UNIVERSITY OF MAURITIUS

FACULTY OF LAW AND MANAGEMENT

SECOND SEMESTER EXAMINATIONS

APRIL/MAY 2019

BSc (Hons) Banking and Finance [+ Fee Paying]

BSc (Hons) International Business Finance
BSc (Hons) Finance
PROGRAMME
BSc (Hons) Finance (Minor: Law) [+ Fee Paying]

Level II

MODULE NAME INVESTMENT AND SECURITY ANALYSIS

Wednesday
DATE 08 May 2019 MODULE CODE DFA2034Y (3)

TIME 13:30 – 16:30 Hours DURATION 3 Hours

NO. OF 6 NO. OF QUESTIONS 5

QUESTIONS SET TO BE ATTEMPTED

INSTRUCTIONS TO CANDIDATES

This paper consists of 6 questions and 2 Sections (Section A and Section B).
Section A is Compulsory and carries 80 marks.
Answer ANY ONE (1) question from Section B. Each question carries 20
marks.
Total: 100 marks
 Investment and Security Analysis – DFA2034Y

SECTION A (COMPULSORY)

All questions are compulsory.

Question 1

According to Mr V. Dabee (2015), “…..if Mauritius loses its taxing rights on capital gains
under the Mauritius-India DTAA, this is likely to lead to an inexorable erosion of the
multitude of investment funds that seek to avail of the various advantages of the Mauritius
portal to access the opportunities which the Indian market offers...” Discuss with regards to
the challenges relating to future investments in the Mauritian Global Business Sector.

[25 marks]

Question 2

(a) You are provided with the following information

Security X Y Z

Expected Return 0.4 0.5 0.6

Covariance

X 0.15 0.5

Y -0.2

Variance 0.16 0.25 0.18

Assuming that an individual decides to invest 25% in Asset X, 40% in Asset Y and the
remaining in Asset Z, calculate the expected rate of return and risk of the portfolio.
[6 marks]

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 Investment and Security Analysis – DFA2034Y

(b) You are provided with the following information:

Asset Expected Return Variance Beta

A 10% 17% 1.5

B 11% 14% 1.3

C 8% 12% 1.2

Portfolio 10% 11% 0.8

Risk free Rate 2% - -

Required:

(i) The Treynor Index of the individual assets and portfolio. [4 marks]

(ii) The Sharpe Ratio of the individual assets and portfolio. [4 marks]

(c) Assume that you are currently employed as the financial analyst of Robertson
Investment Ltd, which offers two types of Funds; Salah FUND and Becker FUND.

The fee structure of the funds is as follows;

Salah FUND: front end load (entry fee) for 4%

Becker FUND: Management fee of 0.7% annually plus back-end load fees with 7% at
the start of the year and falling by 1% every year that the investor hold the portfolio
(until the seventh year)

Other information:

Return on each fund is 22% per annum.

Required:

Calculate the value of Rs 30,000 investment in Salah fund and Becker fund if shares
are sold after 10 years. [4 marks]

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 Investment and Security Analysis – DFA2034Y

Question 3

(a) You are given the following information:

Name UK Govt bonds, 11 % coupon, maturing 20 Nov 2019

Type: Annual coupons

Settlement date: 20 Nov 2015

Denomination: £100

Yield to Maturity 8%

Calculate the followings:

(i) Macaulay Duration [4 marks]

(ii) Calculate the theoretical price if the yield to maturity increases by 45 basis
points. [3 marks]

(iii) Calculate the actual price of the bond if yield to maturity effectively falls by 45
basis points. [3 marks]

(b) You are provided with the following information:

Security: 6% coupon bond maturing 23 June 2018

Type: Corporate US bond, Annual
Yield 5%. Per annum
Face Value $1000
Settlement Date June 2015 (10 days prior to the coupon date)
Year Basis 360 days per year

(i) Calculate the fair price of this bond. [4 marks]

(ii) Assuming that the above-mentioned bond is now a semi-annual bond and that
coupons are being paid every six months, calculate the fair price of the bond.
[8 marks]

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 Investment and Security Analysis – DFA2034Y

Question 4

Consider the value of a bond portfolio consisting of one 8-year annual 8% coupon bond. The
yield to maturity is initially set at 8.50% and the par value is $1000. One can setup a bond
portfolio management, immunization which is a procedure to immunize a bond investment
from subsequent interest rate changes. In this respect, you are required to calculate the
followings;

(i) The bond price in Year 5 following a 30 basis point decrease in interest rates
[4 marks]

(ii) The total amount of re-invested coupons in Year 5 following a 30 basis point decrease
in interest rates. [4 marks]

(iii) The Portfolio value in Year 5 following a 30 basis point increase in interest rates.
[7 marks]

SECTION B

Answer ANY ONE (1) question from this section.

Question 5

“If the markets are not efficient, buy and hold strategies will underperform relative to stock
selection and market timing strategies”. Discuss. [20 marks]

Question 6

“For very small change in the yield, duration can be a good approximation of the actual
change in the bond price “. Discuss in relation to convexity in bonds.
[20 marks]

END OF QUESTION PAPER

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