FIN3003
Lecture 7
Managing Bond Portfolios
(Chapter 11)
1
Bond Pricing (semiannual payments)
P
T
t 1
Coupon
t
(1 y / 2)
Par
T
(1 y / 2)
1 [1 /(1 y / 2) T ]
Coupon
y/2
Par
T
(1 y / 2)
T = number of periods to maturity
y = yield to maturity
2
Price of 8% co

FIN3003 Assignment 5
Requirement: Dont provide answers alone without showing your work.
Consider the following options portfolio: You write a January 2012 expiration call option
on IBM with exercise price $170. You also write a January expiration IBM put

FIN3003 Assignment 5
Suggested Answers
a.
Position
ST<165
165 ST170
ST>170
Short call
0
0
(ST 170)
Short put
(165 ST)
0
0
ST 165
0
170 ST
Total
Payoff
165
170
Write put
ST
Write call
b. Proceeds from writing options (from Figure 15.1):
Call
= $8.93
Put

FIN3003 Assignment 4
Requirement: Dont provide answers alone without showing your work.
1. A 6% coupon bond paying interest annually has a modified duration of 10 years, sells
for $800, and is priced at a yield to maturity of 8%. If the YTM increases to 9

FIN3003 Assignment 1
Requirement: Dont provide answers alone without showing your work.
1. You manage an equity fund with an expected risk premium of 14% and a standard
deviation of 54%. The rate on Treasury bills is 6.8%. Your client chooses to invest
$1

FIN3003 Assignment 2
Requirement: Dont provide answers alone without showing your work.
Suppose that many stocks are traded in the market and that it is possible to borrow at
the risk-free rate, rf. The characteristics of two of the stocks are as follows:

FIN3003 Assignment 3
Requirement: Dont provide answers alone without showing your work.
For Problems below, assume the risk-free rate is 4% and the expected rate of return on
the market is 15%.
1. A share of stock is now selling for $70. It will pay a div

FIN3003 Assignment 2
Suggested Answers
14. Since Stock A and Stock B are perfectly negatively correlated, a risk-free
portfolio can be created and the rate of return for this portfolio in equilibrium will
always be the risk-free rate. To find the proporti

FIN3003 Assignment 3
Suggested Answers
21. Since the stock's beta is equal to 1.0, its expected rate of return should be equal to
that of the market, that is, 15%.
E(r) =
D P1 P0
P0
0.15 =
8 P 70
1
P1 = $72.5
70
22. If beta is zero, the cash flow should b

1. The 1% VaR will be less than 30%. As percentile or probability of a return declines so
does the magnitude of that return. Thus, a 1 percentile probability will produce a
smaller VaR than a 5 percentile probability.
1
X(1+0.12) =
2
3
4
5

FIN3003 Lecture 9
Suggested Answers for Supplementary Exercises
5.
a. The required margin is 1,164.50 $250 .12 = $34,935.00
b. Total Return = (1,210 1,164.50) $250 = $11,375
Percentage Return = $11,375/$34,935.00 = .3256 = 32.56%
c. Total Loss = [1,164.50

FIN3003 Lecture 6
Suggested Answers for Supplementary Exercises
3. a. False. According to CAPM, when beta is zero, the excess return should be zero.
b. False. CAPM implies that the investor will only require risk premium for systematic
risk. Investors are

FIN3003 Lecture 5
Suggested Answers for Supplementary Exercises
1. So long as the correlation coefficient is below 1.0, the portfolio will benefit from
diversification because returns on component securities will not move in perfect
lockstep. The portfoli

FIN3003 Lecture 3
Suggested Answers for Supplementary Exercises
12.
a. In principle, potential losses are unbounded, growing directly with
increases in the price of IBM.
b. If the price of IBM shares goes above $178, then the stop-buy order would
be execu

FIN3003 Lecture 2
Suggested Answers for Supplementary Exercises
14.
After-tax yield = Rate on the taxable bond x (1 Tax rate)
a. The taxable bond. With a zero tax bracket, the after-tax yield for the taxable
bond is the same as the before-tax yield (5%),

FIN3003 Lecture 1
Suggested Answers for Supplementary Exercises
3. Asset allocation is the allocation of an investment portfolio across broad asset classes.
Security selection is the choice of specific securities within each asset class.
9.
a. The bank lo

FIN3003
Lecture 4
Risk and Return: Past and prologue
(Chapter 5)
1
Nominal and Real Rates of Return
Nominal return: Growth rate of your
money
Real return: Growth rate of your
purchasing power
Let r = nominal return, R = real return
and i = inflation rate.

FIN3003
Lecture 3
Securities Markets
(Chapter 3)
1
Primary versus Secondary Markets
Primary Market
Firms issue new securities through
underwriter to public
Investors get new securities; firm gets
funding
Secondary Market
Investors trade previously issued

FIN3003
Lecture 6
Capital Asset Pricing Model - CAPM
(Chapter 7)
1
Capital Asset Pricing Model (CAPM)
The equilibrium model that underlies all
modern financial theory
Gives a precise prediction of the
relationship that we should observe
between the risk o

FIN3003
Lecture 8
Options: Introduction
(Chapter 15)
1
The Option Contract: Calls
A call option gives its holder the right to
buy an asset:
At the exercise or strike price
On or before the expiration date
Exercise the option to buy the underlying
asset if

APPENDICES
A
Quantitative Review
B
References to CFA Questions
C
Glossary
A
P
P
E
N
D
I
X
A
QUANTITATIVE REVIEW
Students in management and investment courses typically come from a
variety of backgrounds. Some, who have had strong quantitative training,
ma

FIN3003
Lecture 9
Futures: Introduction
(Chapter 17)
1
2
The Basics of Futures Contracts
Futures price - agreed-upon price at maturity
Long position - agree to purchase the asset
Short position - agree to sell the asset
At maturity,
Profit to Long positio

Hang Seng Management College
FIN3003: Principles of Investments (2014-2)
Instructor: Johnny Kwok PhD
Email: johnnykwok@hsmc.edu.hk
Office: D722, Block D
I. Module Description
This module provides you with a basic understanding of financial instruments, in

FIN3003
Lecture 1
Investments:
Background and Issues
(Chapter 1)
1
Real Assets Versus Financial Assets
Defining Investment
The current commitment of money or
other resources in the expectation of
reaping future benefits
Real Assets
Used to produce goods a

FIN3003
Lecture 6
Capital Asset Pricing Model - CAPM
(Chapter 7)
1
Capital Asset Pricing Model (CAPM)
The equilibrium model that underlies all
modern financial theory
Gives a precise prediction of the
relationship that we should observe
between the risk o