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(iv) The expected market price if increase in required yield is by 100 basis points.
= Rs. 834.48 1.00 (3.974/100) = Rs. 33.162
Hence expected market price is Rs. 834.48 – Rs. 33.162 = Rs. 801.318
Alternatively, this can also be calculated as follows:
Rs. 848.35 x 100 (3.794/100) = 33.71
Hence, expected market price is 848.48 – 33.71 = 814.77
Thus, the market price will decrease.
(v) The expected market price if decrease in required yield is by 75 basis points.
= Rs. 834.48 0.75 (3.974/100) = Rs. 24.87
Hence expected market price is Rs. 834.48 + Rs. 24.87 = Rs. 859.35
Alternatively, this can also be calculated as follows:
848.35 x 0.75 (3.974/100) = 25.29
Hence, expected market price = 848.35 – 25.29 = Rs. 823.06
Thus, the market price will increase.
(c) Some of the techniques used for economic analysis are:
(i) Anticipatory Surveys: They help investors to form an opinion about the future state of the
economy. It incorporates expert opinion on construction activities, expenditure on plant and
machinery, levels of inventory – all having a definite bearing on economic activities. Also
future spending habits of consumers are taken into account.
(ii) Barometer/Indicator Approach: Various indicators are used to find out how the economy
shall perform in the future. The indicators have been classified as under:
(1) Leading Indicators: They lead the economic activity in terms of their outcome. They
relate to the time series data of the variables that reach high/low points in advance of
economic activity.
(2) Roughly Coincidental Indicators: They reach their peaks and troughs at approximately
the same in the economy.
(3) Lagging Indicators: They are time series data of variables that lag behind in their
consequences vis-a-vis the economy. They reach their turning points after the economy
has reached its own already.
All these approaches suggest direction of change in the aggregate economic activity but
nothing about its magnitude.
Covariance =
∑(Rm - Rm )(Ra - Ra )
N
4.83
Covariance = = 1.61
3
∑(Rm - Rm )2
Variance (σ ) =
m
2
N
4.67
= = 1.557
3
1.61
β= = 1.03
1.557
Company B:
Year Return % Market return Deviation Deviation Rm D Rb D Rm2
(Rb) % (Rm) R(b) Rm
1 11.0 12.0 0.67 1.33 0.89 1.77
2 10.5 11.0 0.17 0.33 0.06 0.11
3 9.5 9.0 0.83 1.67 1.39 2.79
31.0 32.0 2.34 4.67
Average Rb = 10.33
Average Rm = 10.67
∑(Rm - Rm )(Rb - Rb )
Covariance =
N
2.34
Covariance = = 0.78
3
∑(Rm - Rm )2
Variance (σ ) =
m
2
N
1 0.045 F1
1 0.01 64.50
1.045
or 64.50 F1
1.01
67.4025
or F1
1.01
or F 1 = Rs.66.74
(iii) Rate of premium:
66.74 - 64.50 12
100 6.94%
64.50 6
(c) On the basis of different maturity characteristics, the securitized instruments can be divided into
following three categories:
(i) Pass Through Certificates (PTCs): As the title suggests originator (seller of eh assets)
transfers the entire receipt of cash in form of interest or principal repayment from the assets
sold. Thus, these securities represent direct claim of the investors on all the assets that has
been securitized through SPV.
Since all cash flows are transferred the investors carry proportional beneficial interest in the
asset held in the trust by SPV.
It should be noted that since it is a direct route any prepayment of principal is also
proportionately distributed among the securities holders. Further, due to these characteristics
on completion of securitization by the final payment of assets, all the securities are terminated
simultaneously.
Skewness of cash flows occurs in early stage if principals are repaid before the scheduled
time.
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