Question 1

Samson purchased 95 corporate bonds maturing in 15 years at market price of $850 that carries a 7.5% coupon with $1,000 face value. These corporate bonds pay coupon semi-annually and offer an option for bondholders to exchange one corporate bond for 50 shares of common stock.

One year later, when the interest rate changed significantly, the price of these corporate bonds increased to $965 and its stock price was $15. Samson immediately used the total amount received from the sale of these corporate bonds to acquire shares of mutual fund at its net asset value of $12.5 per share directly from a licensed mutual fund sponsor. Shares of mutual fund are issued and redeemed by the licensed mutual fund sponsor at the request of investors.

a. Name and describe the type of the corporate bond.

b. State the direction of change in interest rate leading to the corporate bond price changed from $850 to $965 in a year. Briefly explain.

c. Is the mutual fund an open-end or closed-end fund? List any TWO reasons to invest in mutual fund.

d. Assuming there is no transaction fee, calculate the amount received from the sales of the corporate bonds and number of shares of this mutual fund purchased by Samson.

Question 2

Your friend, Jane has no knowledge on Hong Kong tax system. She calls you for some enquires about taxation in Hong Kong. Jane works as a part-time employee in a marketing firm located in Wanchai that pays a monthly salary of $9,000. She also receives monthly rental income of $10,000 and $5,000 from properties located in Shatin and Bangkok respectively.

a. Determine whether her income from employment and rental incomes from properties are subject to Hong Kong tax. Explain.

b. Based on the above information, advise the tax relief strategy to Jane. Discuss any TWO of its purposes.

Question 3

Danny was a self-employed construction worker. In an accident, he fell from the roof of a building and injured seriously while working in a construction site. He stayed 45 days in a hospital for medical treatment, after which he stayed at home for another 60 days until full recovery to perform his job duties. During his 45-day hospital stay, he incurred the following expenses: room and board charges at $1,000 per day; surgeon fee of $80,000; physician fee of $20,000 and miscellaneous expenses of $8,000. Danny has a health insurance policy that has a $4,000 deductible and an 80-20 coinsurance clause. The policy provides disability income benefit of $500 per day with no waiting period. Danny wants to know more about life insurance policies for his wife and 3-year old son. He looks for a policy that provides flexibility in adjusting premiums and death benefits.

a. What are health insurance and disability income benefit?

b. Explain the policy provision related to deductible in the health insurance policy.

c. Calculate the TOTAL amount that insurance company will pay for the accident from BOTH health insurance policy and disability income benefit. Show your workings.

d. What is the type of life insurance policy that Danny should purchase? Explain your answer.

e. If Danny is totally disabled for a specified length of time, his life insurance premiums can be waived. Name this rider added in Dannys life insurance policy.

Question 4

Citi-food recently reported net profits after taxes of $17 million. It has 2.5 million shares of common stock outstanding. The companys stock currently trades at $60 per share.

a. Compute the stocks earning per share (EPS) and price-earnings (P/E) ratio. Show your workings.

b. Provided that beta for the stock market in general is 1.0 and the beta for Citi-food is 0.8. What is the expected change in value for the Citi-food stock if the stock market decreases in value by 10 percent?

c. Five years ago, Ben purchased 500 shares of Citi-food. At that time, each share of Citi-food was selling for $55. He also paid $100 commission when the shares were purchase. Now, five years later, he has decided its time to sell his investment. Citi-foods share price when sold is current price of $60. In addition, he paid a $100 commission to sell his shares. He also received total dividends of $2 per share over the five-year investment period. Calculate the total return and annualized holding yield for Bens investment. Show your workings.