Securities firms

    Q1. a) What are the key activity areas for securities firms? How does each activity area assist in the generation of profits and what are the major risks for each area? (15 marks) b) What extraordinary actions were taken by central banks and governments during the financial crisis? Explain why these actions were necessary. (10 marks) (Total: 25 marks) Q2. Observed the table below.   (a) How many shares could you buy for $5,000? What would be your annual dividend income for those shares? What must be General Dynamics’ earnings per share? What was the firm’s closing price on the day before listing? (8 marks) (b) Consider the three stocks in the following table. Pt represents price at time t, Qt represents shares outstanding at time t, stock C splits two for one in the last period. P0 Q0 P1 Q1 P2 Q2 A 90 100 95 100 95 100 B 50 200 45 200 45 200 C 100 200 110 200 55 400 Calculate the first-period rates of return on the following indexes of the three stocks via: (i) – A market-value-weighted index and (ii) – An equally weighted index. (8 marks) (c) What problems would confront a mutual fund trying to create an index tied to an equally weighted index of a broad stock market? (9 marks) (Total: 25 marks) Q3. Based on current dividend yields and expected capital gains, the expected rates of return: On portfolios A and B are 12% and 16%, respectively. The beta of A is .7, while that of B is 1.4. The T-bill rate is currently 5%, whereas the expected rate of return of the S&P 500 index is 13%. The standard deviation of portfolio A is 12% annually, that of B is 31%, and that of the S&P 500 index is 18%. a) If you currently hold a market-index portfolio, would you choose to add either of these portfolios to your holdings? Explain. (10 marks) b) If instead you could invest only in T-bills and one of these portfolios, which would you choose? (5 marks) c) XYZ’s stock price and dividend history are as follows:   • An investor buys three shares of XYZ at the beginning of 2016, buys another two shares at the beginning of 2017, sells one share at the beginning of 2018, and sells four remaining shares at the beginning of 2019. What are the arithmetic and geometric average time-weighted rates of return for the investor? What is the dollar weighted return?     Q4. (10 marks) (Total: 25 marks) a) Let us suppose that we purchase a 2-year, semi-annual bond at 100 par. The coupon rate is at 1.60% and the YTM is at 1.38%. Compute the duration for this bond and show your work. (10 marks) b) Using the duration calculated in part (a), what will the price of the bond be when YTM decreases by 0.14%? (5 marks) c) If a 4-year bond with an 8% annual coupon and a face value of $1,000, what is the fair value of this bond if the YTM is at 10%? Is this bond selling at premium, par or discount? Explain. (10 marks) (Total: 25 marks) Q5. a) You are now 30 years old and have just started working for a company that provides you with a defined-benefit pension plan. The pension scheme income that you will get when you retire is equal to 2% of your final-year salary, multiplied by the number of years in service. Your current salary is $40,000 (payable at the end of the year). It is growing at the rate of 1% per year (in real term). You will retire when you reach 65 years old. How much will your pension income be? (8 marks) b) You have just started working. Your employer offers you a defined benefit (DB) pension plan, under which your annual pension payment will be equal to 2% of your average salary during the final 3 years in employment multiplied by the number of years in service. Your current salary is $50,000 and it is expected to increase at 2% until you retire. You plan to retire in 30 years, what will your annual pension benefit be under this scheme? (8 marks) c) What are the main differences between unfunded (pay-as-you-go) and funded pension schemes? (9 marks)