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Question-01: Answer:

Differentiate between ADRs and GDRs.

1. Global depository receipt (GDR) is compulsory for foreign company to access in any other countrys share market for dealing in stock. But American depository receipt (ADR) is compulsory for non us companies to trade in stock market of usa . 2. ADRs can get from level -1 to level III. GDRs are already equal to high pre ference receipt of le vel II and level III. 3. Indian co mpanies pre fer to get GDR due to its global use for getting foreign investment for own business projects. 4. ADRs up to level I need to accept only ge neral co ndition of SEC o f USA but GDRs can only be issued under rule 144 A after accepting strict rules of SEC of USA . 5. GDR is negotiable instrument all over the world but ADR is only negotiable in USA . 6. Many Indian Co mpanies listed fore ign stock market through foreign banks GDR. Names of these Indian Companies are following : (A) Bajaj Auto (B) Hindalco (C) ITC ( D) L&T (E) Ranbaxy Laboratories (F) SBI Some of Indian Companies are listed in USA stock exchange only through ADRs Motors 7. Even both GDR & ADR is the proxy way to sell shares in foreign market by India companies ADRs is not substitute of GDRs but GDRs can use on the place of ADRs. 8. Investors of UK can buy GDRs from Lo ndon stock exchange and luxemberg stock exchange and invest in Indian companies without any extra responsibilities. Investors of USA can buy ADRs from New york stock exchange (NYSE) or NASDAQ (National Association of Securities Dealers Automated Quotation). 9. American investors typically use re gular equity trading accounts for buying ADRs but not for GDRs. 10. The US dollar rate paid to holders of ADRs is calculated by applying the exchange rate used to convert the foreign dividend payment (net of local withholding tax) to US dollars, and adjusting the result according to the ordinary share but GDRs is calculated on numbers of Shares. One GDR's Value may be on two or six shares :- (A) Patni Computers (B) Tata

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Question 2: Using financial ratios, study the financial performance of any particular company of your interest. Answer: Financial ratios illustrate relationships b etween different aspects of a small business's operations. They involve the comparison o f elements from a balance sheet or income statement, and are crafted with p articular points of focus in mind. Financial ratios can provide small business owners and managers with a valu able tool to measure their progress against predetermined internal goals, a certain competitor, or the overall industry. In addition, tracking various ratios over time is a powerful way to iden tify trends as they develop. Ratios are also used by bankers, in vestors, and business analysts to assess various attributes of a company's financial strength or operating results. Ratios are determin ed by dividing one number by another, and are u sually expressed as a percentage. They enable business owners to examine the relationships between seemingly unrelated items and thus gain useful info rmation for decision-making. "They are simple to calculate, easy to use, and provide a wealth of in fo rmation that cannot be gotten anywhere else," James O. Gill noted in his book Financial Basics of S mall Business But, he added, "Ratio s are aids to judgment Success. and cannot take the place of experience. They will not replace good management, but they will make a good manager better. They help to pinpoint areas that need investigation and assist in developing an operating strategy for the future." Virtually any financial statistics can be compared using a ratio. In reality, however, small business owners and managers only need to be concerned with a small set o f ratios in order to identify where improvements are needed. "As you run your business you juggle dozens of different variables," David H. Ban gs, Jr. wrote in his book Managing by the "Ratio an alysis is d esigned to help Numbers. you id entify those variables which are out of balance." It is important to keep in mind that financial ratios are time sensitive; they can only present a picture of th e business at the time that the underlying figures were prepared. For example, a retailer calculating ratio s before and after the Christmas season would get very differen t results. In add ition, ratios can be misleading when taken singly, though they can be quite valuable when a small business tracks them over time o r uses them as a basis for comparison against company goals or industry standard s. As a result, business owners should compute a variety of applicable ratio s and attempt to discern a pattern, rather than relying on the information provided by only one or two ratios. Gill also noted that small business owners should b e certain to view ratios objectively, rather than using them to confirm a particu lar strategy or point of view. Perh aps the best way for small business owners to use financial ratios is to condu ct a formal ratio analysis on a regular basis. The raw data used to compute the ratios should be recorded on a special form mo nthly. Then the relevant ratios should be computed, reviewed, and saved for future comparisons. Determining which ratios to compute depends on the type of business, the age of the business, the po in t in the business cycle, and an y specific information sought. For example, if a

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small business depends on a large number o f fixed assets, ratio s that measure how efficiently these assets are being used may be the most significant. In general, financial ratio s can be broken down into four main categoriespro fitability or return on investmen t, liquidity, leverage, and operatin g or efficiencywith several specific ratio calculations prescribed within each. Q1 Financial Summary Google reported revenues o f $6.77 billion for the quarter ended March 31, 2010, an increase of 23% compared to the first quarter of 2009. Google reports its revenues, consistent with GAAP, on a gross basis without deducting traffic acquisition costs (TAC). In the first quarte r of 2010, TAC totaled $1.71 billion, or 26% of advertising revenues. Google reports operating income, operating margin, net income , and earnings per share (EPS) on a GAAP and non-GAAP basis. The non-GAAP measures, as well as free cash flow, an alternative non-GAAP measure of liquidity, are described below and are reconcile d to the corresponding GAAP me asures in the accompanying financial tables. GAAP operating income in the first quarter of 2010 was $2.49 billio n, or 37% o f revenues. This compares to GAAP operating income o f $1.88 billion, or 34% of revenues, in the first quarter of 2009. Non-GAAP operating income in the first quarter of 2010 was $2.78 billion, or 41% of re venues. This compares to non-GAAP operating income of $2.16 billion, or 39% of revenues, in the first quarter o f 2009. GAAP net income in the first quarter o f 2010 was $1.96 billion, compared to $1.42 billion in the first quarter of 2009. Non-GAAP net income in the first quarter of 2010 was $2.18 billio n, compared to $1.64 billion in the first quarter of 2009. GAAP EPS in the first quarter of 2010 was $6.06 on 323 million diluted shares outstanding, compared to $4.49 in the first quarter of 2009 on 317 million diluted shares outstanding. No n-GAAP EPS in the first quarter of 2010 was $6.76, compared to $5.16 in the first quarter of 2009. Non-GAAP operating income and non-GAAP o perating margin exclude the expenses related to stock-based compensation (SBC). Non-GAAP net income and non-GAAP EPS exclude the expenses related to SBC and the relate d tax be nefits. In the first quarter of 2010, the charge related to SBC was $291 million, compare d to $277 million in the first quarter of 2009. The tax benefit related to SBC was $65 million in the first quarter o f 2010 and $64 millio n in the first quarter of 2009. Reconciliations of non-GAAP measures to GAAP operating income, operating margin, net income, and EPS are included at the end of this release. International Re venues - Revenues from outside of the United States totaled $3.58 billion, represe nting 53% of total revenues in the first quarter of 2010, compared to 53% in the fourth quarter of 2009 and 52% in the first quarter of 2009. Excluding gains related to our foreign exchange risk management program, had foreign exchange rates remained constant from the fourth quarter of 2009 through the first quarter of 2010, our revenues in the first quarter o f 2010 would have been $112 million higher. Excluding gains related to our foreign exchange risk management program, had foreign e xchange rates remained constant from the first quarter of 2009 through the

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first quarter of 2010, our revenues in the first quarter o f 2010 would have been $242 million lower. Re venues from the United Kingdo m totaled $842 million, re presenting 13% of revenues in the first quarter of 2010, compared to 13% in the first quarter of 2009. In the first quarter of 2010, we recognized a benefit of $10 million to revenues through our foreign exchange risk management program, compared to $154 million in the first quarter of 2009. Paid Clicks Aggregate paid clicks, which include clicks related to ads served on Google sites and the sites of our AdSense partners, increased approximately 15% over the first quarter of 2009 and increased approximately 5% over the fourth quarter o f 2009. Cost-Per-Click Average cost-per-click, which includes clicks related to ads served on Google sites and the sites o f our AdSense partners, increased approximately 7% over the first quarter of 2009 and decreased approximately 4% over the fourth quarter of 2009. TAC - Traffic Acquisition Costs, the portion of reve nues shared with Googles partners, increased to $1.71 billion in the first quarter of 2010, compared to TAC of $1.44 billion in the first quarte r of 2009. TAC as a perce ntage of advertising revenues was 26% in the first quarter of 2010, compared to 27% in the first quarter of 2009. The majority of TAC is related to amounts ultimately paid to our AdSe nse partners, which totaled $1.45 billion in the first quarte r of 2010. TAC also includes amounts ultimately paid to certain distribution partners and others who direct traffic to our website, which totaled $265 million in the first quarter of 2010. Other Cost of Revenues - Other cost of revenues, which is comprised primarily of data center operational expenses, amortization o f intangible assets, content acquisition costs as well as credit card processing charges, increased to $741 million, or 11% o f revenues, in the first quarter of 2010, compared to $666 million, or 12% of revenues, in the first quarter of 2009. Operating Expenses - Operating expenses, other than cost of revenues, were $1.84 billion in the first quarter of 2010, or 27% of revenues, compared to $1.52 billion in the first quarter of 2009, or 28% of revenues. Stock-Based Compe nsatio n (SBC) In the first quarter of 2010, the total charge related to SBC was $291 million, compared to $277 million in the first quarter of 2009. We curre ntly estimate SBC charges for grants to employees prior to April 1, 2010 to be approximately $1.2 billion for 2010. This estimate does not include expenses to be recognized related to employee stock awards that are granted after March 31, 2010 or non-employee stock awards that have been or may be granted. Operating Income - GAAP operating income in the first quarter of 2010 was $2.49 billion, or 37% of re venues. This compares to GAAP operating income of $1.88 billion, or 34% of revenues, in the first quarter o f 2009. Non-GAAP operating income in the first quarter of 2010 was $2.78 billion, or 41% of revenues. This compares to non-GAAP operating income of $2.16 billion, or 39% of revenues, in the first quarter of 2009.

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Interest Income and Other, Net Interest income and other, net increased to $18 million in the first quarter of 2010, compared to $6 million in the first quarter of 2009. Income Taxes Our effective tax rate was 22% for the first quarter of 2010. Net Income GAAP net income in the first quarter of 2010 was $1.96 billion, compared to $1.42 billion in the first quarter of 2009. Non-GAAP net income was $2.18 billion in the first quarter of 2010, compared to $1.64 billion in the first quarter of 2009. GAAP EPS in the first quarter of 2010 was $6.06 on 323 million diluted shares outstanding, compared to $4.49 in the first quarter of 2009 on 317 million diluted shares outstanding. Non-GAAP EPS in the first quarter of 2010 was $6.76, compared to $5.16 in the first quarter of 2009. Cash Flow and Capital Expenditures Net cash provided by operating activities in the first quarter of 2010 totalled $2.58 billion, compared to $2.25 billion in the first quarter of 2009. In the first quarter of 2010, capital expenditures were $239 million, the majority of which was related to IT infrastructure investments, including data canters, servers, and ne tworking equipment. Free cash flow, an alternative non-GAAP measure of liquidity, is defined as net cash provided by operating activities less capital expenditures. In the first quarter o f 2010, free cash flow was $2.35 billion. We expect to continue to make significant capital expenditures. A reconciliation o f free cash flow to net cash provided by operating activities, the GAAP measure o f liquidity, is included at the end of this release. Cash As of March 31, 2010, cash, cash equivalents, and short-term marketable securities were $26.5 billion. On a worldwide basis, Google employed 20,621 full-time e mployees as of March 31, 2010, up from 19,835 full-time employees as of December 31, 2009. FORWARD-LOOKING STATEMENTS This press release contains forward-looking statements that involve risks and uncertainties. These statements include statements regarding our plans to heavily invest in innovation, our expecte d stock-based compensation charges and our plans to make significant capital e xpenditures. Actual results may differ materially from the results predicted, and reported re sults sho uld not be considered as an indication o f future performance. The potential risks and uncertainties that could cause actual results to differ from the results predicted include , among others, unfore seen changes in our hiring patterns and our need to expend capital to accommodate the growth o f the business, as well as those risks and uncertainties included under the captions Risk Factors and Managements Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2009, which is on file with the SEC and is available on our investor relations website at investor.google.com and on the SEC website at www.sec.gov. Additio nal information will also be set forth in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, which we expect to file with the SEC in May 2010. All information provided in this re lease and in the attachments is as of April 15, 2010, and Google undertakes no duty to update this information.

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CONSOLIDATED SHEETS (In millions)

BALANCE December 31, March 31, 2009* 2010 (unaudited)

Assets Current assets : Cash and cash equivalents 10,198 9,192 Marketable securities 14,287 17,322 Accounts receivable, net of allowance 3,178 3,084 Deferred income taxes, net 644 399 Income taxes receivable, net 23 Prepaid revenue share, e xpenses and other assets 837 1,135 Total current assets 29,167 31,132 Prepaid revenue share, expenses and other assets, non 415 454 current Deferred income taxes, net, non-current 263 446 Non-marketable equity securities 129 154 Property and equipment, net 4,845 4,773 Intangible assets, net 775 790 Goodwill 4,903 5,122 Total assets 40,497 42,871 Liabilities and Sto ckholders' Equity Current liabilities: Accounts payable 216 329 Accrued compensation and benefits 982 578 Accrued expenses and other current liabilities 570 576 Accrued revenue share 694 696 Deferred revenue 285 293 Income taxes payable, net 450 Total current liabilities 2,747 2,922 Deferred revenue, non-current 42 36 Income taxes payable, net, non-current 1,392 1,300 Other long-term liabilities 312 330 Stockholders' equity: Co mmon stock and additional paid-in capital 15,817 16,171 Accumulated other comprehensive income 105 163 Re tained earnings 20,082 21,949 Total stockholders' equity 36,004 38,283 Total liabilities and stockholders' equity 40,497 42,871 * Derived from audited financial statements.

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CONSOLIDATED STATEMENTS OF INCOME (In millions, except share amounts which are re flected in thousands and per share amounts) Three Months Ended March 31, 2009 2010 (unaudited) Re venues $ 5,509 $ 6,775 Costs and expenses: Cost of revenues (including stock-based compe nsation 2,102 2,452 expense of $13, $6) Research and development (including stock-based 642 818 compensation expense of $168, $191) Sales and marketing (including stock-based compensation 434 607 expense of $59, $54) General and administrative (including stock-based 447 410 compensation expense of $37, $40) Total costs and expenses 3,625 4,287 Income from operations 1,884 2,488 Interest income and other, net 6 18 Income before inco me taxes 1,890 2,506 Provision for income taxes 467 551 Net income $ 1,423 $ 1,955 Net income per share - basic $ 4.51 $ 6.15 Net income per share - diluted $ 4.49 $ 6.06 Shares used in per share calculation - basic 315,252 317,895 Shares used in per share calculation - diluted 317,221 322,608 CONSOLIDATED FLOWS STATEMENTS (In millions) Three Months Ended OF CASH

March 31, 2009 2010 (unaudited) Operating activities Net income Adjustments: 321 264 Depreciation and amortization of property and equipment Amortization of intangible and other asse ts 277 291 Stock-based compensation expense (32) (12) $ 1,423 $ 1,955 82 67

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Excess tax benefits from stock-based award (13) (13) activities Deferred income taxes (21) 2 Other Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable 97 46 Income taxes, net 325 381 Prepaid revenue share, expenses and other 78 (157) assets Accounts payable 22 120 Accrued expenses and other liabilities (322) (394) Accrued revenue share 4 23 Deferred revenue 9 11 Net cash pro vided by operating activities 2,250 2,584 Investing activities Purchases of property and equipment (263) (239) Purchases of marketable securities (5,245) (12,487) Maturities and sales of marketable securities 5,110 9,495 Investments in non-marketable equity (19) (3) securities Acquisitions, net of cash acquired, and (2) (190) purchases of intangible and other assets Net cash used in investing activities (419) (3,424) Financing activit ies (37) (38) Net payments re lated to stock-based award 32 12 activities Excess tax benefits from stock-based award - (97) activities Re purchase of common stock Net cash used in financing activities (5) (123) Effect of exchange rate changes on cash and (57) (43) cash equivalents Net incre ase (decre ase) in cash and cash 1,769 (1,006) equivalents Cash and cash equivalents at beginning of 8,657 10,198 period Cash and cash equivale nts at end of period $ 10,426 $9,192

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Question 3 : As an investor how would you select an equity mutual fund scheme Answer: How do I choose a Scheme Fundas and more fundas. There is no end to verbosity when e ducating on funds. But getting to actually choose a fund may not be eased with more fundas. It often turns out, like with most ventures in life, that pick ing your fund is like crossing the saddle point the first time is always the most difficult. There are more than 350 schemes and choosing one of them is not an easy task. We will provide you an easy way to filter this huge number down to a more manageable size so that you can look spe nd more time looking at schemes in greater detail. But to be gin your selection start from the very beginning: Specify your investment needs What are you looking for when investing in mutual funds? What are your investment needs? The more well defined these answers are the easier it is to find schemes best for you. So how do you assess your nee ds? The answers obviously lie with you. But the questions investors ask to assess their needs are possibly the same . You might ask yourself: At my age what am I expecting out o f investing? To assess the needs investors look at their lifestyles, financial independence, family commitments, and le vel of income and expenses among other things. Questions can be many but to get cracking ask yourself these two: What are the returns you want on your investments? Do you have well-defined time period for the returns you expect on your investment? The father of an aspiring engineer who would have to shell out the boy's institute fees soon enough, could reply: I want a fixed mo nthly income of about Rs.5000 per month. To the second query he might say: Yes, for the next four years. When asked, the justout-of-B-school graduate planning for his new Zen could reply: I should make about Rs. 60,000 by the end of one year. Be lieve us, but getting the right answers to these questions does a lot to simply your fund picking exercise. Having de fined the needs that direct you to invest, one can find a category o f funds that come close to satisfy your needs with their objectives. While we are on the topic of what returns to expect, someone might as well wish for a fund that assures returns. Some of the mutual funds have floated "assured" return

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schemes that guarantee a certain annual return or guarantee a buyback at a spe cified price after a specifie d period. Examples of these include funds floated by the UTI, SBI Mutual Fund, etc. Many of these funds have not earned returns that they promised and the asset management companies of the respective mutual funds or their spo nsors have made good their promises. Nowadays, there are very few funds that come out with such sche mes as the funds have realized it is not viable to assure returns in a volatile market. Assess the risk you can take Co ntrary to the commonplace thinking, mutual funds do carry risks. And there are some that can become as risky as stocks. Given the almost diverse objectives with which schemes operate, there are some with more risks and some relatively safer. Ask yourself if you are ready for a scheme whose investment value might fluctuate every week or one that gives a minimum amount of risk? Or are you in for a short-term loss in order to achieve a long-term potential gain? At this point it is good to ask oneself how will you take it if your investme nt fails to deliver the returns you expected or makes losses. Knowing this will reduce your chances (or e ven temptation) to select a fund that doesnt come close to your objective. Investors comfortable with numerical recipes do a technical check of what the returns of a scheme would be in the worst case. They check is done with the Sharpe ratio. The higher the Sharpe ratio, the better the fund's historical risk-adjusted performance. Evaluate a scheme by looking at how its NAV has behaved o ver the past. Do you see the scheme behaving rather erratically i.e., the NAV changes just too often? More the volatility more are the risks involved. Great returns are not the only thing to look for in a scheme. If you feel while researching a scheme, which we will do later, that its returns are modest and steady and good enough for your needs, avoid other schemes that have recently de livered high returns. Because great returns in the past are no guarantee for the fabulous performance to continue in the future . Never forget one of the commonplace morals o f investment: The schemes that are expected to give the highest returns have the greatest probability to fall flat! Ask : How long can you park your cash ?? Is the cash you have earmarked for your investment meant to be spent for something else? Do you need a regular cash flow? Or you dont mind locking your cash in the scheme so that your assets can appreciate over time?

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Settle this question upfront on what your cash flow requirements will be till the time your money is invested in mutual funds Getting the right Fund. The success of your investment depends in a large measure on the objective you define. Having defined that, choosing a fund isnt difficult. Through a search o f schemes on our advanced search you can draw up a list of schemes that come close to the objectives you have set. Our search allows you to set criteria based on your objectives. The criteria you can set are: The schemes expe nse : All schemes have a minimum re quirement for the total amount of money you can invest. Usually they begin from a minimum of Rs.5000. Do a check for the expense ratio and sales charges the fund has. The NAV is good enough to know what each unit of the scheme will cost you. But, remember a low NAV (sometimes even be low the usual offer price of Rs.10) may make a scheme more affordable as you can acquire more units but chances are the scheme is not performing well. The schemes performance : Returns from schemes are calculated over various periods from a week to one year or more. For each time period specify the returns. While you enter returns figures the maximum, minimum and average returns for all schemes in the category you have chosen are also displayed. The schemes fund house : Over the years fund house s in India have established a name for themse lves for their investment style and their performance. Hence, some investors usually try to satisfy their diverse investments through one fund house. If you have been re commended a fund house choose the fund to list all schemes under it. Investment mix : If you know of an industry that has been doing particularly well, you can select sche mes that have invested in that industry. You can also select schemes that have invested in companies with a dazzling performance. A mixed basket for your diverse needs Once again, back to the basic question. You came here looking for schemes that can suffice your investment needs. You might be like many others who actually have multiple needs. Consider going for a combinatio n of schemes. Yet another recap of the basics: one o f the things that made these mutual funds gre at was diversification. While you might have selected a scheme that has a diversified portfolio, you can also go for more than one scheme to further diversify your investments. It is well po ssible that just by picking more than one scheme from one fund house you can achieve enough diversification. In fact many investors who have tried out a fund

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house for long and developed a trust with the fund, prefer to pick another scheme from the fund's But convenience sometimes leads to venerable prejudices that might deprive you o f trying something new and better. There could be a better-managed scheme in a different fund house that you are missing out on if you decide to stick to your old fund house for convenience sake basket for their new investment needs

Question 4: Answer:

Show ho w duration o f a bond is calculated and how is it used

Duration of Bonds Bo nd Duration is a measure of bond price volatility, which captures both price and reinvestment risk and which is used to indicate how a bond will react in different interest rate environments. The duration of a bond re presents the length of time that elapses before the average rupee of present value from the bond is rece ive d. Thus duration of a bond is the weighted average maturity of cash flo w stream, where the weights are proportional to the present value of cash flows. Formally, it is defined as: Duration = D = {PV (C1) x 1 + PV (C2) x 2+ ----- PV (Cn) x n} / Current Price of the bond Where PV (Ci) is the present values of cash flow at time i. Steps in calculating duration: Step 1 : Find prese nt value of each coupon or principal payment. Step 2 : Multiply this present value by the year in which the cash flow is to be received. Step 3 : Repeat steps 1 & 2 for each ye ar in the life of the bond. Step 4 : Add the values obtained in step 2 and divide by the price of the bond to ge t the value of Duration.

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Example: Calculate the duration of an 8% annual coupon 5 year bond that is priced to yield 10% (i.e. YTM = 10%). The face value o f the bond is Rs.1000. Annual coupon payment = 8% x Rs. 1000 = Rs. 80 At the end of 5 years, the principal of Rs. 1000 will be returned to the investor. Therefore cash flows in year 1-4= Rs. 80. Cash flow in year 5= Principal + Interest = Rs. 1000 + Rs. 80 = Rs. 1080 (t) Annual PVIF Present Value Explanation Cash @10% of Annual flow Cash Flow PV(Ct) 1 80 0.90909 72.73 = 80 x 0.90909 72.73 = 1 x 72.73 2 80 0.82645 66.12 = 80 x 0.82645 132.24 = 2 x 66.12 3 80 0.75131 60.10 = 80 x 0.75131 180.3 = 3 x 60.1 4 80 0.68301 54.64 = 80 x 0.68301 218.56 = 4 x 54.64 5 1080 0.62092 670.59 = 1080 x 0.62092 Total 924.18 Price of the bond= Rs 924.18 The proportional change in the price of a bond: ( P/P) = - {D/ (1+ YTM)} x y Where y =change in Yield, and YTM is the yie ld-to-maturity. The term D / (1+YTM) is also known as Modified Duration. 3.89 years.

Time x PV of cash flow

Explanation

3352.95 = 5 x 670.59 3956.78

The modified duration for the bond in the example abo ve = 4.28 / (1+10%) = This implies that the price of the bond will decre ase by 3.89 x 1% = 3.89% for a 1% increase in the interest rates. Example A bond having Rs.1000 face value and 8 % coupon bond with 4 years to maturity is priced to provide a YT M of 10%. Find the duration of the bond. Ans: P0 = 80 x PVIFA 10%, 4 years + 1000 x PVIFA 10%, 4 years

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= 80 x 3.170 + 1000 x .683 = 937 rc = 80/937 = 0.857 (current yield ) rd = YTM n = 4 years Duration = PVIFA (rd ,n) (1+rd) + [1 ] n = 3.170 (1.10) + [ 1 ] 4 .10 .0854 .10 .0854 = 2.977 + .584 = 3.561 years dc rr rd rc

Generally spe aking, bond duratio n possesses the following properties: Bonds with higher coupon rates have shorter durations. Bonds with longer maturities have longer durations. Bonds with higher YTM lead to shorter durations. Duration of a bond with coupons is always less than its term to maturity because duratio n gives weight to the interim payments. A zero-coupon bonds duration is equal to its maturity.

Question 5: risk. Answer:

Show with the help of an example ho w portfolio diversif ication reduces

Portfolio diversification 'Don't put all your e ggs in one basket' is a we ll-known proverb, which summarizes the message that there are benefits from diversification. If you carry your breakable items in several baskets there is a chance that one will be dropped, but you are unlikely to drop all your baskets on the same trip. Similarly, if you invest all your wealth in the shares of one company, there is a chance that the company will go bust and you will lose all yo ur money. Since it is unlik ely that all companies will go bust at the same time, a portfolio of shares in several companies is less risky. This may sound like the idea of risk-pooling, which we discussed earlier in this chapter, and risk-pooling is certainly an important reason for diversification. We will use the notion of risk-pooling to explain some forms of financial behavio ur, but a full

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understanding of portfolio diversification involves a slightly wider knowledge of the nature of risk than what is involved in coin-tossing. The key difference between risk in the real world of finance and the risk of coin-tossing is that many of the potential outcomes are not independent of other outcomes. If you and I toss a coin, the probability of yours turning up heads is independent of the probability of my throwing a head. However, the return on an investment in, say, BP is not independent of the re turn on an investment in Shell. This is because these two companies both compete in the same industry. If BP does especially well in attracting new business, it may be at the expense of Shell. So high profits at BP may be associated with low pro fits at Shell, or vice versa. On the other hand, all oil companies might do well when oil prices are high and badly when they are low. The important matter here is that the fortunes of these two companies are not independent of each other. The fact that the risks o f individual investments may not be independent has important implications for investment allocations, or what is now called theor . Investments can be combined in different proportions to produce risk and y return characteristics that cannot be achieved through any single investme nt. As a result, institutions have grown up to take advantage of the bene fits of diversification. Diversified portfolios may produce combinatio ns of risk and return that dominate nondive rsified portfo lios. This is an important statement that requires a little closer investigation. That investigation will help to identify the circumstances under which diversification is beneficial. It will also clarify what we mean by the word 'dominate'. Table 2 sets out two simple examples. In both there are two assets that an investor can hold, and there are two possible situations which are assumed to be equally likely. Thus, there is a pro bability of 0.5 attache d to each situation and the investor has no advance knowledge of which is go ing to happen. The two situations might be a high exchange rate and a low exchange rate, a booming and a depressed economy, or any other alternatives that have different effects on the earnings of different asse ts. Table 2: Combinations of risk and return

portfoli o

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Assets differ in e xpected return and variability in returns. Part (i) illustrates the return on two assets in two different situations. Asset A has a high return in situation 2 and a low return in situation 1. The reverse is true for asset B. A portfolio of both assets has the same expected return but lower risk than a holding of e ither asset on its own. In (ii) both assets have a high return in situation 2 and a low return in situation 1. For the risk-averse investor asset A dominates asset B. Co nsider part (i) o f the table. In this case both assets have the same expected return (20 per cent) and the same degree of risk. (The possible range of outcomes is between 10 and 30 per cent o n each asset.) If all that mattered in investment decisions were the risk and return of individual shares, the investor would be indiffe rent between assets A and B. Indeed, if the cho ice were between holding only A or only B, all investors should be indifferent (whe ther they were risk-averse, risk-neutral, or risk-loving) because the risk and expected return are identical for both assets. However, this is not the end of the story, because the returns on these assets are not independent. Indeed, there is a perfect negative correlation between them: when one is high the other is low, and vice versa. What wo uld a sensible investor do if permitted to hold some combination of the two assets? Clearly, there is no possible combination that will change the overall expected return, because it is the same on both assets. However, holding some of each asset can reduce the risk. Let the investor decide to hold half his wealth in asset A and half in asset B. His risk will then be reduced to zero, since his return will be 20 per cent whichever situation arises. This diversified portfolio will clearly be preferred to either asset alone by risk -averse investors. The risk-neutral investor is indifferent to all combinations of A and B because they all have the same expected re turn, but the risklover may pre fer not to diversify. This is because, by picking one asset alone, the risklover still has a chance of getting a 30 per cent return and the extra risk gives positive pleasure. Risk-averse investors will choose the diversified portfolio, which gives them the lowest risk for a given expected rate of return, or the highest expected return for a given level of risk.

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Diversification does not always reduce the riskiness of a portfolio, so we need to be clear what co nditions matter. Consider the example in part (ii) of Table 2. As in part (i), bo th assets have an expected re turn of 20 per cent. But asset B is riskier than asset A and it has returns that are positively correlated with A's. Portfolio dive rsification does not reduce risk in this case . Risk-averse investors would invest only in asset A, while risk-lovers would invest only in asset B. Combinatio ns of A and B are always riskier than holding A alone. Thus, we could say that for the risk-averse investor asset A dominate asset B, as asset B will never be held so long as asset A is available . The s key difference between the example in part (ii) of Table 2 and that in part (i) is that in the second example returns on the two assets are positively correlated, while in the former they are negatively correlated [ Note ]. The risk attached to a combination of two assets will be smaller than the sum of the individual risks if the two assets have returns that are ne gatively correlated. Diversifiable and non-diversifiable risk Not all risk can be eliminated by diversification. The specific risk associated with any one company can be diversified away by ho lding shares of many companies. But even if you held shares in every available traded company, you would still have some risk, because the stock market as a whole tends to move up and down over time. Hence we talk about market risk and specific risk. Market is non-diversifiable, where as risk specific is diversifiable through risk-pooling. risk Bo x 3 discusses the issue of whether all firms should diversify the activities in order to reduce risk. Be ta It is now common to use a coefficient called beta to measure the relationship between the movements in a spe cific company's share price and movements in the market. A share that is perfectly correlated with an index of stock market prices will have a beta of 1. A beta higher than 1 means that the share mo ves in the same direction as the market but with amplified fluctuations. A beta between 1 and 0 means that the share moves in the same direction as the stock marke t but is less volatile. A negative beta indicates that the share moves in the opposite direction to the market in general. Cle arly, other things being equal, a share with a negative beta would be in high demand by investment managers, as it would reduce a portfolio's risk. The capital asset pricing , or CAPM, pre dicts that the price o f shares with higher betas model offer higher average returns in order to compensate investors for their must higher risk.

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For example

two stocks whose returns move in exactly together have a coefficient of +1.0. Two stocks whose returns move in exactly the opposite direction have a co rrelation of -1.0. To effectively diversify, you should aim to find investments that have a low or negative correlation. The banking stocks (or the technology stocks) would have a high positive correlation as their share prices are driven by common factors. As you increase the number of securities in your portfolio, you reach a point where you have diversified as much as is reasonably possible. When you have abo ut 30 securities in your portfolio you have diversified most of the risk.

Question 6: Study the performance of any emerging market of your choice . Answer: emerging market With emerging market econo mies like India and China growing at nearly 10%, you may be feeling pain from all the criticism from pundits and advisers that you are a myo pic, short-sighted American for not allocating enough to emerging market equities. According to Vanguard, the average allocation to e merging market equities among US house hold investors is still only 6%. Shouldn't the percentage of your equity portfo lio inve sted in emerging markets equities be roughly in line with the proportionate share of emerging-market stocks to total global stock-market capitalization or around 10% to 15% of an investor's total equity portfolio? It seems natural to expect that the powerful economic growth o f emerging markets such as Brazil and China will lead to higher stock market returns than in the slower growing markets such as the U.S. and Europe. So should emerging market e quities be a bigger part of your portfo lio? In fact, US household investors may, at least for the moment, be properly weighted in emerging markets. For the following reasons higher potential growth may not justify investing heavily right now in emerging market equities and instead you may want to be gradually increasing your allocation over time: First, 12% economic growth in a country like India has not necessarily meant 12% market returns. While there is certainly reasonable evidence to support expectations o f long-term growth in markets like India, China, Brazil, etc., as reported in this Wall Street Journal article - studies suggest that strong economic growth often does not translate into strong stock returns.

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One study, which looked at market returns in 32 nations since the 1970s, concluded that stock gains and economic performance can diverge dramatically. University o f Florida finance professor Jay Ritter found, for example, that stocks in Sweden posted a mean return of better than 8% a year from 1970 through 2002, even though GDP grew at an annualized pace of just 1.8%. In contrast, while GDP expanded more than 5% annually in South Korea from 1988 to 2002, the mean stock return was only 0.4% a year. 'A healthy economy isn't a guarantee that established companies will attract enough capital and labor to e xpand sales and earnings stro nglypartly because they have to compete with newer ventures fo r resources,' Dr. Ritter says. More basically, since markets are large ly efficient, inve stors have long ago anticipated potential for equities in places like China. Right now, by many measures, it would appear that valuations for US and MSCI Emerging Markets Index on a trailing P/E basis are roughly inline . Second, even if average annual returns from emerging markets e xceed developed markets, emerging markets are still materially more volatile, and this volatility will not just keep you awake at night, it will erode your returns over time through the process o f volatility drag. My colleague explains in this article how volatility drag will reduce your re turns. Right now, the 3-year standard deviation of emerging market returns is 32.83 versus 24.27 for the S&P500, a difference that translates into roughly a 3% drag on your cumulative return. And while the 60-day volatility on US Large-Cap Equities has now dropped all the way down to 10.99%, the 60-day eme rging market volatility actually rose slightly this quarter to 19.55% (see chart below for period ending December 31, 2010): click enlarge to

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Third, emerging market indexes are less efficient investment ve hicles which makes a big difference over time for prudent, long-term investors. Most emerging market funds are significantly more expensive than US funds - ofte n hundreds o f basis points more. Our firm recommends low cost funds such as iShares MSCI Emerging Market Index (EE ), and Vanguard Emerging Markets ( VWO ). But even these low-cost funds face M higher costs than US equity funds. Compare Vanguard's VWO at 0.27 expense ratio vs. Vanguards S&P500 Index Fund ( VOO ) at 0.06%. If you are investing within a fund family such as Fidelity, your choice for emerging markets is an actively managed fund with an annual cost of 1.14% versus Fidelity's S&P500 Index at only 0.10% (This is why if you re ally seek more exposure to emerging markets economic growth, a more efficient way to gain exposure is through multinationals traded on US exchanges S&P500 companies derive about 50% of their revenue from abroad, with about a third of that coming from emerging markets). So higher economic growth may not lead to higher returns on emerging markets equities, volatility drag is likely to erode much of this potential higher return, and higher investment costs are certain to drag the return down even further. In our dynamic asse t allocation process, emerging markets allocations are likely to grow along with other equity allocations over the next few ye ars assuming volatility continues to decline. But, right now, it appears that the average American household is not necessarily being naive and xenophobic when they choose to be underweighted in emerging market equities.

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