IPM Practice – Question Bank

1. What do you mean by investment, briefly explain the difference between investment,
speculation and gambling.
2. Explain different investment avenues in brief.
3. Define a primary and secondary market for securities and discuss how they differ. Discuss
why the primary market is dependent on the secondary market.
4. Discuss the Capital Asset Pricing Model.
5. What do you mean by stock market, explain the characteristics of stock market.
6. A bond has a par value of Rs. 100 and carries a 10 percent per annum coupon payment. The
applicable discount rate is 8 percent and the maturity period is 6 years.
(A) Calculate value of bond
(B) Compute the duration of the bond
7. Calculate the value of a bond having a par value of Rs.1000, coupon rate of 12% and
maturity period of 8 years. The required yield is 10%.
8. A debenture holder is to receive an annual interest of Rs.100 for perpetuity on his debentures
of Rs.1000. Calculate the value of the debenture if the required rate of returns is (a) 10% (b)
15% and (c) 8%.
9. A bond has a par value of Rs.100 and carries a 9 percent per annum coupon payment. The
yield to maturity is 7 percent and the maturity period is 5 years. Compute the duration.
10. A bond has a par value of Rs. 1000 and carries a 9 percent per annum coupon payment. The
applicable discount rate is 12 percent and the maturity period is 7 years.
(A) Calculate value of bond
(B) Compute the duration of the bond
11. The current market price of a bond is Rs. 990 and face value is Rs. 1,000. This bond carries a
coupon rate of 12 percent and maturing after 6 years. What will be an approximate YTM?
12. The current market price of a bond is Rs. 1030 and face value is Rs. 1,000. This bond carries a
coupon rate of 12 percent and maturing after 8 years. What will be an approximate YTM?
13. Investors of XYZ were paid Rs. 5 as dividend per share last year and this dividend are expected
to grow indefinitely at 10% rate. What is the value of the equity if the investors require an
15% return as an opportunity cost?

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14. Investors of XYZ were paid Rs. 3 as dividend per share last year and this dividend are expected
to grow at a rate of 25% in first three years and will grow at a rate of 8% indefinitely. What is
the value of the equity if the investors require an 12% return as an opportunity cost?
15. Van products currently pays a dividend of Rs.2 per share and their dividends are expected to
grow at a 15% annual rate for 3 years then at a 12% rate for the next 3 years. After it is
expected to grow at 5% forever. What value would you place on the equity if the required
rate of return were 9%?
16. Considering the world economic outlook for the coming year and estimates of sales and
earnings for the pharmaceutical industry, you expect the rate of return for Merks Labs
common stock to range between –20 percent and 40 percent with the following probabilities:

Probability Possible Returns

0.1 -20
0.15 -5
0.2 10
0.25 15
0.2 20
0.1 40

Compute the expected rate of return for Merks Labs.

17. Stocks A and B display the following returns over the past few years.

Stock A Return Stock B Return

Years (%) (%)
2011 5 -10
2012 10 -5
2013 -15 25
2014 25 20

(A) What is the average returns?

(B) What is the standard deviation of each stock?
(C) What is the covariance of stocks A and B?
(D) Determine the correlation coefficient of stocks A and B
(E) What is the expected return and risk of a portfolio made up of 50 percent A and 50
percent B?

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18. The following are the monthly rates of return for Ralson Software Corp. and for Johnson
Electric during a six-month period.

Month Ralson Software Johnson Electric

1 -4 7
2 6 -2
3 -7 -10
4 12 15
5 -2 -6
6 5 2
Compute the following:

(A) Expected monthly rate of return for each stock

(B) Standard deviation of returns for each stock
(C) The covariance between the rates of return
(D) The correlation coefficient between the rates of return
19. The information about 2 securities A and B are as under:

Particulars A B
Expected Rate of return of security 12% 15%
Standard Deviation of security 20% 30%
Weightage in Portfolio 1 50% 50%
Weightage in portfolio 2 60% 40%
Correlation between securities 0.55
(A) Determine the return of portfolio 1 and 2.
(B) Determine the variance of portfolio 1 and 2.
20. State the formula for Capital Asset Pricing Model (CAPM). Assuming beta of 1.2, risk free
return of 6% and the expected market return of 12%, calculate the required return of an
investment under CAPM.
21. The risk-free rate (Rf) is 6.85% and the expected rate of return of market index (Rm) and
security A is 10% and 15% respectively. The market portfolio has a standard deviation of 15%.
security A has a correlation coefficient with the market of 0.60 and a variance of 18%.
According to the CAPM, what is the expected rate of return on security A?