BBMF2023 PRINCIPLE OF INVESTMENT

Tutorial 1: Introduction to Investment

1. Summarize the basic nature of the investment decision in one sentence.

2. One of the attributes of investment is to break down the investment into categories.
Define THREE (3) categories of investment.

3. Define risk, and explain its relationship with return.

4. Explain other constraints besides risk do investors face?

5. Who are institutional investors? Explain how their actions affect the investing
environment.

6. Investors should always seek to maximize their return from investing. Agree or disagree

7. Differentiate direct investing and indirect investing.

8. Common stock represents an ownership share of a corporation, and investor can get two
sources of return from it. Define the two form of return. Do all common stocks pay
dividends? Who decides?

9. Briefly explain the types of investment that you aware of.

10. People tend to have different investment philosophies as they go through different stage
of life cycle. Using example, explain the stage of life cycle and how investor should form
their investment in different stage.
Tutorial 3: Bonds/Fixed Income Securities
1. Define Yield to Maturity (YTM). Explain the importance of YTM and why it is less
practical to use YTM for the valuation of bond in a callable bond?

2. Given two bonds with identical risk, coupons and maturity date, with the only difference
between the two being that one is callable, which bond will sell for the higher price?

3. Define two characteristics of a bond that determine its reinvestment rate risk?

4. Explain the conditions that affect the bond to be sold at premium or discount.

5. What is the value of a zero-coupon bond paying semiannually that matures in 20 years,
has a maturity of $1 million, and is selling to yield 7.6%? (CFA Question)

6. Suppose a 10-year 9% coupon bond is selling for $112 with a par value of $100. What is
the current yield for the bond? What is the limitation of the current yield measure? (CFA
 Question)

7. Determine whether the yield to maturity of a 6.5% 20-year bond that pays interest
semiannually and is selling for $90.68 is 7.2%, 7.4%, or 7.8%. (CFA Question)

8. What effect does the use of semiannual discounting have on the value of a bond in
relation to annual discounting?
9. Explain the term “bond immunization” and how can it reduce the interest rate risk.

10. A 10-yr bond is paying 8% coupon compounded annually, with a par value of RM1000.
If it is yield at 6%, estimate the followings:
a) duration of the bond
b) the changes of price for a 25 basis point changes in interest rate
11. Calculate the price of a 30-year bond with 7% coupon rate which is callable in 5 years at
a price of RM1,030. Assume that the yield to call is 7% and coupon payments are made
semi- annually.
Tutorial 4: Unit trust/Mutual fund
1. Discuss FOUR (4) attractions of mutual funds.

2. Differentiate between a load fund and a no-load fund.

3. Explain the differences of open-end fund, and close-end fund.

4. Briefly explain how the net asset value for a mutual fund calculated is.

5. Explain the exchange traded fund.

6. Explain the concept of Real Estate Investment Trust, and how investor can profit from
the investment in REITs.

7. A retiree who wish to preserve his capital from depreciation due to the inflation factor.
Propose a fund that suitable to the investor above.

8. A just married couple is planning to invest in the market to reduce the current income
burden and to generate sufficient fund for their children’s education fund after 20 years.
Suggest a fund that might be suitable for the investors above.

9. In Malaysia, it is difficult for a retail investor to invest in the bond market due to its high
minimum funds required. Explain the way for retail investor to invest in the bond market.

10. “Not only investing in foreign currency involve exchange rate risk, invest in the funds
also involve exchange rate risk”. Justify the above statement.

11. Explain the factors that investor concern while comparing mutual funds.
Tutorial 5: Money market/ Marketable securities
1. Describe the characteristics of money market.

2. Explain the yield instrument and discount instrument in money market.

3. Explain FOUR (4) types of money market instruments.

4. Malaysian Treasury Bills (TBs) of face value RM10 million with 150 days remaining to
maturity is sold at a rate of 4.20%. Assumes that one year has 365 days, determine the
value of the proceeds.

5. ABC Holdings drew a BA for RM1.5 million for 120 days and accepted by XYZ Bank at
a discount rate of 5.0% p.a. The customer enjoys an acceptance commission rate of
0.75% p.a.
(a) How much does ABC Holdings have to pay the bank as acceptance commission?
(b) What are the discounted proceeds?
(c) If XYZ Banks holds the BA for 25 days and then sells the BA at a rate of 4.5%
p.a., what are the discounted proceeds and the effective rate of return on the BA?
Notes: Assumes that one year has 365 days.

6. Steven has bought a treasury bill that has a face value of RM3 million with 9 months
maturity sold at 4.3%. Assumes that one month equals to 30 days, calculate the value of
the proceeds.

7. On 1 March 2016, ABC Funds has bought a banker acceptance (BA) which carries a face
value of RM15 million issued at 10% for 180 days. On 1 July 2016, ABC Funds decided
to sell it to a third party at the prevailing rate of 10%. Assumes that one month is equal to
30 days, calculate the value of the proceeds on 1 July 2016 and determine the holding
period return in percentage for the BA.

8. A deposit of RM1 million is made on 1 March 2016 for 90 days, and interest paid on the
amount is 15% (referred to as a 15% 90-day NCD), determine the following:
a) Maturity value for the deposit.
b) Proceeds of the deposit if the seller decided to sell the deposit to another buyer on
31 March 2016 at a yield of 14%.
Notes: Assume that one year has 365 days.

9. Hedgeman has a negotiable deposit of RM2,500,000 is made on 1 April 2016 for 120
days, and interest paid on the amount is 8%, determine the following:
a) Maturity value for the deposit
b) Proceeds of the deposit if Hedgeman decided to sell the deposit to
another buyer on 15 June 2016 at a rate of 7%.
c) Holding period return for Hedgeman who decided to sell the deposit to
another buyer on 15 June 2016.
Notes: Assumes that one month equals to 30 days.
Tutorial 6: Common stock
1. Of what value to investors are stock dividends and splits?

2. Identify the advantages and disadvantages of stock ownership.

3. Stock ABC has $9 million net profits in the current financial year, and the management
has decided to keep 70% of its profit as retained earnings. If the company ABC has 3
million of share outstanding, determine the dividend payout ratio and the earning per
share.

4. Stock A is paying dividend, D0 = RM2, and the management is expecting a constant

dividend growth rate of 5% per year. Estimate the dividend yield after 5 years if the stock
is trading at RM50 on that moment.

5. Explain the key date for dividends

6. Different types of stocks usually have different characteristics. Explain the type of stocks
that you familiarize with.

7. An investor, Steve, who wish to conserve his capital from depreciation. Suggest an
investment strategy for him.

8. The size of the stocks can be classified by market capitalization of the corporation.
Explain the types of stock based on market capitalization.
Tutorial 7: Derivatives (Options)
1. Explain the term option.

2. Discuss how a call and a put option work.

3. “Losses of an investor can be limited by purchasing a call or a put option” Justify the
above statement.

4. Stock ABC is currently trading at RM 20.50 in the market, and KC, an investor is
anticipating the decrease in price of Stock ABC due to the losing competitive advantage
among its peers. A 6-month expiration option is written by an underwriter with a strike
price of RM21.00 and premium of RM205 per contract. Consider that each option
contract consist of 100 shares.
a) Explain how KC can make profit from trading the option of Stock ABC if the
market is up to his expectation.
b) Explain the maximum amount of loss will KC face if the market is not up to his
expectation.
c) Calculate the profit/loss that KC make if the market price is rising to RM35 at
expiry if he has purchase the option based on his expectation.
 d) Calculate the profit/loss that KC make if the market price is falling to RM10 at
expiry if he has purchase the option based on his expectation.

5. On 1 April 2016, Steve bought 10 contracts of call option with a strike price of RM 24,
and the expiration of the option is 6 months later. However, each contract consists of 100
shares and the cost of the option is RM 250 per contract.
a) Determine whether Steve’s call option is in the money or out of money if the
shares is trading at RM 30 on 1 June 2016. Will the price volatility influence the
profit and loss after 1 June 2016?
b) Should Steve exercise the option on expiry if the market price rises to RM26.
Justify your answer.
c) Should Steve exercise the option on expiry if the market price falls to RM20.
Justify your answer.
6. Using appropriate example, explain the physical settlement and cash settlement for
option.

7. Determine the intrinsic value of a call option with a strike price of RM38.
a) If the market price of the underlying security is RM55
b) If the market price of the underlying security is RM25

8. Suppose an investor purchases a call option on a Treasury bond futures contract with a
strike price of $90 and the cost of the option is 5% of the security's price.
a) If at the expiration date the price of the Treasury bond futures contract is $96, will
the investor exercise the call option; if so, and how is the settlement for the
option?
b) If at the expiration date the price of the Treasury bond futures contract is $89, will
the investor exercise the call option; if so, and how is the settlement for the
option?

9. How can the writer of a call option cancel his or her obligation?

10. Explain the reason why the naked option is riskier for an option writer.
Tutorial 8&9: Economic, Industry, and Fundamental Analysis
1. Briefly explain the intrinsic value, and the factors that determine the intrinsic value.

2. Explain the ‘Top-Down’ approach in security analysis.

3. Discuss the usefulness of industry analysis.

4. The sustainability of an industry, in more narrow view, a company depends on the

duration of the growth cycle stages. Explain the growth cycle stages.

5. Explain the importance of fundamental analysis.

 6. Explain the historical relationship between stock prices, corporate profits, and interest
rates?

7. Discuss which types of industry are the most sensitive to the business cycle and which
industries are not.

8. “GDP can be used as one of the main economic indicator that bring significant impact to
the stock price”. Justify the above statement.

9. Financial information as at 31 December 2015

Particulars RM (’000)
Current assets 25,000
Current liabilities 5,000
Long term liabilities 10,000
Fixed assets 20,000
Net Income 8,000
Additional information:
The Chief Financial Officer (CFO) decided to keep RM 6 million of its net income as
retained earnings.
Calculate the followings:
(i) Current ratio
(ii) Debt-to-equity ratio
(iii) Return on assets
(iv) Dividend payout ratio
Tutorial 10: Security Analysis
1. “It is difficult to find a best approach to evaluate the value of stocks in the market and
some ratio analysis brings no significant meaning to some of the stocks”. Justify the
above statement.

2. A firm is estimated to have earnings per share (EPS) of RM0.60 with a P/E ratio of 12
times. Determine the stock price of the firm.

3. Company X is currently paying a dividend of RM 0.50, and it is expected to have a

constant growth rate of 5% per year. Given that the required rate of return of 8%,
calculate the intrinsic value of company X.

4. Stock ABC is currently selling at RM 68.80, and it is paying a dividend of RM1.50. The
management is expecting a constant growth rate of 6% per year, calculate the intrinsic
value of Stock ABC if the required rate of return is 8.5%. Justify whether Stock ABC is
overvalue or undervalue based on the dividend discount model.

5. Stock Fly Asia is currently paying a dividend of RM 0.80, and it is expected to have a
constant growth rate of 4.5% per year. Assume that risk free rate is 3%, risk premium is
3.5%, and beta is 1.25. Calculate the intrinsic value of Stock Fly Asia.
 6. A preferred share of CDE stock is currently paying dividend of RM0.70 per share. Given
that the required rate of return is 8%, Calculate the value of CDE’s preferred share.

7. Safe Security Bhd’s share is currently paying dividend ( D0 ) of RM1.00 per share and is
expected to remain the same for the next three years. After that, Safe Security Bhd’s
dividend is expected to grow at a constant rate of 5 percent a year for the indefinite
future. The management believe that their business are more likely to be affected by the
business cycle and it will not affect their promise to meet their target of 35% dividend
payout each year. Currently, the price of Safe Security Bhd is trading at RM25 with 250
million share outstanding. Assume that the beta is 1.8, market return is 6%, and risk-free
rate is 3%.
a) Calculate the intrinsic value of Safe Security Bhd. Comment on the intrinsic value
and determine whether it is overvalue or undervalue.
b) Justify TWO types of stock that Safe Security Bhd tend to be.
c) Calculate dividend yield
d) Calculate the stock price and number of share outstanding if the stock exercise a
2-for-1 stock split.

8. Cole Pharmaceuticals is currently paying a dividend of $2 per share, which is not

expected to change. Investors require a rate of return of 20% to invest in a stock with the
riskiness of Cole. Calculate the intrinsic value if the stock.

9. Baddour Legal Services is currently paying a dividend of $2 per share, which is expected
to grow at constant rate of 7% per year. Investors require a rate of return of 16%.
Determine the company’s value.

10. Bibbins Software Company is currently selling for $60 per share and is expected to pay a
dividend of $3. The expected growth rate in dividend is 8% for the foreseeable future.
Calculate the expected rate of return for this stock.
Tutorial 11: Technical Analysis
1. Discuss the rationale for technical analysis

2. Differentiate between fundamental analysis and technical analysis.

3. Explain the role of volume in technical analysis.

4. Discuss the rationale of contrary opinion.

5. Explain the insider trading activities.

6. Explain usefulness and weaknesses of advance-decline line

7. Explain the indication of mutual fund cash ratio (MFCR).

8. Explain how’s the sell signal generated by using moving average.

Tutorial 12: Efficient Market Hypothesis
1. Define the term ‘efficient market’.

2. What are the conditions for an efficient market?

3. Describe the THREE (3) form of efficient market hypothesis (EMH).

4. “Weak Form Efficient Market Hypothesis (EMH) is direct opposition to technical

analysis”. Justify the above statement.

5. What does the Semi-Strong Efficient Market Hypothesis (EMH) attempt to test for?

6. Describe FOUR (4) market anomalies.

7. Discuss FIVE (5) behavioral factors that might influence the actions of investors.

8. Explain FIVE (5) behaviors that can improve the investment results.
Tutorial 13&14: Portfolio Management
1. Discuss the traditional portfolio approach and modern portfolio theory.

2. Briefly explain the following term:

a) Dollar-cost averaging
b) Constant-dollar plan
c) Constant-ratio plan
d) Variable-ratio plan

3. Briefly explain THREE (3) approaches to asset allocation.

4. Explain the portfolio revision and justify the rationale for the portfolio revision.

5.

Fund Manager A Fund Manager B

Portfolio return (%) 13 17.50
Beta 1.3 2.85
Standard deviation (%) 2.5 3.5
Risk free rate (%) 3.3 3.3
Market risk premium (%) 4.7 4.7
Market return (%) 8 8

a) Using Sharpe’s measure, compare the performance of both fund managers and
select the best of them.
b) Using Treynor’s measure, compare the performance of both fund managers and
select the best of them.
 c) Using Jensen’s measure, compare the performance of both fund managers and
select the best of them.

6. ‘Investing in a portfolio cannot completely diversify all the risk no matter how diversified
portfolio it is’. Justify the statement with appropriate illustration.

7. Why is the asset allocation decision the most important decision made by investor?