APRIL 2009 QUESTION 4 ANSWER:- A.) The agency was formed in November 1990, with a paid up capital of RM 10M. The formation of RAM is very important for the development of capital market especially in the bond and debt securities market RATING SCALES - Private Debt Securities Ratings RATING DEFINITION AAA The best quality and offer the highest safety for timely payment of interest and principal AA High safety for timely payment of interest and principal A Adequate safety for timely payment of interest and principal. More susceptible to changes in circumstances and economic conditions than debts in higher-rated categories. BBA Moderate safety for timely payment of interest and principal. Lacking in certain protective elements. Changes in circumstances are more likely to lead to weakened capacity to pay interest and principal than debts in higher-rated categories BB Inadequate safety for timely payment of interest and principal. Future cannot be considered as well assured High risk associated with timely payment of interest
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APRIL 2009
QUESTION 4
ANSWER:-
A.) The agency was formed in November 1990, with a paid up capital of RM 10M. The formation of
RAM is very important for the development of capital market especially in the bond and debt
securities market
RATING SCALES
- Private Debt Securities Ratings
RATING DEFINITION
AAA
The best quality and offer the highest safety for timely payment of interest and
principal
AA High safety for timely payment of interest and principal
A
Adequate safety for timely payment of interest and principal. More susceptible
to changes in circumstances and economic conditions than debts in higher-
rated categories.
BBA
Moderate safety for timely payment of interest and principal. Lacking in
certain protective elements. Changes in circumstances are more likely to lead
to weakened capacity to pay interest and principal than debts in higher-rated
categories
BB
Inadequate safety for timely payment of interest and principal. Future cannot
be considered as well assured
B
High risk associated with timely payment of interest and principal Adverse
business or economic conditions would lead to lack of ability on the part of the
issuer to pay interest or principal
B.) Explain the difference between yield- to- maturity (YTM) and Yield-to-call (YTC). (3M)
Yield-to-maturity (YTM) – The yield is the rate of return that the investor will get from the
purchase of bond at current market price and held to maturity.
Yield-to-call ( YTC) – The yield on a bond if it remains outstanding only until a specified call
date.
C.)
5% of convertible bond
m- 12years
c. ratio- 200 shares of common shares
c. price of convertible bond- Rm 880
MP of common shares- Rm 4
Dividend - 18%
CONVERSION VALUE = C.RATIO × MP OF C.SHARES.
= 200 Shares ×Rm4
= Rm 800
CONVERSION PREMIUM (RM) = M.P OF C.BOND – C.VALUE
= RM880-RM800
= RM80
CONVERSION PREMIUM ( %) = RM 80
RM800
= 10%
PAYBACK PERIOD = RM80
( RM1000 × 5% ) – ( 200 × 18%)
= 5.71 YEARS
QUESTION 5 (A.)
I. UNITS (2007)
NAV = T.Asset- T.liabilities
No.Of Outstanding
1.0689 = 242,200 – 1700
X
X = 224,997.66 units
II. VALUE ( 2008)
NAV = T.Asset- T.liabilities
No.Of Outstanding
1.0200 = ( X + 1700) -2100
200,000
206,100 = X = + 1700
X= RM 204,400
B.)
RETURN
SPECULATIVE STOCK
UNIT TRUST
T,BILLS
RISK
In general, there is a positive relationship between risk and return. Investment with high risk tend to
give high expected return. For those with low risk, the return will also be low. From the diagram,
we can see that instruments regarded as risk free ( for example treasury bills) have very low return.
While those which are very risky tend to be on the higher end of the spectrum and give high returns.
OCTOBER 2008
QUESTION 3
A.)
1.) INTEREST RATE RISK- interest rate risk or market risk is the uncertainty cause by the
changes in interest rate during the period in which a fixed income security ( bond) is held.
The price of fixed- income securities is highly influenced by changes in interest rate. An
increase in interest rate can cause the price of the bond is decline and a decline in interest
can cause the price of the bond to increase. When interest rate fall, new issues come to
market with lower yields compared to existing securities. This makes the existing
securities to worth more. Thus, the price increases. On the other hand, if the interest rate
increase, new issues come to market with higher yields than existing securities. This will
make the existing securities to worthless , thus the price drops.
2.) PURCHASING POWER RISK - The uncertainty caused by the changing in price levels in
the economy ( inflation) will adversely affect the returns on the fixed income securities.
When the consumer price index ( CPI) increase, the fixed return from fixed income
securities will reduce purchasing power, for example, less value of goods can be
purchased from the income.
3.) Business/ financial risk - is associated with how the company mix amount of debt and
equity used to finance the company. For the company that aggressively using financial
leverage to finance its investment expose to higher financial risk. Debt financing expose
the company to pay fix interest payment to the lender. Inability to pay the fixed- interest
payment can cause business failure to the company.
4.) LIQUIDITY RISK - The risk being unable to sell the investment at a reasonable price in a
short period of time. The secondary market plays an important role in providing liquidity
to the investors. To be liquid, there must be a lot of market players and different types of
securities to suit different investors.
5.) CALL RISK - A risk related calls features attached to the bond issued, called callable
bond. Callable bond is a type of bond that gives the right to the issuer to call the bond
before maturity date. Investors usually invest in bond for the fix income from the interest
rate. If the bond were called before the maturity, the investors will receive the cash , thus
there is no more fixed income from this investment. With the cash in hand, investors have
to look for another alternative. The issuer usually calls the bond when interest rate drops.
In the case, investor has to replace the investment with lower yields issue.
B.)
I. A bond with a par value of RM1000, a coupon rate of 7% and is currently selling for RM800.
M- 20,
PV-RM1000,
CR- 7%,
MP-RM800
YTM= CP + [ PV-MP]
M
[ PV+ MP]
2
CP= CR × PV
= 7% × RM1000
= RM70
RM 70 + [ RM1000- RM800]
20
[ RM1000+ RM800 ]
2
= 8.89%
II. M- 20,
CR- 0,
PV- RM1000,
MP- RM300
YTM= CP + [ PV-MP]
M
[ PV+ MP]
2
CP= CR × PV
= 0 × RM1000
= RM0
RM 0 + [ RM1000- RM300]
20
[ RM1000+ RM300 ]
2
= 5.38%
Investors should invest in Bond ( 1) because the YTM is higher. The YTM is 8.89, which is
greater than the coupon rate of 7%. To encourage the investor to buy the bond, the issuer must sell
the bond at a discount and provide a rate of return of 8.89 to investors
APRIL 2008
QUESTION 2
A.) YTM= CP + [ PV-MP]
M
[ PV+ MP]
2
YTM ( BOND A)
CP= CR × PV
= 0 × RM1000
= RM0
RM 0 + [ RM1000- RM909.10]
1
[ RM1000+ RM909.10 ]
2
= 9.52 %
YTM ( BOND B )
RM 0 + [ RM1000- RM797.20]
2
[ RM1000+ RM797.20 ]
2
= 11.28 %
YTM ( BOND C)
RM 0 + [ RM1000- RM675.00]
3
[ RM1000+ RM675.00]
2
=12.93 %
YTM ( BOND C)
RM 0 + [ RM1000- RM683.00]
4
[ RM1000+ RM 683.00 ]
2
= 9.42 %
Choose BOND C because the YTM is higher. The YTM is 12.93, which is greater than the