Question One

a)A portfolio manager has these two bonds in his portfolio.

Bond A: Coupon 10% (paid semi-annually) time to maturity 18 years, YTM 10%.

Bond B: coupon 10.25% (paid semi-annually) time to maturity 18.5 years, YTM 10.2%.

The historical analysis shows that the difference between the prices of the two bonds has never been more than 10 basis points. The manager believes that within the next six months to the nearest coupon payment the observed anomaly will be eliminated.

Required:

a) Determine the expected profit from the bond switch.

b)Discuss the role of investment companies in economic growth, savings and the investment process.

c)Outline the advantages of investing in the international arena.

Question Two

a)Explain any four concepts that economist have relied on in explaining the exchange rate theory.

b)Using a suitable illustration, explain the differences between systematic and unsystematic risk.

Question Three

a)A client can invest either in the short-term or the long-term market depending on the expected profitability and risk. Enumerate on the main types of short-term financial investment vehicles.

b)Bonds with durations 4,9,11 and 14 years respectively are available for immunization purposes. Indicate how the investment managers can create:

i.A focused (bullet) portfolio

ii.A barbell portfolio from the same

c)Securities are analyzed and managed using the broad two step process security analysis and portfolio management. Describe the categories the two-step process is broken down into.

Question Four

a)A treasury manager can borrow for three months at 10.15% and make a three month loan at 10.25. Regulation requires that a one million borrowing has be supported by sh. 25000 of capital. Show the profit to be derived when he invests in the following ways:

i.Passive portfolio

ii.Positive gapping (interest rates will increase by 1% after 1 month)

iii.Negative gapping (interest rates will fall by 1% after 1 month).

b)Insurance companies in Kenya have increasingly registered and operated mutual funds. Outline how a mutual fund can be beneficial to an investor.

Question Five

a)Using suitable examples, explain the different model definitions that a client on can adoptwhen purchasing securities.

b)Explain the ways in which an investment manager uses fundamental analysis and technical analysis to advise a client.