LUBS5001M Security Investment Analysis Semester One 2021/2022
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LUBS5001M
Security Investment Analysis
Semester One 2021/2022
Question 1
(a) Explain and discuss the role of underwriters in the IPO process.
(20 marks)
(b) Explain and discuss five major trading activities by investment banks.
(30 marks)
(c) An investor buys 1000 stock shares selling at £70 per share using a margin of 60%. The stock pays an annual dividend of £2 per share. A margin loan can be obtained at an annual interest cost of 5%. Determine the return on invested capital the investor will realise if the price of the stock increases to £73 within three months. What is the annualised rate of return on this transaction?
(30 marks)
(d) Explain and discuss two major ways to directly invest in foreign securities.
(20 marks) Total 100 marks
Question 2
(a) Explain and discuss the purpose of technical analysis. Explain how and why it is used by investors and how it can be helpful in timing investment decisions.
(30 marks)
(b) Listed below are data that pertain to the corporate bond market. (Each “period” below covers a span of 6 months.)
|
Period 1 |
Period 2 |
Period 3 |
Period 4 |
|
|
Yield on high-grade bonds Average bond yield |
5.60% 6.60% |
5.70% 7.15% |
5.20% 6.10% |
4.55% 4.80% |
Compute the confidence index for each of the four periods listed above.
Based on your calculations, what is happening to bond yield spreads
and the confidence index over the period of time covered in the question.
Based on your calculations, what would be your overall assessment of
the stock market? In which one(s) of the periods is the confidence index bullish? In which one(s) is it bearish?
(40 marks)
(c) Calculate the Trading Index or TRIN if on a given day, 200 of the S&P 500 stocks are up, and 300 are down, and the volume for up stocks is 500 million, volume for down stocks is 700 million.
(20 marks) Total 100 marks
Question 3
(a) Edward is an aggressive bond trader who likes to speculate on interest rate swings. Market interest rates are currently at 9%, but he expects them to fall to 7% within a year. Edward is thinking about buying either a 25 year zero coupon bond or a 20 year 7.5% bond with annual coupon payments (both bonds have $1000 par values and carry the same agency rating). Assuming that Edward wants to maximise the total return during the next 12 months, which of the two issues should he select? Based on the duration of each bond, which one should be more price volatile? Explain why.
(50 marks)
(b) Explain two types of bond swap investment strategies for bonds. Discuss why investors might choose bond swap investment strategies in bond trading.
(20 marks)
(c) Explain which one of the following bonds would you select if you thought market interest rates were going to fall by 50 basis points over the next six months:
A bond with a Macaulay duration of 8.46 years that is currently being priced
to yield 7.5%.
A bond with a Macaulay duration of 9.30 years that is currently being priced
to yield 10%.
A bond with a Macaulay duration of 8.75 years that is currently being priced
to yield 5.75%.
(30 marks) Total 100 marks
2022-07-25