a) Judy and Jady are assistant portfolio managers. The senior portfolio manager has asked them to consider the acquisition of one of two option-free bond issues with the following characteristics: Issue 1 has lower coupon rate than Issue 2 Issue 1 has a shorter maturity than Issue 2 Both issues have the same credit rating Judy and Jady are discussing the interest rate risk of the two issues. Judy argues that Issue 1 has greater interest rate risk than Issue 2 because of its lower coupon rate. Jady counters by arguing that issue 2 has greater interest rate risk, because it has longer maturity than Issue 1 i) Explain which assistant portfolio manager is correct with respect to their selection of the issue with the greater interest rate risk. marks) (5 ii) Suppose that you are the senior portfolio manager. How would you suggest that Judy and Jady determine which issue has the greater interest rate risk, price risk and reinvestment rate risk? (5 marks) b) Consider the following data for two (2) risk factors: Changes in growth domestic product (GDP) and Government service tax (GST) and three (3) securities: Kossan Bhd., Top Glove Bhd. and Lafarge Bhd. T. bills = 0.02 Brossan, GDP - 0.80 GDP = 0.12 Kossan, GST = 0.00 GST = 0.06 B TopGlove, GDP = 1.2 B TopGlove, GST = 0.00 Lafarge, GDP = 0.3 PLafarge, GST - 0.2 1. Compute the expected returns for Kossan Bhd., Top Glove Bhd. and Lafarge Bhd. (6 marks) ii. Supposed that Kossan, TopGlove and Lafarge are currently priced at RM6, RM5 and RM9 respectively. Further, it is expected that all securities will pay dividend of RM0.50 during the coming year. What is the expected price of each security one year from now? (9 marks) a) Judy and Jady are assistant portfolio managers. The senior portfolio manager has asked them to consider the acquisition of one of two option-free bond issues with the following characteristics: Issue 1 has lower coupon rate than Issue 2 Issue 1 has a shorter maturity than Issue 2 Both issues have the same credit rating Judy and Jady are discussing the interest rate risk of the two issues. Judy argues that Issue 1 has greater interest rate risk than Issue 2 because of its lower coupon rate. Jady counters by arguing that issue 2 has greater interest rate risk, because it has longer maturity than Issue 1 i) Explain which assistant portfolio manager is correct with respect to their selection of the issue with the greater interest rate risk. marks) (5 ii) Suppose that you are the senior portfolio manager. How would you suggest that Judy and Jady determine which issue has the greater interest rate risk, price risk and reinvestment rate risk? (5 marks) b) Consider the following data for two (2) risk factors: Changes in growth domestic product (GDP) and Government service tax (GST) and three (3) securities: Kossan Bhd., Top Glove Bhd. and Lafarge Bhd. T. bills = 0.02 Brossan, GDP - 0.80 GDP = 0.12 Kossan, GST = 0.00 GST = 0.06 B TopGlove, GDP = 1.2 B TopGlove, GST = 0.00 Lafarge, GDP = 0.3 PLafarge, GST - 0.2 1. Compute the expected returns for Kossan Bhd., Top Glove Bhd. and Lafarge Bhd. (6 marks) ii. Supposed that Kossan, TopGlove and Lafarge are currently priced at RM6, RM5 and RM9 respectively. Further, it is expected that all securities will pay dividend of RM0.50 during the coming year. What is the expected price of each security one year from now? (9 marks)
