INVESTMENT MANAGEMENT AND CORPORATE FINANCE / M12-Q&A(1)

This examination is designed to test candidate’s knowledge and understanding of the financial issues relevant to the investment advisory and corporate finance services in the Malaysian capital market. It is one of the examinations to be passed by individuals who:
(a) Intend to apply for a Capital Markets Services Representative’s License (CMSRL) to carry on any of the following regulated activities:
(i) Advising on Corporate Finance;
(ii) Investment Advice; or
(b) Intend to be employees of registered persons who carry out the capital markets activities as stipulated in Items 2 and 3, Part 1 of Schedule 4 of the Capital Markets and Services Act 2007.

Candidates are advised to refer to the Licensing Handbook for detailed combination of examinations required for each regulated activity. Candidates are expected to possess good knowledge and understanding of the subject matter provided in this study outline and specified reference. In addition, candidates are expected to have relatively strong capability in the application and analysis of information in this study outline and its reference. It is estimated that this module will require a minimum of 120 hours of study time. Candidates may need less or more depending on the education background and work experience.

EXAMINATION SYLLABUS The syllabus for this examination is divided into 8 sections and the maximum composition of questions from each section is as follows:

Module 12 : Investment Management and Corporate Finance

 

No. of Questions: 60
Duration: 120 minutes
Pass Mark: 70%

The Securities Industry Development Corporation (SIDC) offers multiple choice question examinations for individuals wishing to undertake one or more regulated activities under the Capital Markets and Services Act 2007.

SAMPLE QUESTIONS AND ANSWERS

Example 1:
A secondary market is a market trades in assets that have been issued in the primary markets. For a secondary market to function properly, efficient supporting institutional infrastructure such as market-based benchmarks, efficient clearing and settlement systems, credit rating agencies and central information systems are required. In order to be efficient, a secondary market needs to provide ___________.
A. a liquid market for the assets traded
B. a good price discovery function
C. a source for diversifying and transferring investment risk, and goodwill for firms.
D. All of the above

Example 2:
Some main types of money market instruments traded as government bonds in Malaysia other than Malaysia Treasury bills are ___________.
A. Malaysian Government Securities
B. Bank Negara Monetary Notes
C. Government Investment Issues
D. All of the above

Example 3:
Generally, the Islamic Capital Markets (ICM) in Malaysia is governed by several Acts and the significant ones are as follows ____________.
I Capital Markets and Services Act 2007
II Securities Commission Act 1993
III Banking and Financial Institutions Act 1989
IV Islamic Banking Act 1983;
A. I and II
B. I, II and III
C. II, III and IV
D. I, II, III and IV

Example 4
The SC has also introduced several guidelines, not just to interpret the legislation, subsidiary legislations and rules relevant to the Islamic Capital Market (ICM), but also to signal the policy decisions that participants in the ICM must follow, such as __________.
I Guidelines on the Offering of Islamic Securities 2004 (ISG),
II Guidelines on Islamic Fund management 2007,
III Guidelines for Islamic Real Estate Investment Trusts (REITs) 2008, and
IV Guidelines and Best Practices on Islamic Venture Capital 2008.
A. I and II
B. I, II and III
c. II, III and IV
D. I, II, III and IV

Example 5
Bursa Malaysia has established an Islamic Markets division dedicated to the development of Shariah-compliant capital capital market products and services as well as trading platforms such as an Islamic Exchange Traded Funds (IETFs). Among others, the Islamic Capital Markets (ICM) products and service available in Bursa Malaysia are as follows EXCEPT:
A. Bursa Suq Al-Sila
B. Shariah-compliant stocks
C. Sukuk
D. Real Estate Investment Trusts (REITs)

Note: The answer is D. REITs is not necessarily Islamic unless it is stated or specified or classified as an Islamic REITs.

Details of the syllabus are as below:

Section 1

TOPIC 2: FUNDAMENTALS OF ECONOMICS
1. Economic Fundamentals
2. The Real Economy
3. The Public Sector
4. Monetary Policy
5. The International Sector
6. International Economics
7. Economic Analysis and Investment Strategy
8. Economic Indicators – Usefulness and Practicality for Market Participants

Fundamentals include the basic qualitative and quantitative information that contributes to the financial or economic well-being of a company, security, or currency, and their subsequent financial valuation. Where qualitative information includes elements that cannot be directly measured, such as management experience, quantitative analysis (QA) uses mathematics and statistics to understand the asset and predict its movements…Read more

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Key takeaways

Exercises:

1. In order to induce producers to supply more of a commodity, a higher commodity price must be paid because producers usually face:
A. decreasing production costs
B. economies of scale
C. increasing production costs
D. specialisation and division of labour in production

2. Which of the following is NOT part of the government sector to the economy?
A. Federal government
B. State government
C. Firms
D. Municipal government


Section 2

TOPIC 5: RISKS AND RETURNS
1. Present Value and Opportunity Cost of Capital
2. Capital Budgeting
3. Measurement of Risk
4. Measurement of Investment Returns

In investing, risk and return are highly correlated. Increased potential returns on investment usually go hand-in-hand with increased risk. Different types of risks include project-specific risk, industry-specific risk, competitive risk, international risk, and market risk. Return refers to either gains or losses made from trading a security. The return on an investment is expressed as a percentage and considered a random variable that takes any value within a given range. Several factors influence the type of returns that investors can expect from trading in the markets.

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Key takeaways

Exercises

1. Which one of the following statements is FALSE in relation to the computation of returns:
A. Portfolio return = ∑[(Weight of asset in portfolio) X (return on asset)]
B. Total returns = Net cash flows + Capital gains
C. Nominal returns = Real returns + Inflation rate
D. Coefficient of variation = returns per unit of risk

Question 2 to 5 will be based on the following information:
An investor bought two shares (share A and B) from the main board of Bursa Malaysia in 20X5. At the end of 20X9, the following information is available on these shares:

2. What is the realised average return on share B for the period 20X5 to 20X9?
A. 17.8%
B. 18.7%
C. 18.9%
D. 19.8%

3. What is the standard deviation of returns on share B?
A. 15.63%
B. 17.02%
C. 30.22%
D. 38.05%

4. What is the realised return of portfolio AB, if equal amounts are invested in each share?
A. 18.72%
B. 18.90%
C. 19.08%
D. 19.71%

5. What is the standard deviation of portfolio AB, if equal amounts are invested in each share, given the correlation of returns of A and B is 0.92?
A. 12.33%
B. 13.56%
C. 16.46%
D. 18.54%


Section 3

TOPIC 6: PORTFOLIO THEORY
1. Risk Aversion and Utility
2. Markowitz Portfolio Theory
3. Capital Asset Pricing Model
4. Arbitrage Pricing Theory

The Modern Portfolio Theory (MPT) refers to an investment theory that allows investors to assemble an asset portfolio that maximizes expected return for a given level of risk. The theory assumes that investors are risk-averse; for a given level of expected return, investors will always prefer the less risky portfolio.

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Exercises

Questions 1 and 2 are based on the following information:
Two investors, A and B are considering the purchase of a security with an expected return of 16% per annum and a variance of 40. A's level of risk aversion is -1 and B's level of risk aversion is 5.

1. Which of the following statements in relation to the risk averseness of investors A and B is TRUE?
A. A is more risk-averse than B
B. A and B has the same level of risk aversion
C. B is more risk-averse than A
D. None of the above

2. What is A and B’s level of utility?
A. U(A) = 15.0; U(B) = 16.2
B. U(A) = 16.2; U(B) = 15.0
C. U(A) = 18.6; U(B) = 5.1
D. U(A) = 12.5; U(B) = 8.2

3. The beta in CAPM measures:
A. The amount of systematic risk of a company
B. The sensitivity of market returns with its own series
C. The sensitivity of portfolio returns to the market returns
D. The sensitivity of one asset’s returns against another in a portfolio.

4. Which one of the following statements is FALSE about BETA?
A. It is a determinant of the investor’s required rate of return for a company.
B. It is used in the portfolio investment decision
C. Betas can be positive or negative
D. Historical betas are designed to capture fundamental change to the company.

5. Assume that a portfolio comprises the following securities: Compute the expected return of the portfolio (E(Rp)) variance of the portfolio (Varp).
A. E(R) – 13.5%, Varp = 4.38%
B. E(R) – 14.8%, Varp = 5.55%
C. E(R) – 14.4%, Varp = 5.94%
D. E(R) – 15.3%, Varp = 4.38%


Section 4

TOPIC 7: PORTFOLIO MANAGEMENT
1. Market Efficiency
2. Security Analysis
3. An Introduction to Portfolio Management
4. Evaluation of Investment Performance

Portfolio management by Dr Jake Xia

What Is Portfolio Management? Portfolio management is the art and science of selecting and overseeing a group of investments that meet the long-term financial objectives and risk tolerance of a client, a company, or an institution. Some individuals do their own investment portfolio management. That requires a basic understanding of the key elements of portfolio building and maintenance that make for success, including asset allocation, diversification, and rebalancing.

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What Is Portfolio Management?

Exercises

1. ___________ decomposes the performance results in order to determine the source of over-performance or under-performance of the portfolio manager.
A. Performance appraisal
B. Performance attribution analysis
C. Sensitivity analysis
D. Market analysis

Note: Portfolio performance evaluation is an essential aspect of the investment process that allows investors and portfolio managers to assess the effectiveness of their investment strategies. The main goal of performance evaluation is to determine whether the chosen investment strategy is achieving the desired risk and return objectives.

2. allocation of a portfolio’s fund according to the classes of asset is called:
A. performance measurement
B. performance evaluation
c. asset allocation
D. performance attribution.

3. The dollar-weighted rate of return measures;
A. the opportunity cost of forgoing consumption, given no inflation.
B. the risk-adjusted rate of return of a portfolio
C. the discount rate that equates all cash flows to or from the portfolio, including the ending market value, with the beginning market value of the portfolio.
D. the compounded rate of growth of the initial portfolio market value during the evaluation period.

4. _________ is a measure of market risk.
A. Beta – Beta (β) is a measure of the volatility—or systematic risk—of a security or portfolio compared to the market as a whole (usually the S&P 500). Stocks with betas higher than 1.0 can be interpreted as more volatile than the S&P 500. Beta is used in the capital asset pricing model (CAPM), which describes the relationship between systematic risk and expected return for assets (usually stocks). CAPM is widely used as a method for pricing risky securities and for generating estimates of the expected returns of assets, considering both the risk of those assets and the cost of capital.
B. Standard deviation – Standard deviation is a statistical measurement of how far a variable, such as an investment’s return, moves above or below its average (mean) return. An investment with high volatility is considered riskier than an investment with low volatility; the higher the standard deviation, the higher the risk. A traditional bell curve is a good way to visualize the concept of an investment’s returns over an extended period of time.
c. Alpha – Alpha (α) is a term used in investing to describe an investment strategy’s ability to beat the market, or its “edge.” Alpha is thus also often referred to as “excess return” or the “abnormal rate of return” in relation to a benchmark, when adjusted for risk. Alpha is often used in conjunction with beta (the Greek letter β), which measures the broad market’s overall volatility or risk, known as systematic market risk.
D. Gamma

5. An index that measures the excess return of a portfolio relative to the portfolio’s total risk using standard deviation is known as:
A. information ratio
B. Jensen Index
C. Treynor Index
D. Sharpe Index

Question 6 to 9 are based on the following information:

6. The expected rate of return of portfolio A is:
A. 11.42%
B. 11.66%
C. 12.01%
D. 12.62%

7. What is the rate of return of the benchmark portfolio?
A. 8.88%
B. 9.21%
C. 9.32%
D. 10.53%

8. What is the selection effect portfolio A?
A. -1.45%
B. 1.55%
C. 1.57%
D. 1.63%

9. The allocation effect a portfolio A is:
A. -0.93%
B. -0.65%
C. 0.88%
D. 0.93%

Question 10 to 12 are based on the following table:

10. The HENSEN ALPHA for portfolio Z is:
A. 2.20
B. 3.09
C. 3.34
D. 5.26

Note:
Alpha = R(i) – (R(f) + B x (R(m) – R(f)))
where:
R(i) = the realized return of the portfolio or investment
R(m) = the realized return of the appropriate market index
R(f) = the risk-free rate of return for the time period
B = the beta of the portfolio of investment with respect to the chosen market index

11. The TREYNOR INDEX for portfolio W is:
A. 6.6
B. 7.8
C. 8.6
D. 10.0

Note:
Treynor Ratio = (PR – PFR)/PB = (16 – 8)/0.8 = 10
where:
PR= Portfolio return
RFR= Risk free rate and
PB= Portfolio beta

12. which portfolio ranks the best under the Sharpe Index?
A. W
B. X
C. Y
D. Z


Section 5

TOPIC 9: DEBT FINANCING
1. Key Categories of Debt Financing services
2. Valuation of Bonds
3. Price Volatility
4. Convertible Bonds

Debt financing occurs when a company raises money by selling debt instruments, most commonly in the form of bank loans or bonds. Such a type of financing is often referred to as financial leverage.

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Key takeaways

Exercises:

1. ABC Ltd has a constant overdraft balance of RM100,000 up to 15 March 20X9. Subsequently, the company drew down an additional RM50,000 and the overdraft remains unchanged up to 1 April 20X9. At 7.5% per annum, what would be the interest accrued for the month of March in ABC Ltd’s account?
A. RM 318.49
B. RM 801.37
C. RM 832.19
D. RM 955.48

2. _________ is the periodic interest payment paid to the bondholder before and at the maturity of the bond.
A. Coupon payment
B. Yield
C. Nominal value
D. Capital gains

3. All things constant, the price and yield on a bond are:
A. not related
B. inversely related
C. positively related
D. constant

4. The number of shares for which each convertible bond can be exchanged is called:
A. conversion price
B. conversion ratio
C. conversion premium
D. market value

5. Which of the following statements is CORRECT about ZERO-COUPON BONDS?
A. Zero-coupon bonds provide periodic payments
B. Zero-coupon bonds are sold at a higher price relative to straight bonds.
C. Holders of zero-coupon bonds do not enjoy any capital gains as the price of the bond increase as it approaches maturity.
D. The price of a zero-coupon bond is the present value of the nominal value of maturity.

Use the following information to answer questions 6 and 7.
Consider two bonds, Bond A and B, with a nominal value of RM1,000 and a coupon rate of 6% per year. Both bonds have similar risk characteristics and differ only in their term to maturity. Bond A is term to maturity is 5 years while Bond B’s term to maturity is 10 years. The current yield is 6%.

6. If the yields increase by 2% points, the percentage price change of Bond A is:
A. -13.42%
B. -7.97%
C. 7.97%
D. 13.42%

7. If yields by 2% points, the percentage price change of Bond B is:
A. -13.33%
B. -7.99%
C. 7.99%
D. 13.33%

8. The duration of a bond is a function of the bond’s:
I time to maturity
II coupon rate
III yield
IV price of the bond

A. I and II
B. I and III only
C. I, II and III only
D. All of the above

9. The convexity of bonds is more important when interest rates are:
A. low
B. high
C. expected to change very little
D. less than the coupon rate on the bond

10. The number of shares for which each convertible bond can be exchanged is called:
A. yield to maturity
B. term to maturity
C. modified duration
D. convexity

11. A modified duration of a 8% coupon bond paying interest semi-annually with a duration of 4.5 years and a yield of 10% is:
A. 4.09
B. 4.25
C. 4.29
D. 4.35

Use the following information to answer questions 12 and 13

Sarah and Rani were debating on the direction of interest rates over the next 12 months. Sarah believes that interest rates are going to increase by as much as 2% over the next 12 months. Rani, on the other hand, expects interest rates to decline by around 2% over the next 12 months. With this in mind, consider the following information pertaining to the selected quality bonds:

12. Based on Sarah’s expectations on the direction of interest rates, which of the above bonds would you buy that would MAXIMISE your total earning return over the next 12 months?
A. A and B only
B. B and C only
C. C and D only
D. A only

13. If you concur with Rani’s expectations of interest rate movements in the the future, which of the bonds would you buy that would MAXIMISE your total return?
A. A and B only
B. A and C only
C. A and C only
D. D only


Section 6

TOPIC 10: EQUITY FINANCING
1. Types of Equity Financing
2. Valuation of Equity
3. Effects on Corporate Exercises

Equity financing refers to the sale of company shares in order to raise capital. Investors who purchase the shares are also purchasing ownership rights to the company. Equity financing can refer to the sale of all equity instruments, such as common stock, preferred shares, share warrants, etc.

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How to calculate equity financing

Exercises

Question 1 to 3 are based on the information given below:<br>Company ABC offers a right issue of RM1.60 on the basis of one rights share for every five shares held (one for five). The weighted average market price of the company's shares for the last five days is RM2.30.

1. What is the value of the right issue?
A. RM0.42
B. RM0.32
C. RM0.22
D. RM0.12

2. What is the theoritical ex-price for the right issue?
A. RM2.00
B. RM2.18
C. RM2.22
D. RM2.25

3. What is the discount being priced in the subscription price of the rights issue?
A. 26.7%
B. 20.7%
C. 30.7%
D. 19.7%

TOPIC 11: DIVIDEND POLICY
1. Definition of Dividend Policy
2. Dividend Theories
3. Dividend Policy Issues
4. The Dividend Policy
5. Other Forms of Dividend

A company’s dividend policy dictates the amount of dividends paid out by the company to its shareholders and the frequency with which the dividends are paid out. When a company makes a profit, they need to make a decision on what to do with it. They can either retain the profits in the company (retained earnings on the balance sheet), or they can distribute the money to shareholders in the form of dividends.

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Exercises

1. Which of the following statements is TRUE regarding dividend?
A. Based on the bird-in-hand argument, investors are different between dividends and capital gains.
B. If a company has established a clientele that prefers small dividends, the company is unlikely to adopt a residual dividend policy.
C. The signalling hypothesis is based on the concept that investors prefer current dividends over capital gains.
D. If a company follows a residual method for determining divided payouts, a sudden surge in investment opportunities will result in low dividend payouts for that year.

2. Company D wants to maintains a debt/equity ratio of 0.60 (37.5% debt and 62.5% equity). The company forecasts a net income of RM50,000 for this year. Assume Company D has a capital budget of RM60,000. How much should it pay out in dividends if it follows the residual method?
A. RM12,000
B. RM12,500
C. RM12,750
D. RM13,500

3. If the company follows the residual dividend policy and has an optimal capital budget that will use all of last year's earnings, the company should pay:
A. no dividends to shareholders
B. dividends but only out of past retained earnings
C. dividends financed by borrowing
D. share dividends

TOPIC 12: VALUATION
1. The Role of Valuation
2. What is Value?
3. Valuation Models, Approaches and Applications
4. Discounted Cash Flow Valuation
5. Dividend Discount Model
6. Relative Valuation
7. Asset-based Valuations
8. Discounts, Premiums and other Considerations
9. Alternative Valuation Models

Valuation refers to the process of determining the present value of a company, investment or an asset. There are a number of common valuation techniques, as described below. Analysts who want to place a value on an asset normally look at the prospective future earning potential of that company or asset.

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Factors Influencing a Business’s Valuation

Exercises

1. Firm X has a dividend payout ratio of 60%. Growth rate is expected to remain constant at 5% per annum for an indefinite period of time. The last reported earnings per share of firm X is RM3. Base on the required rate of return of 8%. what is firm X’s share price?
A. RM60
B. RM63
C. RM100
D. RM1005

2. The firm expects to pay out dividends of RM5 per share next year. The share price of the firm is RM55 per share. If the required of return is 12% and the firm expects to maintain a constant growth rate of the firm?
A. -2.90%
B. 2.80%
C. 2.90%
D. 3.10%

Questions 3 and 4 are based on the following:
Investor Y’ has just a large amount of money and is considering investing in a technology share recently listed on Bursa Malaysia, firm S. Firm S experts expects to pay out dividends next year. The dividend payout ratio is expected on to be 30%. the firm expects their earnings to grow at 20% per annum for the next year 3 years only to stabilize to 8% for an indefinite period of time. The firm recently announced that the firm had recorded an earnings per share of RM5 for the last financial year end. Investor Y’s required rate of return is 10% per annum.

3. Based on the above information, what is the price of the share of firm S?
A. RM101.11
B. RM110.56
C. RM121.11
D. RM145.34

4. Based on the above, if the current market price of firm S is RM105, what action should be taken by investor Y?
A. Buy the share
B. Hold on the cash and do not buy the share
C. Place has money in the fixed deposit that will pay him an annual interest of 3%.
D. Do not take any action


Section 7

TOPIC 13: OPTIONS
1. Definition and Concept of Options
2. Trading of Options
3. Option Payoffs
4. Option Strategies
5. Option Valuation
6. Options in Portfolio Management

An option is a derivative, a contract that gives the buyer the right, but not the obligation, to buy or sell the underlying asset by a certain date (expiration date) at a specified price (strike price). There are two types of options: calls and puts. American-style options can be exercised at any time prior to their expiration. European-style options can only be exercised on the expiration date.

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Key takeaways

Exercises

1. A European put option gives its holder the right to:
A. sell the underlying asset at the exercise price on or before the expiration date.
B. buy the underlying asset at the exercise price on or before the expiration date.
C. sell the underlying asset at the exercise price at the expiration date.
D. buy the underlying asset at the exercise price at the expiration sate.

2. In an option contract, the buyer has the __________ to conduct the transaction and the seller of the option has the _________ to deliver.
A. right and the obligation; obligation
B. right but not the obligation; obligation
C. right but not the obligation; right
D. the obligation; right

3. Which one of the following statements regarding options is inaccurate?
A. Options can be used to alter the risk and return characteristics of a portfolio.
B. If the put-call parity does not hold, arbitrage opportunities will be available.
C. A long straddle is usually used when the trader expects the markets to move but is unsure of its direction
D. The profit profile of a long underlying asset can be synthetically replicated by a long put and a short call

4. Which of the following statements in relation to delta is inaccurate?
A. The option delta of a call option is zero when the option is in the money before expiration date.
B. The delta of a put option is computed by taking the delta of a call option-1
C. For small changes in the price of the underlying asset, the delta is represented by N(d1) from the Black Scholes pricing model.
D. A delta of put option is close to-1 when the put option is deep in the money.

TOPIC 14: FUTURES
1. Definition and Concept of Futures
2. The Futures Market
3. Futures Pricing Review
4. Commodity Futures
5. Equity Futures
6. Interest Rate Futures
7. Bond Futures

A futures contract is an agreement to buy or sell an underlying asset at a later date for a predetermined price. It’s also known as a derivative because future contracts derive their value from an underlying asset. Investors may purchase the right to buy or sell the underlying asset at a later date for a predetermined price. By purchasing the right to buy, an investor expects to profit from an increase in the price of the underlying asset. By purchasing the right to sell, the investor expects to profit from a decrease in the price of the underlying asset.

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Key takeways

Exercises

1. it is September. Given that the current spot price of crude palm oil is RM960, if the cost of carry is 9%, what is the futures price of the December crude palm oil futures?
A. RM980.90
B. RM998.36
C. RM1,026.30
D. RM1,046.40

2. A finance manager of a large corporation was informed that the firm would require to borrow some funds in 3 months’ time. Current interest rates are based on the 3-month KLIBOR rate of 8% per annum. As the finance manager expects interest rates to increase during this period, he decides to lock in the current interest rates by:
A. buying KLIBOR futures contracts
B. selling KLIBOR futures contracts
C. buying bond futures contract
D. buying and selling corresponding KLIBOR futures contracts

3. Which one of the following statements about futures contract is NOT accurate?
A. Equity futures are futures contacts based on shares which are traded on Bursa Malaysia Derivatives.
B. The FBM KLCI futures are based on shares listed on Bursa Malaysia and are traded on Bursa Malaysia Derivatives.
C. The crude palm oil futures traded on Bursa Malaysia Derivatives are the only crude palm oil futures in the world.
D. KLIBOR futures have a principal amount of RM2 million and are traded on Bursa Malaysia Derivatives.

4. A portfolio manager currently holds a portfolio worth RM20 million. The portfolio returns closely match the returns on the FBM KLCI. The portfolio manager expects the market to experience a downtrend in the short to medium term and decides to hedge against this expectation. The FBM KLCI futures is currently trading at 1300 points. The portfolio manager has to ________ to fully hedge his position.
A. buy 153 FBM KLCI futures contracts
B. sell 307 FBM KLCI futures contracts
C. buy 307 FBM KLCI futures
contracts D. sell 153 FBM KLCI futures contracts

TOPIC 15: SWAPS AND INTEREST RATE OPTIONS
1. Definition and Concept of Swaps
2. Types of Swaps
3. Other Options on Debt Instruments and Interest Rates

A swaption, also known as a swap option, refers to an option to enter into an interest rate swap or some other type of swap. In exchange for an options premium, the buyer gains the right but not the obligation to enter into a specified swap agreement with the issuer on a specified future date...

Delving into the financial sector, we discover a plethora of tools that help players sail smoothly through the ever-changing tides of interest rates. Prominently, interest rate options emerge as both refined and tactical instruments. So, diving into the details, what’s an interest rate option? In essence, it’s a financial derivative granting the holder the privilege—though not the commitment—to either pay or receive a designated interest rate on a set principal for a given duration. Picture this as your safety harness against the erratic ebb and flow of interest rates; a protective layer for those on the frontline of volatile rate shifts. The significance of interest rate options in the financial realm is monumental. In a landscape where interest rates can pivot sharply due to central bank moves, geopolitical shifts, or data-driven economic revelations, these options rise as indispensable shields for banks, businesses, and savvy investors...

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Key takeaways

Exercises

1. A _________ of a swap agreement will receive floating rate interest payments.
A. floating rate payer
B. receive fixed party
C. fixed rate payer
D. swap counterparty

2. Which of the following statement about swaps are INACCURATE?
I swaps are highly flexible contract.
II swaps trade on both over-the-counter markets as well as organised exchanges.
III swaps carry default risk even though there is a clearing house that takes the other side of every transaction.
IV swaps can be interpreted as either a package of futures contracts or a package of cash market instruments.

A. I only
B. II and III
C. II and IV
D. I, II and III

Question 3 and 4 are based on the following information:
A bank entered into a swap agreement as a fixed rate payer with a notional principal amount of RM20 million. The swap agreement is for two years with semiannual settlement dates. the fixed rate is 8% while the the floating rate is 1% plus KLIBOR.

3. Assume KLOBOR fell to 6% at the first settlement date. What is the net cash flow to the bank at this time?
A. -RM100,000
 B. RM98,630
C. RM100,000
D. -RM98,630

4. Assume KLIBOR rose to 7.5% on the second settlement date. What is the net cash flow to the counterparty (floating rate payer) of the swap agreement at the second settlement date?
A. RM0
B. RM50,000
C. RM45,000
D. -RM50,000


Section 8

TOPIC 1: OVERVIEW OF THE INVESTMENT ENVIRONMENT
1. Introduction
2. Development of the Capital Market and Its Technology
3. The Malaysian Markets
4. Growth of Capital Market Products and Services in Malaysia
5. Regulatory Framework of the Malaysian Capital Market
6. Conclusion

When investors take a decision to invest in either stocks or bonds or attempt to make an investment in a portfolio of assets in any market or across markets (i.e. international investing), they make such decisions in an investment environment where higher (lower) returns are associated with higher (lower) risk. The term “Investment Environment” essentially includes all types of investment opportunities (i.e. varied financial and real assets), investment vehicles or alternatives in the market that are available to an investor, financial markets, investment process, market structure that enables purchasing and selling of investments, regulatory set up that fosters an enabling environment to invest, and market intermediaries. Investment environment relates to developments in the domestic and international economy, which have an impact (positive or negative) on asset (financial and real) prices or values of asset classes and related risk.

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Exercises

1. The following are the functions of a stock market, EXCEPT:
A. liquidity
B. goodwill
C. diversification
(d) hedging

Explanation
A. liquidity – means how quickly you can get your hands on your cash. In simpler terms, liquidity is to get your money whenever you need it. Description: Liquidity might be your emergency savings account or the cash lying with you that you can access in case of any unforeseen happening or any financial setback.
B. goodwill – is an intangible asset that is associated with the purchase of one company by another. It represents the value that can give the acquiring company a competitive advantage.
C. diversification – is a strategy that mixes a wide variety of investments within a portfolio in an attempt to reduce portfolio risk.
(d) HEDGING – is a strategy that seeks to limit risk exposures in financial assets. is therefore a trade that is made with the purpose of reducing the risk of adverse price movements in another asset. Normally, a hedge consists of taking the opposite position in a related security or in a derivative security based on the asset to be hedged.

2. Which of the following is an interest rate futures contract:
A. CPO Futures
B. SIF Futures
C. KLIBOR Futures – means, in respect of Malaysian Ringgit and for any specified period, the interest rate benchmark known as the Kuala Lumpur inter-bank offered rate.
D. KLCI Futures

3. The price discovery function of a well functioning secondary market relates to:
A. alternative source of financing
B. diversification
C. transfer of risk at a cost
D. LIQUIDITY – Liquidity refers to the efficiency or ease with which an asset or security can be converted into ready cash without affecting its market price. The most liquid asset of all is cash itself. Consequently, the availability of cash to make such conversions is the biggest influence on whether a market can move efficiently. The more liquid an asset is, the easier and more efficient it is to turn it back into cash. Less liquid assets take more time and may have a higher cost.

4. The Securities Commission (SC) is responsible for the administration and enforcement of the following acts, EXCEPT:
A. Securities Commission Act 1993.
B. Capital Market and Security Act 2007.
C. Companies Act 1965– The Companies Act 1965, is a Malaysian law which relates to companies.
D. Securities Industry (Central Depositories) Act 1991

5. All the following are the areas covered by the Capital Market and Services Act 2007 (CMSA), EXCEPT:
A. enhancing the standards of trustee for debenture holders
B. enhancing the SC’s power to take civil action and administrative actions.
C. private enforcement capacity of investors and disclosure.
D. extending investor protection provisions to clients of financial institutions.

TOPIC 3: STRATEGIC MANAGEMENT
1. Overview of Strategic Management
2. Linking Corporate Finance with Strategic Management
3. Shareholder Value The are no activities for this topic.

Strategic management in a business refers to the planning, management, utilization of resources to define and achieve objectives efficiently. It also includes a review of internal processes and external factors impacting the business. Formulating and implementing strategies allow a company to proceed with its action plan.
Why is strategic management important? Strategic planning and management give companies a competitive advantage and also help in the identification of possible opportunities. Furthermore, organizations gain insight into potential risks that could become roadblocks in the future.

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Exercises

5 Related questions to build strategy

1. What are our broad aspirations for our organization & the concrete goals against which we can measure our progress?
2. Across the potential field available to us, where will we choose to play and not play?
3. In our chosen place to play, how will we choose to win against the competitors there?
4. What capabilities are necessary to build and maintain to win in our chosen manner?
5. What management systems are necessary to operate to build and maintain the key capabilities?

TOPIC 4: FINANCIAL STATEMENT ANALYSIS AND PERFORMANCE MEASUREMENT
1. The Importance of Financial Statement Analysis
2. Financial Statement Analysis
3. Economic Value Added
4. Market Value Added

Financial statement analysis is the process of analyzing a company’s financial statements for decision-making purposes. External stakeholders use it to understand the overall health of an organization and to evaluate financial performance and business value. Internal constituents use it as a monitoring tool for managing the finances.
Financial performance measures a firm’s financial health based on assets, liabilities, revenue, expenses, equity, and profitability. It is a thorough analysis of company financial statements. Analysts examine a firm’s Income Statement, Cash Flow Statement, Balance Sheet, and Annual Report.

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Key Highlights

Exercises

Question 1 to 5 are based on the following information:

1. The current ratio for Company X in 20X8 was:
A. 0.09
B. 0.36
C. 0.57
D. 1.07

2. The average collection period for Company X in the year 20X9 was:
A. 8.8 days
B. 9.7 days
C. 38 days
D. 41 days

3. The equity turnover for Company X in the year 20X9 was:
A. 1.66
B. 2.67
C. 3.05
D. 3.20

4. The net profit margin of Company X in year 20X8 was:
A. 5.2%
B. 6.0%
C. 7.4%
D. 8.7%

5. The return on shareholders’ equity for the year 20X9 was:
A. -10.9%
B. -11.4%
C. -25.6%
D. -29.9%

6. Which one of the following statements is TRUE in relation to financial statement analysis?
A. Financial ratio analysis is useful as it allows companies operating in different countries with different accounting treatments to be directly comparable.
B. For a cash flow analysis, a company in the start-up phase will usually have a very low cash balance due to their high expenditure needs.
C. A horizontal analysis refers to a direct comparison of the financial statements of two or more companies at one period of time.
D. An analysis of financial statements is meaningful whether it is done in isolation in comparison to some pre-determined benchmark.

TOPIC 8: FINANCING DECISIONS
1. The Financing Decision
2. Capital Structure
3. Financial Decisions in a Perfect Market
4. The Stakeholder Theory

Financial decisions are the backbone of any organization’s success. The main aim and the key efficiency of the professional managers is the maximization of the financial worth/value of the company and its stakeholders. They have to increase profitability while maintaining sufficient liquidity for the company. And also to minimize the risk level of the company. It is their duty to set goals to achieve them, evaluate alternatives and choose the best possible course of action, effectively implement financial plans, continually revise, update and review those plans, and finally, where necessary, take corrective actions....

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Key Learning Points...


Exercises

1. Which of the following is a key determinant of operating leverage?
A. The company’s beta
B. Level and cost of debt
C. The competitive nature of the business
D. The trade-off between fixed and variable costs.

2. the company’s target capital structure should tend towards which one of the following?
A. Maximising risk
B. Minimising cost of equity
C. Maximising earning per share
D. Manimising weighted average cost of capital

Use the following information for questions 3 to 6.
Company Stud sells 10,000 units of its products at RM5 per unit. the company’s costs are RM8,000, interest expenses are RM2,000 and variable costs per unit is RM3,00.

3. What is Company Stud’s operating profits?
A. RM11,000
B. RM11,500
C. RM12,000
D. RM13,500

4. What is Company Stud’s degree of operating leverage?
A. 1.25
B. 1.50
C. 1.67
D. 1.75

5. What is Company Stud’s degree of financial leverage?
A. 1.00
B. 1.20
C. 1.33
D. 1.67

6. What is Company Stud’s degree of total leverage?
A. 1.25
B. 1.50
C. 1.75
D. 2.00

7. All of the following statements regarding the MM Theorem are TRUE, EXCEPT.
A. Under the MM Theoram with taxes, the company’s optimal capital structure is 100% debt.
B. Under the MM Theoram with taxes and bankruptcy cost, the value of the company will be maximised when WACC is maintained.
C. Under the MM Theoram with no taxes, the value of the company is dependent on the company’s capital structure.
D. Under the MM Theoram with taxes and bankruptcy costs, at a certain point, the WACC will increase with an increase in leverage.

TOPIC 16: CORPORATE RESTRUCTURING AND MERGERS AND ACQUISITIONS
1. Types of Corporate Restructuring Exercises
2. Mergers and Acquisitions
3. Divestitures
4. Leveraged Buyout
5. Capital Reduction and Consolidation
6. Recapitalisation
7. Liquidation and Winding-up
8. Schemes of Arrangement and Reconstruction
9. Motives and Determinants
10. Regulatory Framework
11. International Mergers and Acquisitions

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Exercises

1. Which fiction might affect the choice between cash or share consideration for acquisations?

A. Shareholding structure of the acquirer
B. Cash flow of acquiree company
C. Profit of the acquiree company
D. Composition of the Board of Directors

2. Which of the following statements is TRUE in relation to a spin-off?
A. Spin-off companies normally have the same management team as the parent company.
B. Spin-off provides the parent company with positive cash flows
C. Spin-offs is the same as equity carve-out
D. Spin-off companies have the same shareholders as their parent companies.

3. Which of the following statements DOES NOT describe an MBO?
A. An MBO is a form of LBO
B. The vendor of an MBO is the parent company needs cash
C. One of the reasons for an MBO is the parent company needs cash
D. MBO and LBO undergo the same process.

4. Additional factors to be considered by companies undertaking cross border M&As are stated below EXCEPT:
A. Foreign currency exposes
B. Political risk
C. Purchase consideration
D. Transfer pricing

5. Which one of the following statements is TRUE in a relation to section 176 scheme of arrangement?
A. A capital reduction will help to reduce or eliminate the accumulated losses of the company.
B. Creditors normally will obtain a restraining order under Section 176 of the Companies Act 1965 to prevent the management from undertaking a restructuring exercise which may jeopardise their interest.
C. In the scheme of arrangement, all the creditors of the company will be assured of receiving RM1 settlement for every RM1 owned by the company.
D. In a scheme of arrangement, the white knight refers to the party that buys the company’s assets.

Topic 17: Structured Products
1. What is a Structured Product?
2. Issuers of Structure Products in Malaysia
3. Uses and Benefits of Using
Structured Products
4. Components of a Structured Product
5. Features and Payout Structures of Structured Products
6. Risks of Investing in Structured Products

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Exercises

1. Structured investment products are tailored, or packaged, to meet certain financial goals of investors. Which of the following are motivations for investing in structured products?
I. Yield enhancement
II. Portfolio diversification
III. Seeking principal protection
IV. Hedging against volatility of
currencies

A. I, II and III only
B. I, III and IV only
C. II, II and IV only
D. All of the above

2. One of the principal attractions of structured products is the ability to customize a variety of features into one instrument. Which of the following statements are CORRECT?
I. Structured products are an investment vehicles that are linked to the performance of a basket of underlying references, such as equities, debts, commodities, indices, currencies, or any combination thereof.
II. Structured products are created mainly to meet the financial needs of individual investors.
III. Structured products may have a range of possible payouts
IV. Structured products with principal protection expose investors to the risk of the issuer.

A. I and II only
B. I, II and III only
C. I, III and IV only
D. None of the above

3. All of the following statements relating to structured products with principal protection are RELEVANT except?
A. There may be additional cost to the investor for securing the protection.
B. For investors of a protected product, there is still risk on principal repayment.
C. For a protected product, the strength of the protection is dependent upon the financial strength of the underlying reference.
D. The protection is subject to the financial strength of the issuer.

4. Which of the following describes the payout structure of a range actual structural product?
A. Payouts that are predetermined by the performance of more than one underlying reference.
B. Payouts that are fixed after the underlying reference price exceeds the strike price.
C. Payouts for situation where the price of the underlying reference stays within a certain range.
D. Payouts upon the occurrence of certain predetermined events.

5. Structured products may include a provision that allows for the issuer to retire all or part of issue before maturity. Investor of such structured product are said to be exposed to risk known as:
A. Market risk
B. Call risk
C. Credit risk
D. Mismatch risk 

Self-Assessment 2
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