1 Coffee Company is a medium-sized company with a number of branches across the

country. Having previously raised capital from the private debt markets, the company

has experienced rapid growth with profits increasing each year. The company is now

considering raising debt through the public corporate debt market and is considering a

formal credit rating.

(i) Describe the main areas that a credit rating agency would consider in

determining a credit rating for Coffee Company. [9]

(ii) Suggest, with reasons, why Coffee Company may:

(a) want to raise debt through the public corporate debt market.

(b) be keen to attain a formal credit rating.

2 A large investment fund currently invests all of its assets in global equities. It has

decided to move a large proportion of the fund from US equities into emerging market

equities.

(i) Outline two strategies to make the switch using derivatives. [2]

(ii) Compare these strategies with each other and to buying and selling the

physical assets. [6]

(iii) Discuss the risks introduced by entering into the derivative strategies above

3 (i) State what is meant by behavioural finance. [2]

(ii) Explain the types of biases that can affect an investor's view of the probability

of an event occurring that is outside their control, such as a property market

crash. [2]

(iii) Explain the main behaviour being exhibited in each of the following scenarios:

(a) A pension scheme has been advised by the same investment

consultancy over a five-year period. The trustees are now carrying out

a review to decide whether they would like to continue working with

this investment consultancy or appoint a new investment consultancy.

During the selection process the trustees decide to re-appoint the

current consultancy, even though other firms had clearly given better

presentations.

(b) A group of pension scheme trustees has seen high returns in their

equity portfolio over the last five years and views among market

commentators suggest this performance will continue. The trustees

decide to increase their allocation to equities in order to generate

further returns for the scheme.

(c) Market commentators have been suggesting for several months that

equity valuations are not justified and they expect a market correction.

However, an equity trader who is investing their own portfolio has

allocated a large proportion to equities.

(d) A pension scheme has experienced an increase in its deficit as a result

of falling government bond yields. (The falling yields have resulted in

a higher value for the scheme's liabilities and the scheme's assets have

not kept pace with this rise.) Given the low level of government bond

yields and market commentary that suggests that yields are at 'all time

lows' and are expected to rise, the scheme's trustees are reluctant to

invest in assets which would help protect their portfolio against further

falls in government bond yields.

(e) An investment consultant comments on the poor performance of a

hedge fund's strategy. The consultant believes that the hedge fund

should have been able to foresee market events based on historic

market data, although the consultant did not provide any views on

hedge funds prior to this.