N 17 QUESTION 4 (30 MARKS)

(i) Critically explain the concept of Capital Asset Pricing Model (CAPM) and argue why do financial managers apply CAPM in financial decision making with difficulty?(14 marks)

(ii) Write short notes on the three forms of efficiency.(12 marks)

(iii) Describe any two main market anomalies of efficient hypothesis.(4 marks)

J 18 QUESTION 3 [25 MARKS]

"A bond is a long term instrument or security. Bonds are also called fixed income securities and pay a fixed interest to the bond holder up to maturity when the nominal amount of the bond is redeemed"

a) Assess the main features of a bond.

[10 marks]

b) Distinguish between 'callable bonds' and 'convertible bonds'

[4 marks]

c) A government bond has a 12% coupon rate and a face value of $1000. Interest is paid on a semi-annual basis and the bond has a maturity period of 15 years. Investors require a 15% yield. Calculate the market value of the bond. [5 marks]

d) Calculate the Yield to Maturity (YTM) on a bond priced at $1066 which has 4 years to maturity, a 10% coupon rate and a face value of $1000 at maturity.[6 marks]

J 18 QUESTION 5

c) Explain the difference between ordinary annuity and due annuity.

[2 marks]

d) Thomas got a job and has decided to plan for his future. He will pay the bank contributions of Rs 4, 000 each year for 40 years. The plan pays a compound interest of 8% per annum.

(i) How much would Thomas get if contributions are payable at the end of eachyear?[4 marks]

(ii) If contributions are payable at the start of each year, how much more Thomas will have after 40 years.(6 marks