CONFIDENTIAL ACIJUN 2019/MAF653 UNIVERSITI TEKNOLOGI MARA FINAL EXAMINATION COURSE : FINANCIAL MARKETS COURSE CODE MAF653 EXAMINATION JUNE 2019 TIME : 3HOURS INSTRUCTIONS TO CANDIDATES 1 This question paper consists of five (5) questions. 2 ‘Answer ALL questions in the Answer Booklet. Start each answer on a new page. 3 Do not bring any material into the examination room unless permission is given by the invigilator. 4, Please check to make sure that this examination pack consists of i) the Question Paper li) a two-page Appendix 4 (Present Value Table) lil) an Answer Booklet ~ provided by the Faculty 5. Answer ALL questions in English DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO This examination paper consists of 6 printed pages (© Hak Cipta Universiti Teknologi MARA CONFIDENTIALCONFIDENTIAL, 2 ACIJUN 2019/MAF653 QUESTION 1 A A stock price analyst has given Tatana Bhd a strong buying recommendation. Following the advice, an investor, Mr. Muhammad decides to invest in this stock and seeking your assistance. You find that Tatana Bhd's current earnings is RM2.50 per share, dividend payout ratio is 65% and the cost of equity is 18%. Earnings and dividends are expected to increase at 25% annual rate over the next 5 years. However, in the 6” year, the growth is declining to 10% annually for an indefinite period of time. Currently, the stock is selling at RM35 per share. Required: Calculate and comment on the value of Tatana Bhd's stock. (6 marks) At the end of year 2018, LLM Bhd's statement of financial position showed total assets of RM70 million, total liabilities of RM55 million and 5,000,000 ordinary shares outstanding, In the coming year, LLM Bhd estimates that it will have a net income of RM20 million and PE ratio for the company is 11.48 times. Required: i Based on the information given, determine the value of the LLM Bhd’s share. (4 marks) ii, Inthe recent department meeting, Mr. Loo, the Investor Relation Manager of LLM Bhd has mentioned that “earnings announcements made by LLM Bhd give significant impact on the stock prices of the company”, Do you agree with the statement and explain your arguments. (3 marks) As advice by his friend, Adam is considering investment in stock market. He is interested in Berjaya Tahan Bhd's stock which is currently selling at RM60 per share. The last dividend paid by the company was RM1.20 per share. He forecasts that the dividend is to grow consistently at 8% each year starting this year due to growth dividend potential. Required: i. Advice Adam whether he should invest in Berjaya Tahan Bhd's stock if the required rate of return of similar risk investment is 10 percent. (3 marks) ii. In financial markets, stock valuation is the method of calculating theoretical values of companies and their stocks. It is a necessary for the company to do the stock valuation. Discuss any two (2) reasons for the valuation of stock. (3 marks) (© Hak Cipta Universiti Toknolog! MARA CONFIDENTIAL,CONFIDENTIAL, 3 ACIJUN 2019/MAF653 ili, Propose any two (2) types of order that can be placed by an investor to his broker in order to achieve a certain profit target for a particular stock investment. (2 marks) (Total: 21 marks) QUESTION 2 A Forced conversion provides the issuers of the flexibility to retire a bond while giving bondholders the options of converting bond into common stock or redeem the convertible bond at a stipulated call price. Required: Identify two (2) circumstances that may result in forced conversion. (2 marks) ji, Explain two (2) benefits of callable bonds from the perspective of issuers. (2 marks) An investor holds a 10-year bond paying a coupon of 9 percent. In 2018, the yield to ‘maturity of the bond is 7.8 percent. However, in 2019 the yield to maturity rises to 10.5%, Required: Based on the information given, explain whether the investor is holding a par-value bond, premium bond, or discount bond in year 2018 and 2019. (No calculation is needed). (4 marks) Tixel Bhd has 8-year bonds outstanding. These bonds, which pay interest semi- annually, have a coupon rate of 9 percent and a yield to maturity of 8 percent. Face value and market price of the bonds is RM1,000 and RM1, 100 respectively. Required: i Calculate the maximum price of the bonds. (6 marks) ii, If the bonds can be called in five years at a premium of 13.5 percent over par value, calculate the investor's realized yield to maturity. (6 marks) In the money market, borrowers with high credit ratings issue highly liquid and short term financial instruments such as bankers’ acceptances, treasury bills, certificates of deposit, commercial paper and Eurodollars. Mr. Akram seeks your advice for the investment of his money in short-term financial instruments. (© Hak Cipta Universiti Teknologi MARA CONFIDENTIALCONFIDENTIAL, 4 ACIJUN 2019/MAF653 Required: Suggest any two (2) financial instruments that are traded in Malaysian money market. (3 marks) (Total: 22 marks) QUESTION 3 A Mr. Smurf views that the underlying fundamentals of Malaysian stocks is in a good condition. He holds some stock in the Malaysian financial market and intends to keep his position in the stocks. However, he is worried that the value of his portfolio would shrink due to volatility in the stock market. The value of portfolio of stocks is RM15 million and currently KLCI are traded at 1350 index. He seeks your advice on what is the best strategy he could adopt to protect his portfolio value. He also mentions that the futures price is higher than spot price with a basis of 50 points. Required: i, Explain a strategy that could help Mr. Smurf to protect his portfolio's value. (2 marks) ji, Calculate Mr. Smurf’s net worth if in the next 6 months, KLCI stands at 1250 and FBM KLCl is traded at 1230. (5 marks) Rajoo is a speculator, strongly feels that the FBMKLCI is about to enter a bearish period, however he holds no shares. Due to that, Rajoo decides to use stock index futures contracts to speculate. He then sells three November FBMKLCI futures contracts at the current market price of 1950 on 16 November 2019. The following day, the FBMKLC! goes down closing at 1930. On 18 November 2019, the price of futures contract moves up closing at 1940. On the next day, the market continues to moves up closing at 1960. Rajoo still maintains its position and leaves his position opens. On 20 November 2019, the FBMKLCI goes down and closing at 1920. The market continues to decline further on 21 November 2019 and Rajoo decides it is about time to take profits. Rajoo closes and cancels out its position on that day by buying three November FBMKLCI futures contracts at 1900. Required: i. Calculate the variation gain or loss for each day over the 5-day period, and determine the total profit or loss made on the speculative trade made by Rajoo. ( marks) il Analyse whether Rajoo has successfully in his speculative trade over the 6 days. (2 marks) (© Hak Cipta Universiti Teknologi MARA CONFIDENTIAL,CONFIDENTIAL 5 ACIJUN 2019/MAF653 The spot price of crude palm oil (CPO) now is RM2,290 per tonne. The annualized tisk free rate is 8%. While there is no yield from holding the CPO, there is a storage cost. Currently the storage cost is about RM150 per tonne per year. Futures contract on CPO is quoted as follows: 3 month futures: RM2,110 (90 days) Required: i Advice investors on the possibility of mispricing in the above futures contracts; 3 months futures. (4 marks) ii, Based on answer in (i) above explain the arbitrage strategy and evaluate the strategy whether it brings profit or loss if the investors took a position equivalent to 10 contracts. Assume the spot price of CPO on day 90 is RM2,450. (5 marks) iii, State two (2) situations that could result in non-zero basis at maturity. (2 marks) (Total: 25 marks) QUESTION 4 A Santosa Bhd bought Pasific October RM9 call option for RM2.50. The Pasific stock is currently sold at RM10.50. After a month, the Pasific stock is selling at RM11 while the market remains stagnant, Requi Determine the intrinsic value and time value of the option. (5 marks) On 31 July 2018, the KLCI index shows the value of 950, The trader, Mr. Ahmad buys a September KLCI put option at the exercise price of 950 at a premium of 20 points. Assume two weeks before expiry, the KLCI drops to 930. Required: i. Calculate the breakeven point and prepare a payoff diagram for the option. (3 marks) ii. Comment on finding in term of profit or loss if given time value for the option is worth 15 points. (3 marks) (© Hak Cipta Universiti Teknologl MARA CONFIDENTIAL,CONFIDENTIAL, 6 ACIJUN 2019/MAF653 C. Discuss on the concept of the bold phrases: i. When the long call is in the money, it looks like the long stock payoff diagram. Similarly, when the long put is in the money, it looks like short stock payoff diagram. This statement is related to the Synthetic Strategy. Interest rate swaps is one of the financial instruments that available in derivative markets in order to manage the risks exposed to both borrowers and lenders, (5 marks) D. Both Safari Berhad and Mariri Berhad have a RM20 million, 4-year loan with a bank These companies are also rated with the same credit ratings. Safari Berhad's is offered a fixed interest rate of 11.5% or floating interest rate of 3-month KLIBOR + 2.85%. However, they prefer a fixed interest rate. Meanwhile, Mariri Berhad has been offered a fixed interest rate of 11.5% or a floating interest rate of 3-month KLIBOR + 3%. Mariti Berhad however prefers a floating interest rate. Required: Design a fixed-for-floating swap. (No calculation is required). (4 marks) (Total: 20 marks) QUESTION 5 A. State three (3) differences between Islamic Finance and Conventional Finance. (3 marks) B. Gharar is one of the fundamental prohibited elements in Islamic finance. Explain briefly the meaning of Gharar by giving an example. (3 marks) Magasid al-Shariah as defined by Ibn ‘Ashur means “the deeper meanings and inner aspects of wisdom (hikam) considered by the Lawgiver in all most of the areas and circumstances of legislation.” Explain three (3) major categories of Magasid al- Shariah according to its inner strength. (3 marks) D. Proposed two (2) ways to overcome major challenges faced by Malaysian government in developing its Islamic Financial Markets. (3 marks) (Total: 12 marks) END OF QUESTION PAPER (© Hak Cipta Universiti Teknolog! MARA CONFIDENTIAL,Table A-1: Present Value of RM1 Due at the End of n Periods 4% YEVW IBojouyay nIsieAUN eIaID EHO “WLLNAGILINOD. Period 5% 6% _7% 8% __9% 10% 12% 14% ~—*15% ~—*16% ~—*18% —- 20% ~— 24% ~——-28% T9615 952494349346 -9259_—~«9174 9091 8929 8772 8606 8621 6475 8333 8065 7813 2 9246 9070 8900 8734 8573 8417-8264. 7972-7695 7561 7432 «7182 6944 6504 (6104. 3 8890-8638 8396-8163 7938 77227513 «7118 ©6750 6575 6407 6086-5787 5245 4768 4 854882277921 7629 7350-7084 6830 6355 5921-5718 ©5523 5158 4823-4230 3725 5 8219 7835-7473 7130 6806 6499 620956745194 4972-4761 «4371 «4019-3411. 2910 6 790374627050 6663 6302 59635645 5065 4556 432341043704 33492751 2074 7 7599 71076651 6227 583554705132 4523-3996 .3759 3638 «3139-2791 2218 1776 8 730767686274 5820 5403 5019-46685 4039-3506 3269 ©3050 2660 2326 «1789 1388 9 7026 6446-5919 5439-5002 4604 «4241 3606-3075 284326302255 «193814431084 10 6756 61395584 508346324224 3855-3220 2697 2472-2267 «1911-1615 1164 0847 114 6496 584752684751 42893875 3505-2875 236621491954 1619 1346 0938 0662 12.6246 55684970 44403071 3555 3186-2567 2076 «1869-1685 137211220757 0517 13 6006 53034688 41503677 3262 2897-2202 1821 1625-1452 -.1163 0935 0610 0404 14 877550514423 3878 3405-2902 2633-2046 «159714131252 0985 0779 0492 0316 15 855348104173 3624 315227452394 1827 1401-1229 «107908350649 «0307 +0247 16 633945813936 3387 291925192176 «1631 1229-1069 .0930 0708 + .0541 0320 0193 1761344363 .3714 316627032311 1978-1456 10780929 0802 06000451 0258 0150 18 493641553503 .2959 25022120 1799-1300 0946 08080891 05080376 0208 0118 19 4746 395733052765 «231719451635 .1161 082907030596. 043103130168 +0092 20 45643769 3118-2584 21451784 1486-1037 0728 «06110514 0365 02610135 0072 21 438835892042 2415-1987 1637-1351 09260638 0531 0443 0309 0217 0109 0056 22 © 42203418 2775-2257 1839-1502 122808260560 0462 0382 02620181 0088 0044 23° A057 «9256 2618-2109 170313781117 073804910402 .0329 | 0222 0151 0071 0034 24 390131012470 1971-1877 1264 10150659 043103490284 0188 0126 0057-0027 25 «3751-2953 2330 1842-1460 -1160 09230588 0378 0304 0245 0160 0105 0046 0021 “WILNAGIINOO (Wb XIQNaddv es94vW/6L0z NOTIOVTable A-2: Present Value of an Annuity of RM1 per period for n Periods Vv IBofouyar pIBienUN eIdID HEH O “WLLNaGIINOD Period 4% __5% _6% _7% __8% __9% 10% 12% 14% 15% 16% ‘18% ——-20% ~—-24% ~—-28% T 0.9615 0.9524 0.9434 0.9346 0.9259 09174 0.9097 0.8929 0.8772 0.8606 0.8621 0.8475 0.8333 0.8065 0.7813 2 1.8861 1.8594 1.8334 1.8080 1.7833 1.7591 1.7355 1.6901 1.6467 1.6257 1.6052 1.5656 1.5278 1.4568 1.3916 3 2.7751 2.7232 2.6730 26243 25771 2.5313 2.4869 24018 23216 2.2832 22459 2.1743 2.1065 1.9613 1.8684 4 3.6299 3.5460 3.4651 3.3872 3.3121 3.2397 3.1699 3.0373 2.9137 28550 2.7982 26901 2.5887 2.4043 22410 5 4.4518 4.3295 4.2124 4.1002 3.9927 3.8897 3.7908 36048 3.4331 3.3522 32743 3.1272 2.9906 27454 2.5320 6 5.2421 5.0757 4.9173 4.7665 4.6229 4.4859 4.9553 4.1114 3.8887 3.7845 3.6847 3.4976 3.3255 3.0205 2.7594 7 6.0021 5.7864 5.5824 5.3803 6.2064 5.0330 4.8684 4.5638 42883 4.1604 4.0386 3.8115 3.6046 3.2423 2.9370 8 6.7327 6.4632 6.2098 5.9713 5.7466 5.5348 5.3349 4.9676 4.6389 4.4873 4.3436 4.0776 3.8372 3.4212 3.0758 9 7.4353 7.1078 6.8017 6.5152 6.2469 5.9952 6.7590 5.3282 4.9464 47716 4.6065 4.3030 4.0310 3.5655 3.1842 10 8.1109 7.7217 7.3601 7.0236 6.7101 6.4177 6.1446 5.6502 52161 5.0188 4.8332 4.4941 41925 3.6819 3.2689 11 8.7605 8.3064 7.8869 7.4987 7.1300 6.8052 6.4951 5.9377 5.4527 5.2337 5.0286 4.6560 43271 3.7757 3.3351 12 9.3851 8.8633 8.3838 7.9427 7.6361 7.1607 6.8137 6.1944 5.6603 5.4206 5.1971 4.7932 4.4392 3.8514 3.3868, 13 9.9856 9.3936 8.8527 8.3577 7.9038 7.4869 7.1034 6.4235 5.8424 5.5831 5.3423 4.9095 4.5327 3.9124 3.4272 14 10.563 9.8986 9.2950 8.7455 8.2442 7.7862 7.3667 6.6282 6.0021 5.7245 5.4675 5.0081 46103 3.9616 3.4587 15 14.1184 10.38 9.7122 9.1078 8.5595 8.0607 7.6061 6.8109 6.1422 5.8474 5.5755 5.0916 46755 40013 3.4834 16 11.652 10.838 10.106 9.4466 8.8514 8.3126 7.6237 6.9740 6.2651 5.9542 5.6685 5.1624 4.7296 4.0333 3.5026 17 12.166 11.274 10.477 9.7632 9.1216 8.5436 8.0216 7.1196 6.3729 6.0472 5.7487 5.2223 4.746 4.0591 3.5177 18 12659 11.69 10.828 10.059 9.3719 8.7556 8.2014 7.2497 6.4674 6.1280 5.8178 5.2732 4.8122 4.0799 3.5294 19 13.134 12.085 11.158 10.336 9.6036 8.9501 8.3649 7.3658 6.5504 6.1982 5.8775 5.3162 48435 4.0967 3.5386 20 1359 12.462 11.47 10.5940 9.8181 9.1285 8.5136 7.4694 66231 6.2593 5.9288 5.3527 4.8696 4.1103 3.5458 21 14.029 12.821 11.764 10.836 10.017 9.2022 8.6487 7.5620 66870 6.3125 5.9731 5.3837 4.8913 4.1212 3.5514 22 14.451 13.1630 12.042 11.061 10.201 9.4424 8.715 7.6446 6.7429 6.3587 6.0113 5.4099 4.9094 4.1300 3.5558 23° 14.887 13.489 12.303 11.272 10.371 9.6802 8.8832 7.7184 67921 6.3088 6.0442 5.4321 4.9245 4.1371 3.5592 24 15.2470 13.799 12.55 11.469 10.529 9.7066 8.9847 7.7843 6.8351 6.4338 6.0726 5.4509 4.9371 4.1428 3.5619 25 18.622 14.094 12,783 11.654 10.675 9.8226 90770 7.8431 6.8729 6.3641 6.0971 5.4669 4.9476 4.1474 3.5640 ‘WILN3GIINOO. (2) + XIaNaddv es94V/6L0z NNTIOV