Fundamentals of Investment

List out any four investment vehicles available in Nepal.

Define primary market.

Why do we compute market index?

What is systematic risk?

What do you mean by short sale?

New National Company had sales of Rs. 55 million in 2019, and is expected to have sales of Rs. 83,650,000 for 2020. The company's net profit margin was 5 percent in 2019, and is expected to increase to 8 percent by 2020. Estimate the company's net profit for 2020.

A convertible bond has a conversion ratio of 20. The current market price of the underlying common stock in Rs. 49. What is the bond's conversion value?

ABC Equity Fund's net asset value per share is Rs. 15. If the fund's front-end load fee is 5 percent, what should the offer price be?

A stock has a beta of 1.5, the expected return on the market is 12 percent, and the risk-free rate is 6 percent. What must the expected return on this stock be? If stock's return in 16 percent would you purchase the stock ? 

What is the value of a put option written on a share if its strike price is Rs. 145 and market price of a share is Rs. 135?

What do you mean by an investment banker? Describe the roles of investment bankers in securities offering process.

A stock sells for Rs. 150 per share. You purchased 100 shares for Rs. 150 a share, and after a year the price rises to Rs. 175. Initial margin requirement was 60 percent.

a. What will be the percentage return on your investment if you bought the stock on margin? Ignore commissions, dividends, and interest expenses.

b. Determine the percentage return on your investment but in this case suppose the company pays dividend Rs. 15 per share and interest on loan is 10 percent per annum.

c. In calculating the return on investment you ignored commissions expenses. Describe how does commissions affect the return on your investment?

Consider the following stock price and shares outstanding information:

Stock B splits two for one at the end of 2018.

a. Compute the price-weighted index for two periods and the rate of return on price weighted index in 2019.

b. Compute value weighted index for two periods and the rate of return on value weighted index in 2019.

c. Why are they different?

Consider a bond selling at its par value of Rs. 1,000 with three years to maturity and a 7 percent coupon rate with annual interest payments.

a. What is the yield to maturity on this bond?

b. Calculate the bond's duration.

c. Calculate the bond's modified duration.

d. If market interest rate increases to 7.5 percent, what is the percentage price change on this bond?

One year ago, Sahara Closed-End Fund had a NAV of Rs. 10.50 and was selling at an 10% discount. Today, its NAV is Rs. 12 and it is priced at a 5% premium. During the year Sahara distributed dividends and capital gains of Rs. 1.5. One the basis of the given information, calculate each of the following.

a. Sahara's NAV-based holding period return for the year.

b. Sahara's market-based holding period return for the year. Did the market premium/discount hurt or add value to the investor's return?

As an analyst, you want to evaluate Equity Fund Portfolio consisting entirely of common stocks of banking sector in Nepal. You have collected the following information the portfolio and the market during the past ten years.

a. Evaluate the Equity Fund by using Sharpe's, Treynor's and Jenson's portfolio performance measures.

b. Which of the performance measures did show that Equity Fund outperformed the market?

What are the different phases of economic cycle? How do they impact on the stock and bond investment? Also discuss the different components of investment environment in Nepal?

You are given the following probability distribution of alternative rate of return associated with three investment alternatives along with their beta coefficient.

a. Which alternative provides highest expected return?

b. Which alternative is the least risky in terms of standard deviation? Which alternative is the most risky in terms of beta?

c. Suppose you created two portfolios—portfolio X and portfolio Y. Portfolio X consists of 75 percent investment in Equity Fund A and 25 percent investment in Stock B. Portfolio Y consists of equal investment in Stock B and Certificate of Deposit C. Which portfolio is least risky in terms of (i) standard deviation, and (ii) beta?

This year, Mero Nepal Company paid its stockholders as annual dividend of Rs. 30 a share. A major brokerage firm recently put out a report stating that in its opinion, the company's annual dividends should grow at the rate of 10 percent per year for each of the next 3 years and then level off and grows at the rate of 6 percent a year thereafter. According to consensus estimate provided by analysts the stock beta is 1.4 percent, risk-free rate is 5 percent and market return is 14 percent.

a. What is the required rate of return on this stock?

b. What is the maximum price you should be willing to pay for this stock?

c. Define dividend yield and capital gain yield. What is the dividend yield and capital gain yield in year 4?

d. Now assume that after year 3, dividends stop growing altogether. What is the stock's intrinsic value?