a). Anna is considering investing in a bond currently selling in the market for ȼ875. The bond has 4 years to mature, a 1000 GHS face value and a 7%coupon rate. The next annual interest payment is due one year from today. The appropriate discount rate for the securities of similar risk is 10%. Required: i). Estimate the intrinsic value of the bond. Based on the result of this estimation, should Ann purchase the bond? Explain. ii). Estimate the yield-to-maturity of the bond. Based on the result of this estimation, should Ann purchase the bond? Explain. b). With the aid of appropriate diagram(s) explain the Markowitz portfolio theory.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Question 1

a). Anna is considering investing in a bond currently selling in the market for ȼ875. The bond has 4 years to mature, a 1000 GHS face value and a 7%coupon rate. The next annual interest payment is due one year from today. The appropriate discount rate for the securities of similar risk is 10%.
Required:
i). Estimate the intrinsic value of the bond. Based on the result of this estimation, should Ann purchase the bond? Explain.
ii). Estimate the yield-to-maturity of the bond. Based on the result of this estimation, should Ann purchase the bond? Explain.
b). With the aid of appropriate diagram(s) explain the Markowitz portfolio theory.

c). The following data relates to the ordinary shares of T & M Company Ltd.

Current market price, 31 December 2018 GH¢250
Dividend per share, 2018 GH¢3
Expected growth rate in dividends and earnings 10% pa
Average market returns 10% pa
Risk-free rate of return 4%
Beta factor of T&M equity share 1.40

Required
Using the information to answer the following questions
i. What is the estimated cost of equity using the dividend growth model?
ii. What is the estimated cost of equity using the capital asset pricing model?

c). Kofi Oteng is a portfolio manager. He is currently considering a portfolios whose expected returns, betas and standard deviations are given below. The risk-free rate is 3%.

Portfolio Expected Return (%) Beta Standard Deviation (%)
1 8 1.3 8.8
2 18 2.0 12.4
3 16 1.4 10.1
4 7 0.6 0.9
5 13 1.2 6.5
Market Portfolio 10 1.0 5.0
       

a. What is the required rate of return of portfolio 3, according to the CAPM?
b. Which portfolios are overpriced?
c. Which portfolios are underpriced?

Question 2

Your dad plans to invest in equities listed on the GSE. His investment analyst told him three (3) things that has gotten him confused.
First, he must look for industries that are matured, secondly he should analyze the economic structure of the industry and thirdly, possibility of threat(s) of entry into the sector or industry.
Analyze to your dad how these three (3) variables would impact on corporate performance and their importance to him as a prospective investor to enable him take a decision to invest in IPO’s slated for December 2020.

b). Describe the following bond features
i. Yield to maturity
ii. Par value
iii. Coupon rate

c). What is bond rating? State and explain two factors that influence bond ratings by rating agencies such as Moody’s and Standards & Poor’s.

 

Question 3

You have been approached by Onua Do Ltd who wants to know how their portfolio is fairing. The Company has over the years spread their funds in this order: 30% stock in A, 50% stock in B and the rest in stock C.

State of Economy Probability Stock A Return Stock B Return Stock C Return
Boom 0.10 24% 5% 14%
Normal 0.70 11% 6% 9%
Recession 0.20 -30% 7% -5%

a). What is the standard deviation of their portfolio?
b). Explain the following and analyze how they affects trading decision(s) making and analysis of investments:
i) Snakebite effect
ii) House-money effect
iii) Endowment effect
iv) Disposition effect
v) Overconfidence

Question 4

Consider the following information regarding a new investment that a company intends to undertake:.

State of the Economy Probability Market Return Investment Return
Expansion 0.30 40% 60%
Normal 0.50 10% 25%
Recession 0.20 -15% -40%

a). Compute the variance and standard deviation of each
b). Compute the correlation between the market the investment return(s)
c). Compute the beta of the investment
d). Assuming the risk free rate is 5% p.a. Compute the required rate return and advice if the investment is worth undertaken.

 

Question 5

a. Distinguish between the following:
i. Primary market and secondary market
ii. Money market and capital market
iii. Fixed income security and convertible security
iv. Systematic risk and Unsystematic risk

b. You are an investment advisor and you are asked to guide a new investor to trade shares on the Ghana Stock Exchange (GSE). Explain any six (6) of the listing requirement of GSE that are to be met before the company can start trading on the market.

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