Fundamentals of Investment — DU B.Com (P) Previous Year Question Papers

1. (a) What factors should an investor consider while making investment decisions? How does inflation affect returns from an investment? Explain with the help of an example. (6) (b) The following is the probability distribution of return on two securities Q and S under different economic conditions: (i) Find the expected return and risk associated with Securities Q and S. (ii) Which security is less risky and why? (iii) Suppose an investor has Rs 10,000 to invest. He invests Rs. 5,500 in Security Q and the remaining Rs. 4,500 in Security S. What will be the expected return of his portfolio? (12) (c) Briefly explain different investment avenues available to investors in (d) The returns on two securities under four possible states of nature are given below : (12) (i) Expected return on Security A and Security B. (ii) Risk on Security A and Security B. (iii) Covariance between returns on Securities A and B. (iv) Coefficient of correlation between returns on Securities A and B. 2. (a) “The market prices of bonds are inversely related to the market interest rates.” Explain with the help of a diagram. (6) (b) Ryan Ltd.’s 12% bond with face value of Rs. 1000 is currently available at a price of Rs. 950 and has 8 years remaining to maturity. The redemption value will be 90% of the face value. Calculate the YTM on this bond. Should this bond be bought by an investor if his required rate of return is 13%? (12) (c) Differentiate between : (6) (i) Callable bonds and Putable Bonds (ii) Yield to Maturity (YTM) and Yield to Call (YTC) (d) Mack Ltd. is proposing to issue 9% bonds of face value of Rs. 1000 having maturity period of 5 years. The required rate of return of the investors is (i) If the bonds are redeemable in 5 annual installments of Rs. 200 each over 5 years period, at what price the bonds should be offered to the investors? (ii) If the company decides to redeem the full face value of Rs. 1000 at maturity i.e. at the end of 5th year, what will be the value of this bond? (12) 3. (a) Explain Economic-Industry-Company (EIC) approach of equity analysis. What are limitations of using this approach? (6) (b) The following information is available about a company : (12) Current Earning per share (EPS) : Rs. 2 Dividend payout ratio : 50% Growth rate in earnings : 6% p.a. forever Required rate of return : 10% Expected PE ratio after 5 years : 12.5 (i) The intrinsic value of share at present. (ii) The expected price of the share at the end of 5 years using constant growth model. (iii) The expected value of the share after 5 years using Earning Multiplier approach. (iv) The maximum price at which an investor should buy this share today. (c) Explain any 3 charts used by technical analysts to predict future price behavior. (6) (d) Mr. Shukla wants to invest in a company that has just given a current dividend of Rs. 5 per share. Dividends are expected to grow at 10% p.a. for the next 5 years; at 8% p.a. for 6-8 years, and at 5% p.a. thereafter perpetually.