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Fnce 412:Security Valuation And Portfolio Selection December 2010 Question Paper
Fnce 412:Security Valuation And Portfolio Selection December 2010
Course:Bachelor Of Commerce
Institution: Kabarak University question papers
Exam Year:2010
KABARAK UNIVERSITY
UNIVERSITY EXAMINATIONS
2010/2011 ACADEMIC YEAR
FOR THE DEGREE OF BACHELOR OF COMMERCE
COURSE CODE: FNCE 412
INSTRUCTIONS:
1. Answer questions one and any other two questions.
2. Marks allocated are indicated at the end of each question.
Question one (30marks)
In the recent past, the capital market in Kenya have gone through a lot of
developments in order to be more investor friendly and allow more products to be
offered. In the year 2010, some of the developments proposed include
demutualization of the Nairobi Stock Market (NSE) and introduction of Over The
Counter (OTC) trading.
Required:
a. Discuss FIVE roles of the capital markets authority in the development of Kenya
and towards the achievements of the Vision 2030 goals.
(10 marks)
b. Define demutualization of stock market and briefly explain the strengths and
weaknesses of a demutualised exchange.
(10 marks)
c. what is Over The Counter trading. Briefly discuss whether it should be introduced
in Kenya. (10 marks)
Question two
a. What is a bond portfolio? Using examples explain two main ways of managing bond
portfolios. (4marks).
b. Explain four factors affecting the interest rates on bonds. (4 marks).
c. X ltd issued a 10 year 10% coupon bond with a face value of shs.1000 on 1st October
2009. The yield to maturity on this bond as at the same date was estimated at 14.38. %.
At the end of the first year the bond price reduced to Shs 692 and the yield to maturity
16.37%
Required
i. Determine the price of the bond on October 1st 2009. (3 marks)
ii. Determine the elasticity coefficient of the bond. (3 marks)
iii. What is the duration of the bond? (6 marks)
Question three
a. Explain how the following option strategies can be used to minimize risks in option
trading.
i. Covered call writing.
ii. Short straddle.
iii. Long put strategy. (6 marks)
b. Assume you purchase 200 shares of stock at $80 per share and wish to hedge part of
your position by writing a 100 share option. The option has a strike price of 75 and a
premium of $6. If at the time of expiration, the stock is selling at the following prices
($75, $80, $90) what will be your overall gain or loss? (6 marks)
c. Z ltd is interested in writing a six-month Black and Schole option on Mighty
Engineering company stocks. The stocks are currently selling at Ksh. 120 each. The
standard deviation of the share return is estimated as 67% and expected exercise price
is Ksh.120. the risk-free interest rate is 10%. Calculate the value of the option.
( 8 marks).
Note C= SoN(d1) – Ex. e-rt N(d2)
Question four (20 MARKS)
a. One of the theories that try to explain the movement of security prices in the stock
exchanges is “The efficient markets hypothesis (EMH)”.
i. Clearly define the meaning of an efficient capital market (4 marks)
ii. Explain the three levels of market efficiency according to the (6 marks)
iii. In your own opinion explain the level of efficiency of the Nairobi Stock
Exchange market using recent examples. (4 marks)
b. A company has a ß of 0.745; the average return in the market is currently 12%.
The company has just paid an interim dividend 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 3 years, 6% in the next
three years and thereafter 7 % forever.
Required
Determine the value of the share and the price earning ratio. (6 marks)
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