APRIL 2009

QUESTION 4

ANSWER:-

A.) The agency was formed in November 1990, with a paid up capital of RM 10M. The formation of

RAM is very important for the development of capital market especially in the bond and debt

securities market

RATING SCALES

- Private Debt Securities Ratings

RATING DEFINITION

AAA

The best quality and offer the highest safety for timely payment of interest and

principal

AA High safety for timely payment of interest and principal

A

Adequate safety for timely payment of interest and principal. More susceptible

to changes in circumstances and economic conditions than debts in higher-

rated categories.

BBA

Moderate safety for timely payment of interest and principal. Lacking in

certain protective elements. Changes in circumstances are more likely to lead

to weakened capacity to pay interest and principal than debts in higher-rated

categories

BB

Inadequate safety for timely payment of interest and principal. Future cannot

be considered as well assured

B

High risk associated with timely payment of interest and principal Adverse

business or economic conditions would lead to lack of ability on the part of the

issuer to pay interest or principal

B.) Explain the difference between yield- to- maturity (YTM) and Yield-to-call (YTC). (3M)

Yield-to-maturity (YTM) – The yield is the rate of return that the investor will get from the

purchase of bond at current market price and held to maturity.

Yield-to-call ( YTC) – The yield on a bond if it remains outstanding only until a specified call

date.

C.)

5% of convertible bond

m- 12years

c. ratio- 200 shares of common shares

c. price of convertible bond- Rm 880

MP of common shares- Rm 4

Dividend - 18%

CONVERSION VALUE = C.RATIO × MP OF C.SHARES.

= 200 Shares ×Rm4

= Rm 800

CONVERSION PREMIUM (RM) = M.P OF C.BOND – C.VALUE

= RM880-RM800

= RM80

CONVERSION PREMIUM ( %) = RM 80

RM800

= 10%

PAYBACK PERIOD = RM80

( RM1000 × 5% ) – ( 200 × 18%)

= 5.71 YEARS

QUESTION 5 (A.)

I. UNITS (2007)

NAV = T.Asset- T.liabilities

No.Of Outstanding

1.0689 = 242,200 – 1700

X

X = 224,997.66 units

II. VALUE ( 2008)

NAV = T.Asset- T.liabilities

No.Of Outstanding

1.0200 = ( X + 1700) -2100

200,000

206,100 = X = + 1700

X= RM 204,400

B.)

RETURN

SPECULATIVE STOCK

UNIT TRUST

T,BILLS

RISK

In general, there is a positive relationship between risk and return. Investment with high risk tend to

give high expected return. For those with low risk, the return will also be low. From the diagram,

we can see that instruments regarded as risk free ( for example treasury bills) have very low return.

While those which are very risky tend to be on the higher end of the spectrum and give high returns.

OCTOBER 2008

QUESTION 3

A.)

1.) INTEREST RATE RISK- interest rate risk or market risk is the uncertainty cause by the

changes in interest rate during the period in which a fixed income security ( bond) is held.

The price of fixed- income securities is highly influenced by changes in interest rate. An

increase in interest rate can cause the price of the bond is decline and a decline in interest

can cause the price of the bond to increase. When interest rate fall, new issues come to

market with lower yields compared to existing securities. This makes the existing

securities to worth more. Thus, the price increases. On the other hand, if the interest rate

increase, new issues come to market with higher yields than existing securities. This will

make the existing securities to worthless , thus the price drops.

2.) PURCHASING POWER RISK - The uncertainty caused by the changing in price levels in

the economy ( inflation) will adversely affect the returns on the fixed income securities.

When the consumer price index ( CPI) increase, the fixed return from fixed income

securities will reduce purchasing power, for example, less value of goods can be

purchased from the income.

3.) Business/ financial risk - is associated with how the company mix amount of debt and

equity used to finance the company. For the company that aggressively using financial

leverage to finance its investment expose to higher financial risk. Debt financing expose

the company to pay fix interest payment to the lender. Inability to pay the fixed- interest

payment can cause business failure to the company.

4.) LIQUIDITY RISK - The risk being unable to sell the investment at a reasonable price in a

short period of time. The secondary market plays an important role in providing liquidity

to the investors. To be liquid, there must be a lot of market players and different types of

securities to suit different investors.

5.) CALL RISK - A risk related calls features attached to the bond issued, called callable

bond. Callable bond is a type of bond that gives the right to the issuer to call the bond

before maturity date. Investors usually invest in bond for the fix income from the interest

rate. If the bond were called before the maturity, the investors will receive the cash , thus

there is no more fixed income from this investment. With the cash in hand, investors have

to look for another alternative. The issuer usually calls the bond when interest rate drops.

In the case, investor has to replace the investment with lower yields issue.

B.)

I. A bond with a par value of RM1000, a coupon rate of 7% and is currently selling for RM800.

M- 20,

PV-RM1000,

CR- 7%,

MP-RM800

YTM= CP + [ PV-MP]

M

[ PV+ MP]

2

CP= CR × PV

= 7% × RM1000

= RM70

RM 70 + [ RM1000- RM800]

20

[ RM1000+ RM800 ]

2

= 8.89%

II. M- 20,

CR- 0,

PV- RM1000,

MP- RM300

YTM= CP + [ PV-MP]

M

[ PV+ MP]

2

CP= CR × PV

= 0 × RM1000

= RM0

RM 0 + [ RM1000- RM300]

20

[ RM1000+ RM300 ]

2

= 5.38%

Investors should invest in Bond ( 1) because the YTM is higher. The YTM is 8.89, which is

greater than the coupon rate of 7%. To encourage the investor to buy the bond, the issuer must sell

the bond at a discount and provide a rate of return of 8.89 to investors

APRIL 2008

QUESTION 2

A.) YTM= CP + [ PV-MP]

M

[ PV+ MP]

2

YTM ( BOND A)

CP= CR × PV

= 0 × RM1000

= RM0

RM 0 + [ RM1000- RM909.10]

1

[ RM1000+ RM909.10 ]

2

= 9.52 %

YTM ( BOND B )

RM 0 + [ RM1000- RM797.20]

2

[ RM1000+ RM797.20 ]

2

= 11.28 %

YTM ( BOND C)

RM 0 + [ RM1000- RM675.00]

3

[ RM1000+ RM675.00]

2

=12.93 %

YTM ( BOND C)

RM 0 + [ RM1000- RM683.00]

4

[ RM1000+ RM 683.00 ]

2

= 9.42 %

Choose BOND C because the YTM is higher. The YTM is 12.93, which is greater than the

coupon rate.

B.) BOND PRICE

VB = CP ( PVIFA I, m ) + PV ( PVIF I, m )

= ( 1000 × 10 % ) ( PVIFA 8%, 1 ) + RM 1000 ( PVIFA 8%, 1)

= RM100 × ( 0.9259) + RM 925.92

= RM1018.51

HPR= ( 1000×10 % ×1) + ( RM1018.51 –RM1000)

RM1000

= 11.85 %

QUESTION 6

C.) CURRENT YIELD

= ( 1000 × 6 % )

RM 800

= 7.5%

CONVERSION VALUE

= 100 × RM7

= RM700

CONVERSION PREMIUM ( RM)

=RM800 – RM 700

= RM100

CONVERSION PREMIUM ( %)

= RM100

RM700

= 14.29 %

PAYBACK PERIOD

= RM100

( 1000 ×6%) – ( 100×0.30)

= 3.33 YEARS.

APRIL 2007

QUESTION 3

A.) The relationship between bond prices and yields is when the market interest rates

increases the bond prices will decline or sells at a discount. If the market value of the

bond is selling lower than the par value it is called a discount bond and when the market

interest rates decline the bond prices will increase or sell at premium. If the market value

of the bond is selling above the par value, it is called a premium bond.

B.) Call risk or prepayment risk is the risk that a bond will be “ called” ( retired) long before

its scheduled maturity date. Issuers often prepay their bonds by calling them in for

prepayment. When issuers call their bonds, the bondholders end up getting cashed out of

the deal and have to find another place for their investment funds and there is a problem.

Because bonds are nearly always called for prepayment after interest rates have taken a

big fall. Thus, the investors have to replace a high-yielding bond with a much lower

yielding issue. From the bondholder’s perspective, a called bond means not only a

disruption in cash flow but also a sharply reduced rate of return

C.) CAPITAL GAINS= PV- MP

Rm1000-Rm863.07 = RM 136.93

RM 1000- RM125.79 = RM874.21

Choose bond which have zero coupon because Ernie can gains more profit

TOTAL RETURN= CP ( PVIFA I, n ) + PV ( P VIF I, n)

CR- 7.5%

M- 20

I- 9%

CP-RM 75

=RM75 × ( PVIFA 9%, 20) + 1000 ( PVIF 9%, 20)

= RM75 ( 9.1285) + 178.43

= RM863.07

CR- 0%

M- 25

I- 9%

CP- RM0

==RM0 × ( PVIFA 9%, 25) + 1000 ( PVIF 9%, 25)

= RM0 ( 9.8225) + 115.9678

= RM125.79

Bond which have the shorter period offers a lot more price volatility which 20 year. It means

if Ernie want to reduce exposure to capital loss or more to the point, to lower the price

volatility in bond holdings, then just choose the shorten maturities.

QUESTION 6

THE CONCEPT OF UNIT TRUST

A unit trust is one of the investment alternatives that are available in our economy. It is an

investment scheme, which pools money from many investors who share the same financial

objectives. An investors can participate in unit trust investment by buying certain number of

units of the unit trust fund which is freely traded. An authorized agent is responsible of the

units. A full time manager them invests the pooled money in shares or other authorized

securities on their behalf.

TYPE OF UNIT TRUST IN MALAYSIA

In Malaysia, there are seven types of unit trust that are classified according to different

categories based on the following criteria:-

1.) Malaysian Income Funds- Malaysian domiciled unit trust which mainly invest in

Malaysian equities and on a regular basis. Approximately half of the total returns

achieved are distributed to unit trust-holder in the form of income. Income funds are less

volatile. It is an investment in high dividend yield companies or in the money markets.

Thus, dividend payment is of primary importance and is consistent even during an

economic downturn.

2.) Malaysian Growth Funds- The fund invested in stocks of smaller and emerging

companies with better growth potential. Malaysian domiciled unit trust, mainly invest in

Malaysia equities and on a regular basis, where more than half of the returns are in the

form of capital gains ( increase unit price or bonus units)

3.) Malaysia Balanced Funds- Malaysia domiciled unit trust, which will only invest up to a

maximum of 60% in Malaysian equities and the balance in fixed interest securities. It is

an investment in stocks with good growth potential and high earning yield. A reasonable

dividend payout and capital appreciation can be expected.

4.) Foreign Managed Malaysian Equity Funds- Foreign domiciled unit trust, which

mainly invest in Malaysian equities.

5.) Malaysian Islamic Funds- Malaysian domiciled unit trust, which mainly invest in

Malaysian equities excluding “non halal stock” and interest-bearing money market

instruments. These funds are investment in “halal” stocks based on Islamic principles of

the Syariah Laws.

6.) Malaysian Bond Funds- Malaysian domiciled unit trust, which mainly invest in fixed

interest securities. Bond funds are primarily invested in high yielding government

securities, corporate bonds, and loan stocks. They tend to be more conservatively

managed than equity funds and less subject to fluctuation. Their objective is to preserve

capital while producing a moderate income.

7.) East Asian Funds- East Asian equities are foreign domiciled unit trusts, which mainly

invest in a selection in East Asian or Asian countries including Malaysia.

ADVANTAGES OF INVESTING IN THE MALAYSIAN UNIT TRUST FUNDS, QUATED

AND UNQUATED

1.) DIVERSIFICATION – The investors , especially with small capital outlay, can diversify the

risk as the funds are invested in a wide range of securities and across different assets classes

such as stocks, bonds, money market instruments and or cash

2.) VARIETY- The investors have various investments to choose from to suit their needs and

objectives.

3.) PROFESSIONAL MANAGEMENT- For an average investor, the unit trust is one of the

few avenues of investment where they can obtain professional management of his investment

at a reasonable service charge. The portfolio management process of a unit trust management

company involves an investment committee which sets an investment policies and strategies

while the fund manager provides research, analysis of assets allocation and stocks

recommendations

4.) EASE OF TRANSACTION- The investors can easily invest, redeem, split, transfer or merge

the units they have.

5.) LIQUIDITY- The investment can be cashed at any time, thus allowing the investors the

flexibility to enter and exit the market at their discretion. The unit trust manager is obligated to

buy back any units redeemed by the investors. All the investors have to do is fill in redemption

or repurchase form and submit it to the management company. The unit will be redeemed and

the proceeds will be paid to the investors within 1business days.

APRIL 2008

QUESTION 7

A.) A stock market index is used to measure the performance of the aggregated shares or the

entire stock market. A well- formulated stock market index also can be used as a leading

indicator of the economic performance and as a useful summary measure of current

expectation of future outlook economy. It is also a sensitive barometer of a short- run political

and economic developments as well as a monitor of long- term structural changes in an

economy.

The index movements illustrate market sentiment. They are use by investors to measure

whether the market going-up or down active or sluggish. The movement in the CI for the in

allows investors to describe the market has having a bull or bear run. There are numerous

indexes, the investors used them to compare which sectors outperform or underperform and

in what direction.

However, this does not mean investors can reap hefty profit by looking at the indexes.

Tracking the indexes is just one of the processes in making investment decision.

B.) The difference between a premium bond and discount bond is premium bond is one that sells

for more than its par value and it occurs when interest rates drop below the coupon rate and

discount bond is sells for less than par value , its occurs when market rates are greater than the

coupon rate.

THREE FACTORS:-

1.) INTEREST RATE RISK- Is the number one source of risk to fixed income investors

because it’s the major cause of price volatility in the bond market. For bond, interest rate

risk translates into market risk. The behavior of interest rates affects all bonds and cuts

across all sector of the market. When market interest rates rise, bond prices fall. As

interest rates become more volatile, so do bond prices.

2.) COUPON RATE- Coupon rate is a rate of interest payment for every bond issued.

Bonds with lower coupons have a lots of price volatility and are more responsive to

changes in market interest rate.

3.) MATURITY TERM- Is a limited life of bond. Bonds with longer maturities have a lots

of price volatility and the largest change in price occurs when the bond has the greatest

number of years to maturity.

C.) GROWTH FUND- The fund objective is to have faster growth rate in term of investment

wealth. This can be seen its net asset value growth over time. This type of fund possesses

diversified portfolio of common stocks in the hope of achieving large capital gains for their

unit holders.

D.) AGGRESSIVE GROWTH FUND- This Fund's investment objective is to seek long-term

aggressive growth of capital. Aggressive Growth Fund seeks to achieve its objective by being

fully invested (95% or more of net assets) in equity mutual funds whose objective is growth or

capital appreciation. This Fund almost never takes a temporary defensive position, although it

has the ability to do so if Management determines that extreme circumstances exist.

OCTOBER 2007

QUESTION2

A.) Closed-end company is one of the investment companies. The word “ closed-end” means

that the company has a limitation in its basic capitalization. The companies will use

leverage by selling senior securities such as bonds and preferred stock. The companies

will proceed from the stock sale to purchase land, equipment, and inventory from the other

firms. Companies shares are traded and organized exchanges. When investors buy

shares in a closed- end investment company, they must buy them from another person or

company. The buyers pays the nominal commission on such a purchase. The shares of

a closed-end company can be sold above or below the net asset value of the shares. The

reason that the closed- end investment companies sell at a discount are the investors

attitude concerning the abilities of the fund’s management , lack of sales effort ( brokers

earn less commission on closed-ended fund shares than an open-ended fund shares)

B.) Capital raisers consist of companies needing funds selling securities to the public through

investment bankers acting as intermediary between the company and investors. The

securities are purchased by the investors who provide funds to the companies. An

INVESTMENT BANKERS is a firm that act as middleman or intermediary between the

investors and the capital raisers . They are the consultant to the corporate clients on

matters pertaining to the sale of new securities and fund raising. Investment bankers also

act as underwriters on the new issue of shares. The responsibility of an underwriter is to

guarantee the subscription of new shares issued by a company. The shares that are not

subscribed in the offer for sale are taken up by the underwriter. The INVESTMENT

BANKER appointed by a company usually act as a financial consultant to the company

planning on the new issues. The investment banker prepares a preliminary prospectus

called red herring which is similar to prospectus except that it does not contain the actual

price of the shares. Once the relevant authorities such as the Securities Commission

approves the preliminary prospectus, a final prospectus is issued through banks and

brokerage firms to be distributed to the public.

C.) YOUNG INVESTORS ( new investment) - The early stages of an industry often are

characterized by a new technology or product. At this stage, it is difficult to predict which

firms will emerge as industry leader. During this start up stages, the industry experiences

modest sales growth and very small or negative profit margins. The market for the

industry’s product or services during this time is small and the firm involves major

development cost. Therefore, there is considerable risk in selecting one firm within the

industry.

Middle-aged investors – During this rapid growth stage, a market develops for the

product or services and demand becoming substantial. The limited number of firms in the

industry face little competition. The profit margins are very high as the sale grow at an

increasing rate as the industry attempts to meet excess demand.

RETIRED INVESTORS ( OLD INVESTMENT)- The success in the stage2 has

satisfied most of the demand for the industry goods or services. Thus future sales growth

may be above normal but it no longer accelerates. Rapid growth of sales and higher

profit margins attract competitors to the industry, which cause an increase in supply and

lower prices such that profit margins begin to decline to normal levels.

QUESTION 3

A.) VB= CP ( PVIFA I,n) + PV ( PVIFA I, n)

= (1000 × 10%) ( PVIFA 12%, 25) + 1000( PVIFA 12%, 25)

= 1000 ( 7.8431) + 1000 ( 0.0588)

= 784.31 + 58.8

= RM 843.11

YTM= YTM= CP + [ PV-MP]

M

[ PV+ MP]

2

CP= CR × PV

= 10% × RM1000

= RM100

RM 100 + [ RM1000- RM920]

5

[ RM1000+ RM920 ]

2

= 12.08 %

When required rate of return ( K) = Coupon interest rate, bond will sell at par.

When required rate of return ( K) ≥ Coupon interest rate, bond will sell at discount

When required rate of return (K) ≤ Coupon interest rate, bond will sell at premium.

B.) BUSINESS ASSESSMENT- Involves assessing the company’s ability to overcome

challenges and threats, growth ,potential, level of profitability and cost compared to industry,

research, and development capability, marketing strategies

FINANCIAL ANALYSIS- At this point, RAM will focus on the different data. It involve in-

depth ratio analysis and also the expected cash flows.

MANAGEMENT EVALUATION- The quality of management is also being assessed

because it is believe the credit strength will also depend on management’s ability to anticipate

change and react timely. RAM look for management’s capability of formulating policies

appropriate to the state of economy.

C.) ZERO COUPON BOND also known as original discount bond is sold at a large discount

from par. Thus the investors return comes from the gain in value that is par value minus

purchase price. The main attraction to investors to buy these bonds would be the low prices

and they would receive full face value at maturity. Firms can raise large capitals at minimum

cost because they don’t pay interest or pay only little interest.