INVESTMENT MANAGEMENT

Question 1

(a) A bond has a coupon rate of 5.5%, a maturity date of 1 December 2017, a yield to maturity of 5.375% and coupon frequency is semi-annual. If today is 1 June 2012, what should be the current price of the bond? (12 Marks)

(b) Would the value of the bond in part (a) be affected more by a 1% increase in yield or a 1% decrease? Give reasons for your answer. (12 Marks)

(c) What happens to the sensitivity of bond prices to changes in yield as a bond nears maturity? Give reasons for your answer. (12 Marks)

(d) How would the calculation in part (a) change if the bond was a convertible bond? (5 Marks)

(e) How would the calculation in part (a) change if the bond was a callable bond? (5 Marks)

(f) If the bond in part (a) had a coupon rate of zero what should the current price be? (4 Marks)

Question 2

(a) Explain what is meant by the “duration” of a bond and why it is useful to investment managers. (15 Marks)

(b) A bond has a coupon rate of 5%, the coupon frequency is annual and the bond has 3 years to maturity. If the current yield is 5.45% what is the duration of the bond? (10 Marks)

(c) How is the duration of a bond affected by the coupon rate? Give reasons for your answer. (5 Marks)

(d) Describe the differences between active and passive bond management strategies, giving 2 examples of each. (20 Marks)

Section B – Answer one question from this section

Question 3

Sam is an investment manager and she is considering an equity investment in the mining industry. She is considering a number of companies, all of which are quoted on the London Stock Exchange.

(a) How would Sam be able to differentiate between the companies based on their latest published financial statements? (30 Marks)

(b) What other publicly available information would be useful to Sam? Explain how each source would help Sam. (20 Marks)

Question 4

(a) Explain clearly the Capital Asset Pricing Model (CAPM), include in your explanation the assumptions on which it is based and the implications for investment management of those assumptions. (30 Marks)

(b) What is Arbitrage Pricing Theory? How can it be used to identify mispriced securities? (20 Marks)

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