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Fnce 412:Security Valuation And Portfolio Selection March 2009 Question Paper

Fnce 412:Security Valuation And Portfolio Selection March 2009

Course:Bachelor Of Commerce

Institution: Kabarak University question papers

Exam Year:2009

KABARAK UNIVERSITY
EXAMINATIONS
2008/2009 ACADEMIC YEAR
FOR THE DEGREE OF BACHELOR OF COMMERCE
COURSE CODE: FNCE 412

INSTRUCTIONS:
- Answer question one and any other two questions.
- Marks allocated are indicated at the end of each question.
- Time allowed is 2 hours.

QUESTION ONE (30MARKS)
a) Explain the FOUR forces that influence the bond market. (8mks)
b) Discuss FOUR reasons why Black and Scholes Options Pricing Model cannot
reliably estimate the value of an option. (8mks)
c) Recently the government of Kenya issued a warning to stockbrokers in Kenya to
put their house in order or be deregistered. This followed the collapse of two
brokerage firms and a suspicion the operations of a number of other brokers.
Explain how the government can stop misuse of investors’ funds or assets under
the custodian of stock brokers. (8mks)
d) What is the difference between margin trading and short selling? (2mks)
e) Investors can minimize their risks by entering in option agreements. Mr. Otieno a
Mathematics lecturer believes that holding a call option is the same as writing a
put option. Explain to him the difference in his position as a call holder and a put
writer. (4mks)

QUESTION TWO (20 MARKS)
Safcom Ltd issued a five year 8.5% bond with a face value of shs 1000 each. The current
yield to maturity e of the bond is 10% and market value shs.954.74. Immediately after
that Celty Ltd a company in the same industry with Safcom issued a 12% five year bond
with face value of shs.1000. The market value of this bond is shs.1044.57 and the yield
to maturity is 10.8%. Both bonds pay annual interest.
Required:
i) The present value of each bond. State which one you can buy and explain
why. (4mks)
ii) The duration of each bond and the interest rate sensitivity. (6mks)
iii) Assuming at the end of year one. The YTM the bonds are 11% and 13%
respectively, calculate the interest rate elasticity coefficient (E) of each
bond. (4mks)
iv) Discuss the three theories of explaining the different shapes of the term
structure of interest rates or the yield curve. (6mks)

QUESTION THREE (20 MARKS)
a) Clearly explain the meaning of an efficient capital market and describe the three
theories of efficient market hypothesis. (10mks)
b) A company has a ? of 0.745; the average return in the market is currently 12%.
The company has just paid an interim devided of shs 3 for the half year 2008 and
expects the same level of dividend for the second half of the year. Future
dividend growth rate is expected to be 5% for the first 5 years and thereafter 7%
forever.
Required:
Determine the value of the share and the price earning ration. (10mks)

QUESTION FOUR (20 MARKS)
a) The current stock price of X ltd is$100. The exercise price of an option on the
stock is $125 and the remainder time to expiration is 3 months. If the
continuously compounded annual interest rate is 0.12 and stock price volatility is
0.62, determine the value of the option.. (10mks)
b) Discuss four option strategies. (10mks)

Fnce 412:Security Valuation And Portfolio Selection March 2009 Question Paper

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