What is meant by utility;
Outline the key issues to be considered when forming a long-term investment strategy for a charitable trust. [5] (1) Define a generalised formula for a total return index suitable for property performance measurement purposes, stating any assumptions you would need to make. [2] (ii) Outline the problems in constructing such an index for quarterly publication. [4] [Total 6] Over the last five years, a general industrial company has restructured itself, principally through acquisition into an information technology and communication services company. The company has borrowed heavily to support its activities. Due to a recession in the market, the company is struggling to cover its debt repayments and also needs further capital to complete research into a new component that the management believes will generate 60% of revenues over the next 10 years. The company has recently appointed a debt management consultant who has approached the bank with a proposal to swap its loans to the company for equity- (i) Set out the principal characteristics of this company. (4] (ii) Outline the factors that will affect the bank's preference for debt or equity investment in the company stating any further information you would require in order that a decision may be made. [8] [Total 12] (1) Define "rack rent" and "marriage value". [2] List reasons why the rack rent might be higher than the rent currently being received. (2] Describe a situation where a tenant may have no option but to pay a rent higher than the rack rent. [215 List the problems that may be encountered with overseas investments. (5] 6 (D) State reasons why an individual might be attracted to collective investment vehicles or policies, rather than direct holdings. (3] List the key differences between an investment trust and a unit trust. (4] (iii) Explain why an investment trust would typically have a more volatile share price than the offer price of a unit trust. (4] [Total 1 1] 7 An investment bank is pricing a 15 year swap using its internal cost of capital of 8% per annum. In return for a swap premium, the bank will pay its client the excess interest payable on a variable rate loan of LIBOR + 100bps above a fixed rate loan of 5.5% (the client will pay the bank in the event of the fixed rate loan giving rise to higher payments than the variable rate loan). These payments are made at the end of each quarter. The capital payment under the client's loan is not covered by the swap arrangement. (i) Assume LIBOR is initially 4%, and remains at this level for the first 7 years of the term, and is 6% thereafter. Calculate the present value of the cashflows covered by the swap based on a principal sum of f10 million. [6] (ii) Explain why in practice the bank will charge more than the present value calculated in (i) above. (5]
