UNIVERSITY OF MAURITIUS

FACULTY OF LAW AND MANAGEMENT

SECOND SEMESTER EXAMINATIONS MAY 2010 PROGRAMME BSc (Hons) Finance with Law Level II, III BSc (Hons) Finance Level II, III BSc (Hons) Management Minor Finance Level II

MODULE NAME DATE

Portfolio Theory and Fixed Income Securities Saturday 8 May 2010 MODULE CODE

DFA2012Y(3) 3 Hours

TIME

9.30 - 12.30

DURATION

NO. OF QUESTIONS SET

NO. OF QUESTIONS TO BE ATTEMPTED

INSTRUCTIONS TO CANDIDATES There are 2 Sections in this paper: Section A AND Section B. Section A consists of TWO (2) Questions which are compulsory. Section B consists of THREE (3) questions. Answer ANY TWO (2) questions from Section B. Candidates are required to answer FOUR (4) Questions in ALL. Section A : 30 Marks Section B : Each question carries 15 Marks

PORTFOLIO THEORY AND FIXED INCOME SECURITIES - DFA2012Y(3)

SECTION A
Question 1 (Compulsory) Mr Park has invested Rs 1 000 000 on the first of January 2010 in the following units managed by the Ferdinand Investment Associates: Table 1 :Mr Parks portfolio Growth Fund Benchmarks All Equities Local Index 0.55 Income Fund Fixed Income Index 0.70

Correlation of the investment with its respective benchmark Value of portfolio at 1January 2010 Number of Units in the portfolio at 1 January 2010

350 000 25 000

650 000 15 000

Mr Wayne, the financial analyst of Ferdinand Investment Associates, reports the following movement in the selected benchmarks of the respective investments: Table 2 : Movements of selected benchmarks Jan 1 15 January 15January 2010 31January 2010 All Equities Local +5% +39% Index Fixed Income +4% +19% Index

Feb 1 15 February 2010 + 3% +2%

Table 3 reports transactions carried out by Ferdinand Investment Associates on behalf of Mr Park. Table 3 : Transactions carried out Jan 1 15 January 2010 Growth Fund Buy 1500 Units Income Fund Buy 1600 Units

15January 31January 2010 Buy 2000 units Sell 2200 Units

Feb 1 15 February 2010 Sell 2300 Units Buy 750 Units

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PORTFOLIO THEORY AND FIXED INCOME SECURITIES - DFA2012Y(3)

Required : (a) Calculate the value of each unit as at 15 February 2010. [6 marks] (b) Hence, calculate the value of Mr Parks portfolio as at that date, clearly indicating the proportion of each investment in his global portfolio. Comment on the reported proportion. [4 marks]

Question 2 (Compulsory) You are given the following information: Corporate US bonds 8%, payable annually and maturing in 3 years. Quoted price is $104. Yield to maturity is at 6.49%. The bonds credit rating is CCC. (a) Calculate the followings: (i) Maculay Duration (ii) Modified Duration [4 marks] [2 marks]

(b) (c)

Find the PRICE VALUE OF A BASIS POINT(PVBP).

[2 marks]

What will be the theoretical price if the yield to maturity falls by 100 basis points ? [2 marks] Calculate the actual price of the bond if yield to maturity effectively falls by 100 basis points. [2 marks] Assume now, that the bond is callable in 2 years. Assess the main possible types risks associated with the purchase of this bond. [8 marks] [Total: 30 marks]
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(d)

e)

PORTFOLIO THEORY AND FIXED INCOME SECURITIES - DFA2012Y(3)

SECTION B
Answer Any Two Questions

Question 3 There are essentially two ways of analyzing investments: fundamental analysis and technical analysis. Discuss. [15 marks]

Question 4 An individual undoubtedly derives some advantages and drawbacks whether he invests in index funds, growth funds or mutual funds. Discuss. [15 marks] Question 5 For very small change in the yield, duration can be a good approximation of the actual change in the bond price . Discuss. [15 marks]

END OF QUESTION PAPER

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