INSTITUTE OF BANKERS IN MALAWI
DIPLOMA IN BANKING EXAMINATION
SUBJECT: PRINCIPLES OF INVESTMENT (IOBM – D208)
Date: Tuesday, 5th November 2013
Time Allocated: 3 hours (08:00 – 11:00 am)
INSTRUCTIONS TO CANDIDATES
1
This paper consists of TWO Sections, A and B.
2
Section A consists of 4 questions each carries 15 marks.
Answer ALL questions.
3
Section B consists of 4 questions, each question carries 20 marks. Answer
ANY TWO questions.
4
You will be allowed 10 minutes to go through the paper before the start of the
examination, you may write on this paper but not in the answer book.
5
Begin each answer on a new page.
6
Please write your examination number on each answer book used.
Answer sheets without examination numbers will not be marked.
7
DO NOT open this question paper until instructed to do so.
SECTION A
(60 MARKS)
Answer ALL questions from this section.
QUESTION 1
a) Give any two asset classes which an investor can consider selecting them in
an investment portfolio.
(2 marks)
b) Distinguish financial risk from non –financial risk.
(2 marks)
c) A family realized an amount of K 5, 250,000 after disposing their NICO shares
whose purchase price three years ago was K 3, 495,000. Calculate the
annual Holding Period Yield (HPY) of the investment.
(5 marks)
d) Describe the following:
(i) Call markets.
(ii) Continuous markets.
(3 marks)
(3 marks)
Total (20 Marks)
Question 2
a) Discuss characteristic line, and its implications in terms of investor returns.
(9 marks)
b) Portfolio A and B comprise of the following ;
PORTFOLIO A
ASSET
RATIO (%)
BETA
PORTFOLIO B
RATIO (%)
BETA
Fixed deposit
15
1.25
11
0.95
Treasury bills
25
1.10
19
0.75
Bond
18
1.20
31
0.85
Real estate
30
1.22
24
0.45
Equity security
12
1.05
15
1.35
TOTAL
100
100
Find betas for Portfolio A and B, and compare how responsive will the Portfolios be
to market dynamics.
(6 Marks)
Total (20 Marks)
A qualification examined by the Institute of Bankers in Malawi
2
Question 3
a)
Describe the following ;
i) Bond markets
ii) Stock markets
(2 marks each)
b)
A pension fund purchased a two year bond which will be paying quarterly
interest of
MK 500,000 beginning 1st December 2013.Calculate total
increase to the fund assuming MK500,000 is to be deposited into a bank
account paying an interest of 24% compounded quarterly.
(5 marks)
c)
Compare expected rate of return with the required rate of return and state how
the comparison will influence an investment decision.
(6 marks)
Total (20 Marks)
Question 4
a)
b)
Mention four factors which will enable the financial markets achieve greater
efficiency.
(8 marks)
Explain the following
i) Annuities
(4 marks)
ii) Internal Rate of Return.
(3 marks)
Total (15 marks)
SECTION B
(60 MARKS)
Answer TWO QUESTIONS from this section
QUESTION 5
a)
List four features associated with proffered stock
b)
Discuss the following procedures which among others, form the basis of
investment process.
(i)
(ii)
Setting investment objectives
Establishment of investment policy
A qualification examined by the Institute of Bankers in Malawi
(4 marks)
(4 marks)
(4 marks)
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(iii)
(iv)
Selection of the portfolio strategy
Measurement and evaluation of portfolio performance
(4 marks)
(4 marks)
(Total 20 marks)
QUESTION 6
a) In terms of the basis for valuation of a company, discuss how Bottom – up
valuation method differ from Top – down approach.
(10 marks)
b) Describe the Efficient Market Hypothesis and its practical shortfalls.
(10 marks)
(Total 20 marks)
Question 7
a)
The table below contains quantifiable expected return and risk associated with
investment in respective securities:
SECURITY TYPE
EXPECTED RETURN (%)
RISK (%)
XY
24
2.50
PQ
36
23.00
UN
28
9.25
KL
25
9.25
RS
51
25.00
Explain the advice you could give to your client on selection of each of the listed
security, if the above information was made available to you as a Fund Manager.
(8 marks)
b) Security EF has a beta of 1.15 and its expected return on the market is 13.95 %.
Given a risk-free rate of 9.5 %, calculate the expected rate of return (CAPM
model).
(4 marks)
c) State the significance of the beta value of a financial instrument.
(6 marks)
d) Define ` risk of a security`
(2 marks)
(Total 20 marks)
A qualification examined by the Institute of Bankers in Malawi
4
QUESTION 8
a) Explain the following the following terms
i) Primary markets
ii) Secondary markets
iii) Convertible preferred stock
(3 marks)
(5 marks)
(3 marks)
b) Mention and explain three types of municipal bonds that are issued based on
security offered.
(9 marks)
(Total 20 marks)
END OF THE EXAMINATION PAPER
A qualification examined by the Institute of Bankers in Malawi
5