Q.1    Please compute your answer and write the alphabate of selected choice in the
          answer column:                                                                                                                 (25)                                                                                                                                                  (Answer)

i	A Rs.10,000 par value T-bill is sold at Rs.9,600 with a maturity of 182 days. The effective annual yield on the T-bill is: A) 8.34%    B) 4.17%     C) 7.91%     D) 8.51%     E) None of the above
ii	Suppose the margin requirement is 60 percent. You want to buy stocks worth Rs.10,000 (100 shares at Rs.100 per share). If the maintenance margin requirement were 40 percent, how far could the price of the stock price fall before the investor would get a margin call? A) Rs.60    B) Rs.66.67     C) Rs.80     D) Rs.40     E) None of the above
iii	An investor’s portfolio is currently worth Rs.1 million. During the year, the investor sells 1,000 shares of Union Bank at a price of Rs.80 per share and 2,000 shares of Maple Leaf Cement at Rs.40 per share. The proceeds are used to buy 1000 shares of OGDC at Rs.160 per share. His portfolio turnover ratio was: A) 32%       B) 8%        C) 16%        D) 24%         E) None of the above
iv	Progressive Bank’s current stock price is Rs.36, and its last dividend was Rs.2.40 per share. In view of Progressive’s strong financial position and low risk, its required rate of return is only 12 percent. If dividends are expected to grow at a constant rate, ‘g’, in the future and if the required rate of return is expected to remain at 12 percent, what is Progressive’s expected stock price 5 years from now? A) Rs.50.75           B) Rs.60.50                   C) Rs.45.95 D) Rs.43.00           E) None of the above
v	XYZ Co. has currently 900,000 shares outstanding at current market price of Rs.130 per share. The Company decides to issue 300,000 right shares to finance its proposed BMR plan costing Rs.22.5 million. The subscription price for rights shares has been fixed at Rs.75 per share. The value of a right is: A) Rs.25                B) Rs.18.33                      C) Rs.43.33 D) Rs.13.75           E) None of the above
vi	The six-month T-bill spot rate is 4%, and the one-year T-bill spot rate is 5%. The implied six-month forward rate for six months from now is: A) 3%       B) 4.5%      C) 5.5%       D) 6%        E) None of the above
vii	You can legally delay payment of Rs.5,000 tax for four years. If you can earn 10 percent return on your investment in a bond, how much would you save in terms of today if decide to delay the payment of tax and invest in the bond: A) Rs.2,320.50             B) Rs.1,583.93                C) Rs.2,000 D) Rs.1,366.03             E) None of the above
viii	The risk free rate is 8% and the expected return on the market portfolio is 16%. A firm is considering an investment that is expected to have a beta of 1.3. What is the expected rate of return of the investment: A) 12%               B) 15.6%                           C) 18.4% D) 20.6%            E) None of the above
ix	The exercise price on a company’s option is Rs.15, its exercise value is Rs.22, and its premium is Rs.5. What is the current price of the stock? A) Rs.20               B) Rs.37                             C) Rs.12 D) Rs.27               E) None of the above
x	A three year discount (zero-coupon) bond is sold at 70% of its face value. What is the yield on the bond? A) 10%                  B) 42.86%                         C) 14.29% D) 12.62%             E) None of the above

Q.2    Please write the alphabate of selected choice in the answer column:                          (10)

                                                                                                                                               (Answer)

i	The value of a stock is primarily determined by which of the following? of return is expected to remain at 12 percent, what is Progressive’s expected stock price 5 years from now? A) Risk adjusted discount rate            B) Expected growth rate C) EPS                                              D) All of the above
ii	Which of the following statements is correct? A) If the market value of a company’s physical assets is below the value      of its total common stock outstanding, the stock is over valued. B) If a stock’s P/E ratio exceeds the industry average P/E ratio,      the stock is over valued. C) Stocks issued by rapidly growing companies usually have       higher than average P/E ratios. D) If a stock’s price exceeds its value, it is a good investment
iii	Which of the following statements is correct? A) Because short term interest rates are easy to forecast, the prices of      short term bonds fluctuate more than the prices of short term bonds. B) No matter what the future interest rates are, the price of long term      bonds are bound to fluctuate more than the short term bonds. C) The prices of both short term bonds and long term bonds remain      constant irrespective of interest rate movements. D) The yield to maturity of a bond is equal to its coupon interest rate.
iv	Which of the following statements describes a wash sale? A) There is no sale at all. B) Transactions performed merely to establish the record of a sale. C) It may be done to establish a tax loss. D) All of the above are true.
v	Which of the following statements is true? A) The premium of the call option is inversely related to the stock price. B) The premium of the call option does not depend on the volatility     of the underlying stock. C) The striking price is inversely related to the premium of call option. D) All of the above are true.
vi	An increase in the volatility of the underlying stock might result in which one of the following? A) A simultaneous increase in the premiums of both the call options      and the put options on the stock. B) An increase in the put option premium and a decrease in the call premium. C) An increase in the call option premium and a decrease in the      put option premium. D) None of the above.
vii	When do the losses from default risk occur? A) Before the default occurs.              B) After the default occurs. C) Concurrently with the default.        D) All of the above.
viii	The income of a collective investment scheme is exempt from income tax if it distributes? A) At least 90 percent of its total income including the realized capital gains. B) At least 90 percent of its total income excluding the realized capital gains. C) At least 75 percent of its total income including the realized capital gains. D) None of the above.
ix	Which statement about portfolio diversification is correct? A) Proper diversification can reduce or eliminate systematic risk. B) Diversification reduces the portfolio’s expected return because it      reduces a portfolio’s total risk. C) As more securities are added to a portfolio, total risk typically      would be expected to fall at a decreasing rate. D) The risk—reducing benefits of diversification do not occur meaningfully      unless at least 30 individual securities are included in the portfolio.
x	The portfolio diversification is most effective if the assets in the portfolio are: A) Perfectly positively correlated.         B) Perfectly negatively correlated. C) Selected from across industries.       D) Have no correlation at all.

Q.3    Fill in the blanks:                                                                                                           (15)

i	The current limit (November 2006) for CFS in Karachi Stock Exchange is Rs.____ billion.
ii	REIT stands for ________________________.
iii	A zero risk, zero-net investment strategy that still generates profits is called ___________.
iv	The maximum price at which a bur is willing to purchase a security is called ___________.
v	A money market instrument consisting of an order to a bank to pay a sum of money at a future date is known as _________________________________.
vi	A ___________ is a standard agreement calling for future delivery of an asset at an agreed-upon price.
vii	____________ is a method to manage interest rate risk where parties trade the cash flows corresponding to different securities without actually exchanging securities directly.
viii	The beta of Karachi Stock exchange is _____________________.
ix	______ is the price level below which it is supposedly difficult for a stock or index to fall.
x	When it is not profitable to exercise an option, it said to be ___________________.
xi	Beta is the variability of returns of a security with respect to the variability of returns of __.
xii	The minimum paid-up capital required to from an Investment Bank is Rs.________.
xiii	Total number of securities listed on Karachi Stock Exchange is ___________.
xiv	A company is put on the defaulters’ list if it fails to pay dividends for a continuous period of ____________ years.
xv	Trading of a security on the stock exchange before the IPO date is called ____________.

Q.4    Since the investors in equity securities are primarily interested in dividend yield and capital gains, the variation in interest rate does not affect the stock prices. Comment. (05)

Q.5     Define Collective Investment Schemes (CIS). What are the two major types of CIS? List down their salient features and advantages and disadvantages. What factors in your opinion have hindered the development of mutual funds industry in Pakistan in the past? (15)

Q.6      What is CFS? How far is different from COT (give a comparison)? Also compare it with the proposed CFS MKTII. (15)

Q.7 A)    The yield to maturity on two 10-year Rs.1,000 bonds currently is 7%. Each bond has a call price of Rs.1,100. One bond has a coupon rate of 6%, the other bond has 8%. Assume that the bonds are called as soon as the present value of their remaining payments exceeds their call price. What will be capital gain on each bond if the market interest rate suddenly falls to 6%? (10)

Q.7 B)    A 20-year maturity 9% coupon bond paying coupons semiannually is callable in five years at a call price of Rs.1,050. The bond currently sells at yield to maturity of 8%. What is the bond’s yield to call? (05)