solution:
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Question 7
A zero coupon bond has 10 years to maturity. Calculate the new price using the Duration model if
yields rise by 0.8% pa to 10% pa. Current price of the bond is $800. Face value is $2,075.
Solution:
Question 8
On Jan 16, 2007, you invested in a British pound denominated CD of equivalent US$8mil at
USDGBP: 0.6350/52, yielding 12% p.a..
What is your US$ gain from the investment today, Feb 16, 2007?
Solution:
Step 1
Step 2
Step 3
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Question 9
Jimmy, a new bondholder matches the periodic cashflows from the bond for his installments on a
bank loan. His bank loan’s interest period is on a 6 months’ basis. The bond has 5 years to
maturity with 8% pa coupons and face value of S$10mil. If the bond sells in the market for
S$9.5mil, which of the following is true? Explain.
Solution: C
Current market price = S$9.5mil = S$400,09999900 (PVIFA i%, 10) + S$10mil (PVIF i%, 10)
Semiannual Coupon payment = (8%/2) x S$10mil = S$400,000
I% = 4.64% (for half a year)
YTM = 4.64% x 2 = 9.28% pa
Question 10
Assuming real interest rates are the same and purchasing power parity holds. In 1 year’s time,
nominal interest rate spread between US and Japan is 6% pa, with US having a higher nominal
interest rate. What is the exchange rate in 1 year’s time? (Assume spot exchange rate:
JPY130/US$1).
Solution:
- End -
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