1. a)For these following corporate financing type, identify the embedded option.) (i) (Right issue) (ii) (Underwrite the new securities issue) (iii) (Callable bondholder)
1. a)For these following
(i) (Right issue)
(ii) (Underwrite the new securities issue)
(iii) (Callable bondholder)
b) (A sole proprietor has RM 500,000 of equity. The sole proprietor is now considering an investment of RM 1,000,000 in a new project. Suppose he borrow RM 500,000 at 10% interest per year. Assume that the investment has a one year life, at the end of which the outcome is known and all financing partners get their respective returns)
(i)(demonstrate using graph the embedded option for the potential payoff of sole proprietor and debtholder)
(ii) (what is the maximum loss, maximum profit and break even point for the business value of sole proprietor and debtholder
c) (Learning that you have just completed a course in Financial Derivatives and Risk Management, a friend comes to you for advice. He is faced with two investment choices.)
(Choice 1: Place a RM 50,000 investment with an index fund for one year. (An index fund is a mutual fund that invests in a portfolio that tracks the index).)
Choice 2: Place the RM 50,000 with an Index linked bank deposit that a local bank is offering. Under this scheme, a depositor gets back his entire capital and zero interest if the FBMKLCI is lower than the day he placed his deposit. On the other hand, if the FBMKLCI rises, then the depositor gets his initial deposit 10% of the percentage rise in the FBMKLCI over the one year.)
(i) (Demonstrate using graph, the payoff profile of each alternative (plot the maximum loss, maximum profit and break even point))
(ii) Describe the risk profile of each alternative.)
(iii) Explain two key factors that your friend ought to consider in deciding between the two alternatives)
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