Question 1

Nichole is holding a 8 year, RM1,000 par value with a 6% annual coupon convertible bond with a 6% required rate of return. The bond is convertible into 60 shares of stock. Each share is worth RM19. Besides that, Nichole is considering to purchase another 6 years corporate bond for investment purpose. A choice of terms such as call feature, convertible feature, warrants, sinking fund and debenture are available for her to select in investing to this bond.

Required:

(a)What is the current market value for her holding bond?(2 marks)

60 x RM19 = RM1,140

The current market value for her holding bond is RM1,140.

(b)What is the maximum gain and loss on her holding bond if the required rate of return do not change? (8 marks)

(c)If she would like to purchase another 6 years corporate bond, which of the terms as mentioned above is desirable? How does each feature affect the required rate of return for the bond? (15 marks) [Total: 25 Marks]

Question 2

Depository financial institutions in Malaysia able to purchase the long term and risky financial assets from depositors, then, finance these purchased with short term and safe financial instruments.

Required:

(a)How could these financial institutions in Malaysia afford to conduct for the above process? (2 marks)

(b)What is the consequences if the whole process go wrong?(12 marks)

(c)How to determine the price of financial instruments that are currently trading in the financial markets? (2 marks)

(d)Which of the financial instruments are more risky when comparing the period of time and cash flow for the investment in Malaysia? Why?(9 marks)

[Total: 25 Marks]

.

Question 3

JC bank in Japan has committed to deliver yen in 3 months to MT Ltd in US, a corporate customer. The spot rate is 118 yen to the dollar and the 3 month forward rate is 106 yen per dollar. In recent years, there are an increasing trading dealing with foreign currency in JC bank.

Required:

(a)Are there costs to hedging this exposure with the forward market? Explain.(10 marks)

(b)Explain FIVE (5) reasons about the level of foreign currency trading has increased in JC bank? (15 marks)[Total: 25 Marks]

Question 4

Marine Company has obtained a substantial loans from financial institutions in Malaysia. The interest rate charges on these loans is based on market interest rates and shall be adjusted every two months by the financial institutions. Currently, Marine has a line of credit with AC bank for the purpose of short-term financing. Also, Marine is holding Treasury securities that it could sell them if it experiences any liquidity problems. If economy of Malaysia become strong, Marine could increase its sales revenue for about 40% over the next few years to satisfy market demand. It is concerned about a possible slowing of the Malaysia's economy because of potential Malaysia government's actions to reduce inflation. Marine needs funding to pay for its supplies. As such, Marine is considering issuing stock or bonds to increase funds in the coming years. Besides that, Marine could issue commercial paper because the prevailing commercial paper market rate is lower than the interest rate it need to pay when using a line of credit.

Required:

(a)Do you think that Marine should issue commercial paper at this prevailing market rate? Explain.(10 marks)

(b)Should Marine obtain funds to cover payments for suppliers by selling its holding of Treasury securities or by using a line of credit? Which alternative has a lower cost? Explain. (8 marks)

Compute the annualized discount rate and investment rate, if Marine is considering to purchase a 90-day Treasury bill for RM5,890 that pays RM6,000 at maturity?(7 marks)