Model Question Paper

Investment Management (SMB2F3)

Section A : Basic Concepts (30 Marks)

• This section consists of questions with serial number 1 - 30.

• Answer all questions.
• Each question carries one mark.
• Maximum time for answering Section A is 30 Minutes.

1. Which of the following statements is false with respect to price to sales ratio (P/S)?
(a) In P/S ratio, earnings are more sensitive than revenues to economic variations
(b) It is more useful tool to examine the effects of changes in pricing policy and other corporate
decisions
(c) It is influenced by the accounting methods used for depreciation, inventory, etc.
(d) It can never be negative
(e) Firms having high profit margin will have high P/S ratio.
2. Which of the following statements is false with respect to Liquidity Preference Theory?
(a) In a longer time frame, the fluctuations in the short-term rates cannot be predicted
(b) The transaction and information costs for short-term maturities are on a larger scale than that
for long term maturities
(c) There is scope for hedging the returns on short term securities
(d) Interest rate can be reduced to low inflation premium causing the yield curve to slope
downward
(e) In this, the opportunity costs differ from one spending unit to another.
3. Consider the following data of Reliance Mutual Fund (Income plan):
` in crore
Value of investments 2512.50
Receivables 155.12
Accrued income 44.79
Other current assets 673.28
Liabilities 471.10
Accrued expenses 121.00
Sales charge is 2.5% on the NAV. If the public offering price is 21.50, the number of outstanding units
is
(a) 133.28 crore
(b) 141.75 crore
(c) 161.18 crore
(d) 102.11 crore
(e) 171.52 crore.
4. Which of the following risks is eliminated through the process of immunization?
(a) Purchasing power risk
(b) Political risk
(c) Interest rate risk
(d) Currency risk
(e) Volatility risk.
5. Polygon Chemicals Ltd. (PCL) has an EPS of ` 8.55 and paid 30% of its earnings as dividends. The
growth rate in earnings and dividends is expected to be 11% in the long run. If the required return on
equity is 15.5%, P/E ratio of PCL is
(a) 7.40
(b) 8.90
(c) 10.20
(d) 11.11
(e) 12.08.

Page 1 of 16

i.exe
6. As per the balance sheets of Kanchi Textiles Ltd. (KTL), the value of the net fixed asset at the beginning of
the financial year is ` 25.50 lakh. Deprecation is provided on written down value (WDV) basis at a rate of
11.5% p. a. The company has equity share capital of ` 950.00 lakh with a face value of ` 10 per share. If
the cash earnings per share is ` 3.35, profit after tax of KTL is
(a) ` 315.32 lakh
(b) ` 215.11 lakh
(c) ` 461.58 lakh
(d) ` 522.09 lakh
(e) ` 431.18 lakh.
7. Which of the following statements is false with respect to technical analysis?
(a) It is assumed that market value is solely determined by the interaction of demand and supply
(b) It is assumed that supply and demand are governed by numerous factors, both rational and
irrational
(c) Cyclical trend visible in the movement of stock price is due to the changes in the attitude of
investors
(d) Technical analysis is based purely on the study and behavior of current prices
(e) It is the study of technical characteristics which may be expected at major market turning points
and their objective assessment.
8. Albright Motors Ltd. (AML) is expected to pay next year a dividend per share of ` 13. The stock
currently is trading at ` 185. If the required rate of return on the stock is 14.5%, the expected growth
rate in dividend is
(a) 5.55%
(b) 7.48%
(c) 6.13%
(d) 4.21%
(e) 3.08%.
9. Bond laddering involves buying bonds of different
(a) Prices
(b) Maturities
(c) Durations
(d) Convexities
(e) Coupons.
10. Which of the following price patterns represents “an equal pressure being exercised by buyers and
sellers, and the combat is indecisive until a breakout occurs”?
(a) Rectangles
(b) Triangles
(c) Head and shoulder
(d) Double tops and bottoms
(e) Flags.
11. Which of the following statements is true?
(a) If market price < face value, coupon rate = current yield = YTM
(b) If market price = face value, coupon rate < current yield < YTM
(c) If market price < face value, coupon rate > current yield > YTM
(d) If market price > face value, coupon rate > current yield > YTM
(e) If market price = face value, coupon rate > YTM > current yield.
12. The average realized return on a portfolio is 12.75% and average return on the market index is 12.5%.
If beta of the portfolio is 0.96 and risk free rate of return is 7.5%, Jensen’s alpha of the portfolio will be
(a) 0.45%
(b) 1.29%
(c) 2.37%
(d) 2.85%
(e) 2.95%.
13. Which of the following methods is not used for analyzing market breadth?
(a) Stock in positive trends
(b) Percentage of stock over a moving average
(c) Diffusion index
(d) High-low statistics
(e) Envelopes.
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14. An European call option can be exercised
I. Only on the expiration date.
II. Any time in the future.
III. If the price of the underlying asset declines below the exercise price.
(a) Only (I) above
(b) Only (II) above
(c) Only (III) above
(d) Both (I) and (II) above
(e) Both (I) and (III) above.
15. Which of the following statements is/are true with respect to “unsystematic risk”?
I. It is the uncertainty in the return that arises from events that are specific to the firm.
II. It is manifested as a tendency of assets to move in such a way that is independent of the market
as a whole.
III. It is the uncertainty in the return that affects the entire market.
(a) Only (I) above
(b) Only (II) above
(c) Only (III) above
(d) Both (I) and (II) above
(e) Both (II) and (III) above.
16. The intrinsic value of an out-of-the-money call option is
(a) Call premium
(b) Stock price minus exercise price
(c) Negative
(d) Strike price
(e) Zero.
17. Fund used in order to increase the size of the value of the portfolio and benefit the shareholders by
gains exceeding the cost of the borrowed funds is called
(a) Income funds
(b) Specialized funds
(c) Balanced funds
(d) Leveraged funds
(e) Growth funds.
18. Which of the following is true, if exit barriers are low and entry barriers are high in the industry?
(a) Returns are high and stable
(b) Returns may vary depending on industry selected
(c) Returns are low and stable
(d) Returns are high and risky
(e) Returns are low and risky.
19. The expected return on the market portfolio and the risk-free rate of return are estimated to be 15%
and 11% respectively. Malavika Ltd., has just paid a dividend of ` 3 per share with annual growth rate
of 9%. The sensitivity index beta of Malavika Ltd., has been found to be 1.2. The equilibrium price for
the shares of Malavika Ltd., is approximately
(a) ` 26
(b) ` 31
(c) ` 35
(d) ` 40
(e) ` 48.
20. If the YTM of a GOI-4 year bonds and GOI-3 year bonds are 6.5% and 5% respectively, implied yield
for 1-year bond starting 3 years from now is
(a) 11.13%
(b) 12.68%
(c) 13.23%
(d) 14.17%
(e) 15.74%.

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21. In which of the following stages of industry life cycle, the financial policies of a firm become firmly
established?
(a) Stabilization stage
(b) Growth stage
(c) Expansion stage
(d) Pioneering stage
(e) Declining stage.
22. Which of the following statements is/are false with respect to Lead indicator approach?
I. An ideal lead indictor should always lead turning points of general business activity with the
same number of months with no false leads.
II. It conveys information on the magnitude and duration of change.
III. The signals provide by different lead indicator can be mixed.
IV. It measures how widespread a phenomenon is.
(a) Only (I) above
(b) Both (I) and (III) above
(c) Both (II) and (IV) above
(d) (II), (III) and (IV) above
(e) (I), (II) and (IV) above.
23. Consider the following information:
Price as on Price as on
Dividend paid
Stock April 1, 2010 (` April 1, 2011
(` )
) (` )
HUL 203.00 232.00 3.1
TCS 1223.00 834.80 4.2
Wipro 409.00 561.50 2.1
If the fund manager diversifies his portfolio by investing 50% in HUL, 30% in TCS and 20% in Wipro,
the ex-post return of the portfolio will be
(a) 6.05%
(b) 6.19%
(c) 6.27%
(d) 6.35%
(e) 6.45%.
24. If systematic risk and unsystematic risk of a portfolio are 125(%)2 and 200(%)2 respectively, the
proportion of variance of the portfolio returns not explained by the market portfolio will be
(a) 14.23%
(b) 25.42%
(c) 38.46%
(d) 61.54%
(e) 62.50%.
25. Which of the following statements is not true with respect to different asset allocation strategies?
(a) Tactical asset allocation takes into consideration the changes in expected return, risks as well
as correlations
(b) In strategic asset allocation, when each asset mix is expressed in terms of percentage of the
total amount invested in each asset class, it is termed as constant asset mix strategy
(c) Strategic asset allocation indicates an optimal asset mix to be held under normal conditions
(d) Tactical asset allocation considers the possibility of investor’s risk-tolerance
(e) Insured asset allocation is aimed at achieving the objectives of the investor without depending
on market timing.
26. Pure cash matching strategy of portfolio dedication can be easily implemented by using
(a) Low coupon bonds
(b) High rated coupon bonds
(c) High coupon bonds
(d) Government bonds with low coupon rate
(e) Zero coupon bonds.

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27. Which of the following is/are true with respect to alpha of a portfolio?
I. Information ratio is the difference between the portfolio alpha and the residual risk.
II. Alpha of the security determines its under/out performance in relation to the expected return.
III. Ex-ante alpha is regarded as the forecast of residual return.
(a) Only (I) above
(b) Only (II) above
(c) Both (I) and (II) above
(d) Both (II) and (III) above
(e) All (I), (II) and (III) above.
28. If a portfolio manager consistently obtains a high Sharpe’s measure,
I. The portfolio manager has exhibited above average forecasting ability.
II. The portfolio manager has exhibited above average selection ability.
III. It supports market efficiency in strong form.
(a) Only (I) above
(b) Only (III) above
(c) Both (I) and (II) above
(d) Both (II) and (III) above
(e) All (I), (II) and (III) above.
29. Consider the following data pertaining to Audi Automobiles Ltd.:
Estimated industry sales ` 450 crore
Estimated market share 18%
Estimated net profit margin 11%
If the number of outstanding shares is 45 lakh, the EPS of the company is
(a) ` 19.80
(b) ` 15.48
(c) ` 16.77
(d) ` 14.02
(e) ` 12.94.
30. In structural analysis which of the following is considered as an exit barrier?
(a) Capital requirement
(b) Product differentiation
(c) Economies of scale
(d) Access to distribution channels
(e) Strategic interrelationship.

END OF SECTION A

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 Section B : Problems/Caselet (50 Marks)

• This section consists of questions with serial number 1 – 5.

• Answer all questions.
• Marks are indicated against each question.
• Detailed workings/explanations should form part of your answer.
• Do not spend more than 110 - 120 minutes on Section B.

1. Consider the following data pertaining to stocks of two companies under different economic
scenarios:
Returns from stocks
Scenario Probability (%)
HDFC (%) ACC (%)
Optimistic 20 40 20
Most likely 70 28 15
Pessimistic 10 22 –15
You are required to determine whether investing in a combination of both the stocks in
equal proportions is better than investing in any one stock. ( 12marks)
2. Mr. Mohan, an investor is trying to analyze the selection skills of 4 fund managers. You are
an analyst whom he approaches for advice. The relevant data about the funds is given as
under:
Fund Return (%) Variance (%)2 Beta
JM Mutual Fund 24.00 582.54 1.32
Dundee Mutual Fund 19.32 491.37 1.21
Alliance Mutual Fund 18.36 397.94 1.09
First India Mutual Fund 21.76 415.20 1.11
Sensex 18.00 – 1.00
The variance on the returns from the sensex is 324(%)2. The T-bill returns is 7.5%.
For the above four fund managers, you are required to compute
a. Return due to total selectivity. ( 4 marks)
b. Return due to net selectivity. ( 4 marks)
c. Appraise the selection skills of the fund manager of the above funds based on the
solutions obtained in (a) and (b) above. ( 2 marks)
3. Parag Ltd., in its issue of Flexibonds, offered Growing Interest Bond. The interest will be
paid to the investors every year at the rates given below:
Year Interest rate
1 10.50%
2 11.00%
3 12.50%
4 15.25%
5 18.00%
You are required to calculate the Yield to Maturity (YTM) of the bond, assuming that Mr.
Balakrishna deposited ` 5,000 on purchasing the bond and holds it till maturity. ( 12marks)
Caselet
Answer the following questions based on the given Caselet:
4. The demand for assured return instruments such as gilt funds and income funds have
soared in the last few months. Discuss the various reasons for the selection of income
funds as one of the best fund to invest with. ( 7 marks)

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5. The global financial crisis has shattered the investors' confidence and has posed a serious
threat to the global financial stability with the death of Lehman Brothers, the emergency
rescue of American International Group, Inc. (AIG) etc. What are the points that an investor
should keep in mind while choosing a fund? ( 9 marks)
As we move into 2009, the level of pessimism among the investors is deepening and most
expect it to be another tough year. However with the stimulus being given by the
governments across the world, the investors must ensure to make the right investment
choice now.
The global financial crisis has shattered the investors' confidence and has posed a serious
threat to the global financial stability with the death of Lehman Brothers, the emergency
rescue of American International Group, Inc. (AIG) by US Treasury, the merger of Merrill
Lynch and Bank of America and the take over of Bear Stearns by JP Morgan Chase. As the
world bids goodbye to one of the worst years, the year 2009 has started out with a gripping
sense of fear and greed. The investors have been in a dilemma over the last few weeks as
the markets have been moving in a narrow corridor. Investors have become so scared that
they have even stopped investing in Systematic Investment Plans (SIP). They instead
prefer the fixed maturity plans. Considering the situation of the financial markets, investors
have started feeling that stock market investments have no future at all.
No matter how much investors would like to forget 2008 for its financial disasters, it is
important to remember the year for the hard lessons it taught. The US housing bubble has
burst and the asset prices are down to unrealistically low levels, just as they were trading at
unrealistically high levels at the beginning of 2008. The year 2008 could be termed as good,
bad and ugly. During market declines, the overpowering urge of the investors is to dump
stocks or equity mutual funds and to retreat to the safety net of the money market funds and
bank deposits. A few risk-averse investors wants to hold cash, while some others park their
funds in gold.
History suggests that instead of selling during market slumps, investors should put their
fears aside. It is a good time for investors to start bargain and protect themselves from loss
of real values of their assets by proper investment planning and getting higher returns. The
investors should realize the importance of making money from money. So, they should look
for investments, which will help them in providing optimum return and one such option is
mutual fund.
Mutual funds are investment vehicles that provide a means of participation in stock markets
to those investors who do not have either the time or the money or even expertise to
directly invest in the markets. The main objective behind this investment is that a large
number of investors pool their savings in a trust to achieve some financial goal. The money
thus collected is invested in capital market instruments such as shares, debentures and
other securities. The income earned through these investments and the capital appreciation
is shared by its unit-holders in proportion to the number of units owned by them.
The demand for assured return instruments such as gilt funds and income funds have
soared in the last few months. Moreover income fund performed better than other funds due
to its strategy of investment both in gilt and corporate bonds which gives the benefit of
diversification.

END OF CASELET

END OF SECTION B

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 Section C : Applied Theory (20 Marks)

• This section consists of questions with serial number 6 - 7.

• Answer all questions.
• Marks are indicated against each question.
• Do not spend more than 25 -30 minutes on Section C.

6. Admission of securities for trading on a stock exchange through a formal agreement

between the stock exchange and the company is called listing. In this context, explain how
listing of securities is advantageous to the company as well as to the investor. Also explain
various types of listing of securities. ( 10marks)
7. The significance of industry analysis can be established by considering the performance of
other industries in similar fashion. Discuss the key characteristics of Industry Analysis. ( 10marks)

END OF SECTION C

END OF QUESTION PAPER

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 Suggested Answers
Investment Management (SMB2F3)
Section A: Basic Concepts
Answer Reason
1. C It is not influenced by the accounting methods used for depreciation, inventory etc. Other
statements are true. Hence option (c) is the answer.
2. C There is no scope for hedging the returns on short term securities by which risk can be
minimized. Other statements are true. Hence option (c) is the answer.
3. A Let the number of outstanding units be x
NAV
Public offering price =
1 − Sales ch arg e
(2512.50 + 155.12 + 44.79 + 673.28 − 471.10 − 121.00) / x
21.50 =
1 − 0.025
2793.56/x = 20.96
x = 133.28 crore.
4. C Immunization is the process of eliminating interest rate risk by adjusting the duration of the
assets and liabilities via the future market or portfolio rebalancing.
5. A Payout ratio =DPS/EPS
Dividend payout ratio = 30%
Payout ratio × (1 + g ) 0.3 × 1.11
P/E ratio = = = 7.4
ke − g n 0.155 − 0.11

6. A Let profit after tax be x

x + Depreciation x + 2.93
CEPS = 3.35 =
No. of Shares 95
318.25 = x + 2.93
x = ` 315.32 lakh.
7. D Technical analysis is based purely on the study and behavior of past prices and not current
prices. Other statements are true. Hence option (d) is the answer.
8. B P0 = D1/(r - g)
185 = 13/(0.145 – g)
26.83 - 185g = 13
185g = 13.83
g = 7.48%.
9. B Bond laddering involves buying bonds of different maturities.
10. A Rectangles indicate an equal pressure being exercised by buyers and sellers, and the combat
is indecisive until a breakout occurs. Thus option (a) is the answer.
11. D If market price is more than face value, the coupon rate will be higher than the discount rate
or the YTM. As current yield is coupon income/market value, when market value is more than
the face value, the current yield will be lower than the coupon rate. Hence, when MP > FV,
coupon rate > Current yield > YTM. Thus option (d) is the answer.
12. A Jensen’s alpha = Realized return on portfolio P- Expected return on portfolio P
12.75 – [7.5+0.96(12.5-7.5)] = 0.45%.

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13. E Envelops is not used to measure the breadth of the market. It represents moving averages as
the centre of a trend with the envelopes enclosing points of maximum and minimum
divergence from that trend. Hence option (e) is the answer.
14. A An European call option can be exercised only on the expiration date. American option can be
exercised on any future date from the time of entering the contract unto the expiration of the
contract. Therefore, options (b) and (d) are not correct.
Further, if the price of underlying asset declines below the exercise price then the buyer of the
call option will not exercise the option as it is not economical to exercise it. Therefore, options
(c) and (e) are not correct.
15. D Statement III relates to entire market hence is implying systematic risk.
16. E The option premium can be broken down into two components - intrinsic value and time
value. The intrinsic value of a call is Max [0, (St-K)]. Similarly, the intrinsic value of a put is
Max [0, (K-St], where K is the strike price and St is the spot price. Options which are OTM and
ATM have only time value and they do not have intrinsic value and hence, their intrinsic value
is zero. Hence, alternative (e) is answer.
17. D Fund used in order to increase the size of the value of the portfolio and benefit the
shareholders by gains exceeding the cost of the borrowed funds is called leveraged funds.
Hence option (d) is the answer.
18. A
Exit barriers
Low High
Entry barriers
Low Low, stable returns Low, risky returns
High High, stable returns High, risky returns
Therefore, Option (a) is the correct answer.
19. E Equilibrium price f shares of Malavika Ltd.:
The required rate of return of Malavika Ltd. may be found with the help of CAPM as follows:
CAPM= R j = R f + β(R m − R f )
= 0.11 + 1.2 (0.15 - 0.11) = 0.158 or 15.8%.
Now K e = 15.8%,Do = ` 3,g = 9%
D1 3(1.09) 3.27
Equilibrium price, Po = = = = 48.08 ≈ ` 48 .
K e - g 0.158 - 0.09 0.068
Hence (e) is the correct answer.
(1 + r4 )
4 4
(1.065)
1+f4 = f4 = −1 f4 = 11.13%.
20. A (1 + r3 )
3
(1.05)
3

21. C Financial policies become firmly established at the expansion stage. Hence (c) is the correct
answer.
22. C Lead indicator approach only provides direction of the change but not magnitude and duration
of change. Thus statement (II) is false. Statement (IV) is related to diffusion indices. Thus
option (c) is the answer.
23. C Rate of return is computed as follows:
232 − 203 + 3.1
HUL = = 15.81%
203
834.80 − 1223 + 4.2
TCS = = −31.40%
1223
561.50 − 409 + 2.1
Wipro = = 37.80%
409
Portfolio return = 0.50 x (15.81) + 0.30 x (-31.40) + 0.20 x (37.80)
= 6.05%.

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 200
24. D Proportion of variance not explained by index = = 61.54%.
200 + 125

25. D Tactical asset allocation takes into consideration the changes in expected return, risks as well
as correlations, but it does not consider the possibility of investor’s risk-tolerance. In strategic
asset allocation, when each asset mix is expressed in terms of the percentage of the total
amount invested in each asset class, it is termed as constant asset mix strategy. Strategic
asset allocation indicates an optimal asset mix to be held under normal conditions. Insured
asset allocation is aimed at achieving the objectives of the investor without depending on
market timing. Hence, alternative (d) is answer.
26. E Pure cash matching strategy of portfolio dedication can be implemented very easily by using
zero coupon bonds because balancing of coupon with liabilities doesn’t arise and only fixed
value of zero coupon bonds at different points of time with respective liability should be
achieved.
27. D Alpha of security determines its under/out performance in relation to the expected return. The
ratio of alpha to residual risk incurred should be maximized to enhance the confidence in the
performance measurement system. The information ratio is calculated as portfolio
alpha/residual risk. On the other hand the ex-ante alpha is regarded as the forecasts of
residual return whereas ex-post alpha is the average of the realized residual return. Hence
option (d) is said to be the answer.
Ri −Rf
28. C Sharpe’s Ratio = i.e., excess return over total risk. Consistent outperformance
σi
based on this ratio indicates proper stock/asset selection, which reduces the proportion of
unsystematic risk in portfolio. It further indicates better forecasting ability to outperform the
market for the level of risk taken.
29. A Si ×M c ×Fc
Nc
EPS = where, Si = estimated industry sales
Mc = estimated market share of the company
Fc = estimated net profit margin of the company
Nc = number of outstanding shares
450×0.18×0.11
EPS = 0.45 = ` 19.80.
30. E Strategic interrelationship operates as exit barriers. Interrelationship between the business
unit and others in the company in terms of image, marketing ability, access to financial
markets, shared facilities and so on. They cause the firm to attach high strategic importance
to being in the business. Product differentiation, capital requirements, economies of scale and
access to distribution channels are major sources of entry barrier.

Page 11 of 16
 Section B: Problems
1. Return on HDFC = 0.2 × 40 + 0.7 × 28 + 0.10 × 22 = 29.8%
Return on ACC = 0.2 × 20 + 0.7 × 15 – 0.10 × 15 = 13%
Standard deviation of HDFC
= [(40 – 29.8)2 × 0.2 + (28 – 29.8)2 × 0.7 + (22 – 29.8)2 × 0.10]1/2 = 5.4%
Standard deviation of ACC
= [(20 – 13)2 × 0.2 + (15 – 13)2 × 0.7 + (15 – 13)2 × 0.10]1/2 = 9.54%
Cov(HDFC, ACC) = (40 – 29.8) (20 – 13) × 0.2 + (28 – 29.8) (15 – 13) × 0.7
+ (22 – 29.8) (–15 – 13) × 0.10 = 33.6(%)2
The expected return from a portfolio consisting of HDFC and ACC in equal proportions will be
29.8 + 13
= = 21.4%
2
The standard deviation of the portfolio will be
= [1/22 × 5.42 + 1/22 × 9.542 + 2 × 1/2 × 1/2 × 33.6]1/2 = 6.84%
The return per unit of risk for the three stocks and the portfolio can be calculated as follows:
Description Return (%) Standard Deviation (%) Return / Risk
Stock of HDFC 29.8 5.4 5.5185
Stock of ACC 13 9.54 1.363
Portfolio 21.4 6.84 3.13
No, it is better to invest in stock of HDFC, rather than the portfolio, as the return per unit of risk is
highest from stock of HDFC.
2. a.
Rf + βi (Rm – Return due to total
Fund Ri
Rf) selectivity
JM Mutual Fund (A) 21.36 24.00 2.64
Dundee Mutual Fund (B) 20.205 19.32 -0.885
Alliance Mutual Fund (C) 18.945 18.36 -0.585
First India Mutual Fund (D) 19.155 21.76 2.605
b.
Rf + σi/σm (Rm –
Fund Return due to net selectivity
Rf)
A 21.58 2.42
B 20.43 -1.11
C 19.14 -0.78
D 19.39 2.37
c. From the above calculations, it is observed that JM Mutual Fund (A) and First India Mutual Fund
(D) are out performed the market and funds Dundee Mutual Fund (B) and Alliance Mutual Fund
are underperformed the market.
As indicated by return from total selectivity, fund manager of JM Mutual Fund has performed better
than any other fund manager. A part of this can be attributed to his superior stock selection skills
which is evident from its higher return due to net selectivity than other funds.
3. Years Y0 Y1 Y2 Y3 Y4 Y5
Initial deposit (` ) –5,000
Annual Interest 525 550 625 762.5 900
Redemption value 5,000
Interest during ‘n’th year = (` 5,000 x interest % in year n)
n It F
PV or Intrinsic Value of Bond = ∑ +
t =1 (1 + YTM) (1 + YTM) t
t

Where,
n = Maturity period
It = Interest in year t
F = Face value of the bond

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 YTM = Yield-to-Maturity
YTM of the bond is ‘i’ in the following equation:
525 550 625 762.5 5,900
5,000 = + + + +
(1 + i) (1 + i) 2 (1 + i)3 (1 + i) 4 (1 + i)5
525 550 625 762.5 5,900
At i = 12%, RHS = + 2
+ 3
+ 4
+
(1.12) (1.12) (1.12) (1.12) (1.12)5
= 468.75 + 438.46 + 444.90 + 484.60 + 3348 = 5184.71
525 550 625 762.5 5,900
At i = 13%, RHS = + 2
+ 3
+ 4
+
(1.13) (1.13) (1.13) (1.13) (1.13)5
= 464.60 + 430.73 + 433.16 + 467.75 + 3202.3 = 4998.54
By interpolation:
5184.71 − 5000
I = 12 + 1× = 12 + 0.99 = 12.99% .
5184.71 − 4998.54
Hence the yield to maturity of Growing Interest Bond = 12.99%.
4. The reasons for the selection of income funds as one of the best mutual funds to invest are as follows:
• In an income fund, the investment is made in both Government and corporate securities such as
bond, debentures, certificates of deposits, etc. The government securities offer an element of
safety to the fund and corporate securities have higher yields as compared to others.
• Income funds invest both in gilt and corporate bonds which gives the benefit of diversification.
• The aggressive monetary easing and fall in inflation has led to a sharp decline in gilt funds. Given
the quantum of rate cuts and liquidity injections announced so far, the pace of monetary easing is
expected to slow.
• The lowering of interest rates assumes even more significance because interest rates are known
to have an inverse relation with bond prices. As interest rates soften, the yield of bonds
decreases, but the price tends to increase. When bond prices rise, this is reflected in a rise in Net
Asset Value (NAV) of income funds.
5. While choosing a fund, investors have to bear in mind a few points that includes:
• Investors who invest for a long period should strengthen their portfolio as the shares of large
companies are available at cheaper prices in the market.
• Investors should invest in large cap companies which have shown good results during market
crisis also.
• Investors should pick a fund which has maintained a consistent performance during both good and
bad times.
• They should keep a check on the performance of the funds managed by fund manager. The
performance track record of the fund must align with the investor's expectations.
• They should look at the portfolio of fund and ratings of the certificates in which the fund manager is
putting the money.
• Keep a look-out for recent changes that have taken place.
• Investors should not invest all the money at a time. First of all they should select a few good
companies and number of shares they would like to purchase.
• Invest money in those funds which are giving high rate of dividends because dividends can help to
come out of the market crisis. Secondly only those companies which are really performing in the
current market conditions will give high dividends.
• Seeking average returns of 12-15% from a balanced portfolio containing a prudent mix of equity,
debt, cash and gold.
• Seek services of experts for advice and route investments accordingly.

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 Section C: Applied Theory
6. Advantages of Listing
Listing of securities on the stock exchanges is advantageous to the company as well as to the investors
as seen hereunder:
a. To the Company
i. The company gains national and international importance by its share value quoted on the
stock exchanges;
ii. Financial institutions/bankers extend term loan facilities in the form of rupee currency and
foreign currency loan;
iii. It helps the company to mobilize resources from the shareholders through ‘Rights Issue’ for
programs of expansion and modernization without depending on the financial institutions in
line with the government policies;
iv. It ensures wide distribution of shareholding thus avoiding fears of easy takeover of the
organization by others.
b. To the Investors
i. Since the securities are officially traded, liquidity of investment by the investors is well
ensured;
ii. Rights entitlement in respect of further issues can be disposed of in the market;
iii. Listed securities are well preferred by bankers for extending loan facility;
iv. Official quotations of the securities on the stock exchanges corroborate the valuation taken by
the investors for purposes of tax assessments under Income Tax Act, Wealth Tax Act, etc.;
v. Since securities are quoted, there is no secrecy of the price realization of securities sold by
the investors;
vi. The rules of the stock exchange protect the interest of the investors in respect of their
holdings;
vii. Listed companies are obligated to furnish unaudited financial results on a half-yearly basis
within two months of the expiry of the period. The said details enable the investing public to
appreciate the financial results of the company in between the financial year;
viii. Takeover offers concerning listed companies are to be announced to the public. This will
enable the investing public to exercise its discretion on such matters.
Types of Listing
Listing of securities is of five types as follows:
Initial Listing
A company, whose securities have not been listed earlier in a recognized stock exchange, if desirous of
listing its securities, should follow procedures applicable to initial listing.
Listing of Public Issue of Shares and/or Debentures
A company whose shares are listed on a recognized stock exchange may issue shares and/or
debentures to the public for subscription. In such cases the company under the Listing Agreement has
to submit necessary application to the stock exchange(s) for listing of its securities. It may so happen
that a green field company, i.e., a company shortly after incorporation may issue its shares and/or
debentures to the public for subscription. In that event, it has to comply with the formalities applicable
to initial listing.
Listing of Rights Issue of Shares and/or Debentures
Companies whose securities are already listed may issue shares and/or debentures by way of ‘rights’
to the existing shareholders. Under the listing agreement, such companies have to list shares and/or
debentures allotted by way of rights to the shareholders with stock exchange(s).
Listing of Bonus Issue of Shares
Companies which issue bonus shares by capitalization of its reserves, pursuant to the listing
agreement should enlist with the stock exchange(s). Bonus shares should issue by submitting
necessary application form for official quotation of the bonus shares.
Listing of Shares Issued on Amalgamation, Mergers, etc.
Amalgamated companies, which issue shares to the shareholders have to get the shares listed on the
stock exchanges to enable the erstwhile shareholders with such shares.

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7. Key Characteristics of Industry Analysis
The most important of the characteristics that are to be evaluated in an Industry Analysis can be
enumerated as given below:
1. Past sales and earnings performance.
2. Permanence of the industry.
3. The attitude of the government towards the industry.
4. Labor conditions within the industry.
5. The competitive conditions as reflected by the existence of the entry barriers and
6. The stock prices of the firms in the industry relative to their earnings.
Past Sales and Earnings Performance
For an analyst, the past sales and earnings performance of the firm form a crucial input in forecasting
future trends. This is not to say that the firm is going to repeat the same performance again. Rather, the
analyst is more interested in examining the contribution of the various factors in the past so that the
relevance of these factors individually and relatively can be properly evaluated under present
conditions.
In any firm, sales and the earnings play an important role. These variables will exhibit a degree of
consistency only when the firm has weathered a variety of economic conditions. The analyst from the
observation of these variables will be able to judge the stability of the performance in terms of sales and
earnings as well as the growth rates. Another crucial factor is that of the relationship between the sales
and the fixed costs. The more the fixed costs, the higher will be the break even point and higher will be
the sales volume to be achieved.
Permanence
By permanence, we understand the products and the technology of a particular industry not becoming
obsolete in a short span of time. If the industry is not permanent, then investing in that industry
altogether becomes a losing proportion. In some of the cases a product with additional features
manufactured by employing superior technology makes the existing product totally irrelevant or at least
results in the manufacturing process becoming a commercially enviable proposition.
In this age of rapid technological developments, this factor plays a crucial role in Industry Analysis. The
Government's role is also an important factor affecting the permanence of the industry.
The Attitude of the Government towards the Industry
It is imperative for an Analyst that he should be well aware of the various Government policies and
regulations with reference to an industry in which he is going to invest. The government policies like
deregulating an industry by allowing foreign investment, imposing high tariffs on imports and restrictive
legislation have a bearing on their performance. Some of the legal restrictions result in the profits being
very low for a particular industry. Thus an analyst, for that matter an investor also should be thorough
with various government regulations and their implications and should be able to predict, at least
broadly, the changes likely to take place in the regulations in the near future.
Labor Conditions
This is an important factor to be considered in industries which are labor intensive. An analyst should
examine the various provisions of the labor laws and also go into the possible reasons that may halt the
production process and its fallout on the profits of the industry. In case of a prolonged strike, a labor
intensive firm will not only lose its customers and goodwill but also may not be able to cover its fixed
costs in certain cases.
Competitive Conditions
While analyzing this situation, the three general types of barriers that an analyst should concentrate on,
are
1. Existence of product differentiation
2. Absolute cost advantages and
3. Advantages rising from economies of scale.
The existence of the first barrier assures that a new entrant will not be able to charge as much as the
existing firms. Also he has to spend large amounts of money on advertising to capture an acceptable
share of the market as this situation is usually found in cases where the customers exhibit a high
degree of brand loyalty. By absolute cost advantages, we understand that the existing firms are capable
of producing and distributing the products at lower costs than the new entrants irrespective of the
volume produced. As a result, they enjoy wider profit margins. This may be due to the fact that the
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existing firms may have exclusive patents, own the resources or superior management skills that are
not available to the new entrants.
Economies of scale are usually realized when the production levels are quite high. A new entrant in this
case also has to garner a significant market share so that he can avail the benefits from economies of
scale. If he fails to do so, he will be able to compete with te prices offered by the existing players.
Industry Share Prices Relative to its Earnings
In addition to the various factors we have been looking at, the analyst also has to look at the present
share prices. In this case under priced share would be the best bet. Also he should examine the fact
that the share prices are not high due to the overzealous nature of the investors to acquire the shares
of the firms in a new industry. Usually the shares of these companies experience high fluctuations
depending on the crowd behavior.

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