Scribd
Upload
28 views

Modular POF Test2 Question

This document contains instructions and two questions for a finance test. Question 1 has parts (a) through (d) calculating interest rates on bonds of different maturities given inflation and risk-free rates. Question 2 has parts (a) through (v) analyzing risk and return for different stocks and a portfolio.

Uploaded by

Ms Tan
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
28 views

Modular POF Test2 Question

This document contains instructions and two questions for a finance test. Question 1 has parts (a) through (d) calculating interest rates on bonds of different maturities given inflation and risk-free rates. Question 2 has parts (a) through (v) analyzing risk and return for different stocks and a portfolio.

Uploaded by

Ms Tan
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 2

Principles of Finance

BAFB1013
Test 2

Instructions:

1. This test consists of TWO (2) questions. You are required to answer all questions and need to
support your answer by showing relevant workings.

2. The workings need to be using the formula as per the discussion during class hours with the
course leader/tutor.

3. Submit your answer using MS Words/Pdf format. Write down your name on the 1st page of
your answer scripts.

Question 1

Assume that the real risk-free rate of return, k*, is 2%, and it will remain at that level far into the
future. Also assume that maturity risk premiums (MRP) increase from zero for bonds that mature
in one year or less to a maximum of 1%, and MRP increases by 0.2% for each year to maturity
that is greater than one year-that is, MRP equals 0.2% for two-year bond, 0.4% for a three-year
bond, and so forth. Following are the expected inflation rates:
Year Inflation Rate (%)
2021 6
2022 7
2023 8

a. Compute the interest rate for a one-, two-, three-year bond. (6 marks)

b. If inflation rate is expected to be equal 10% every year after year 2023, what should be the
interest rate for a five- and 10-year bond? (6 marks)

c. Plot the yield curve for the interest rates you computed in part (a) and (b). (4 marks)

d. Based on the curve (in part c), what would you do if you were the borrower, are you going to
borrow more? Explain your answer. (4 marks)

(Total: 20 Marks)

Question 2

a. “By investing in different securities, an investor can lower his/her exposure to risk”. Do you
agree with this statement? Explain your answer using your own words and understanding.
(5 Marks)
b. Consider the following information about three stocks:

Probability of Rate of Return if State Occurs


State of
State of Stock Hang Stock Hang Stock Hang
Economy
Economy Jebat Tuah Kasturi
Boom 0.40 7% 28% 15%
Recession 0.60 13% (5%) 3%

From the information given, you are required to answer the following questions.

i. Compute the Standard Deviation for each stock. (3 Marks)

ii. Compute the Coefficient Variation for each stock. (3 Marks)

iii. Based on your computation in part (i) and (ii), which stock is riskier? Explain your
answer. (3 Marks)

iv. Assume that you have RM14,000 invested in Stock Hang Jebat whose beta is 1.5,
RM19,000 invested in Stock Hang Kasturi whose beta is 2.5 and RM17,000 invested
in Stock Hang Tuah whose beta is 1.6. Determine what is the beta of this portfolio.
(3 Marks)

v. Based on your answer in part (iv), compute the required rate of return for this portfolio,
given that the market rate of return is 13% and risk-free rate is 5%. (3 Marks)

(Total: 20 Marks)

***end of question***

You might also like