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Fnce: 412:Security Valuation And Portfolio Selection March 2010 Question Paper

Fnce: 412:Security Valuation And Portfolio Selection March 2010

Course:Bachelor Of Commerce

Institution: Kabarak University question papers

Exam Year:2010

KABARAK UNIVERSITY
UNIVERSITY EXAMINATIONS
2009/2010 ACADEMIC YEAR

FOR THE DEGREE OF BACHELOR OF
COMMERCE

COURSE CODE: FNCE: 412

INSTRUCTIONS:
1. Answer questions ONE and any other TWO questions.
2. Marks allocated are indicated at the end of each question.

QUESTION 1 (30 MARKS)
a) The year 2009 was described by many stock markets analyst in Kenya as a year of the bond. This
was due to the upsurge in the value of bonds issued in the Nairobi stock Exchanges at a time
when the stock market was on a bearish move. Many companies like Safaricom and Kengen
turned to issuing bonds instead of the secondary offers.

Required
(i) Explain the meaning of a secondary offer and its effects on the market price of existing
common stock of the issuing company. (4 marks)
(ii) Discuss FOUR possible effects on the performance of the common stock at the Nairobi
Stock exchange. (8 marks)
b) Discuss FOUR roles of the Capital Market authority (CMA) in Kenya. (8 marks)
c) Recently government of Kenya issued a warning to stockbrokers in Kenya to put their house in
order or deregistered. This followed the collapse of two brokerage firms and a suspicion the
operations of a number of other brokers. State how the government can stop misuse of investors’
funds or assets under the custodian of stock brokers. ( 5 marks)
d) In order to transact at the Nairobi Stock Exchange, investors must hold Central Depository
System. (CDS). State the strengths of using the CDS system as compared to the paper certificate
system used five years ago. (5 marks)

QUESTION TWO (20 MARKS)
Safcom ltd issued a five year 8.5% bond with a face of Shs 1000 each. The current yield to maturity of
the bond is 10% and market value shs 954.74. Immediately after that Celty ltd a company in the same
industry with Safcom issued a 12% five bond with face value of Shs 1000. The market value of this bond
is Shs 1,044.57 and the yield to maturity is 10.8%. Both bonds pay annual interest.

Required:
a) The present value of each bond. State which one you can buy and explain why. (4 marks)
b) The duration of each bond and the interest rate sensitivity. ( 6marks)
c) Assuming at the end of year one. The YTM the bond are 11% and 13% respectively, calculate the
interest rate elasticity coefficient (E) of each bond. ( 4marks)
d) Discuss the three theories of explaining the different shapes of the term structure of interest rates
or the yield curve. (6 marks)

QUESTION 3
a) One of the theories that try to explain the movement of security prices is the stock exchanges is
“the efficient markets hypothesis (EMH)”.
(i) Clearly define the meaning of an efficient capital market. ( 4 marks)
(ii) Explain the three levels of market efficiency according to the Emit. (6 marks)
(iii) In your own opinion explain the level of efficiency of the Nairobi Stock exchange market
using recent examples. (4 marks)
b) A company has a ß of 0.745; the average return in the market is currently 12%. The company has
just paid an interim dividend of shs3 for the half year 2008 and expects the same level of dividend
for the second had of the year. Future three years and thereafter 7% forever.

Required:
Determine the value of the share and the share and the price earning ratio. (6 marks)

QUESTION 4
a) The current stock price of X ltd is $100. The exercise price of an option on the stock is
$125 and the remainder time to expiration is 3 months. If the continuously compounded
annual interest rate is 0.12 and stock price volatility is 0.62, determine the value of the
option. (10 marks)
b) Discuss the meaning of the following strategies used in option trading.
Protective put Writing
(i) Long call strategy
(ii) Long straddle
(iii) Short put strategy
(iv) Short straddle. (10 marks)

Fnce: 412:Security Valuation And Portfolio Selection March 2010 Question Paper

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