Investment and Rate

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1. Suppose you discover a treasure chest of RM10 billion in cash a. Is this a real or financial asset?
Yes. 10 billion cash is the financial asset. This is because financial assets only obtain its monetary value from a contractual agreement of what it represents. In contrast, real asset itself has the physical value. b. Is society any richer for the discovery?

No.  This is because the cash does not contribute to the productive capacity of the economy. c. Are you wealthier?
Yes. You would become wealthier with RM10 billion cash.
d. Is anyone worst off as a result of the discovery?
Yes. The society as a whole is worse off. This is because cash is the financial asset and it becomes is a liability of the government upon the time you found the cash. So, the taxpayers will have to make up for the government liability. 2. The average rate of return on investment in large stocks has outpaced that on investments in T-Bills by about 8% since 1926 in US. Why, then, does anyone invest in T-Bills? Answer:

This is because T-bill is regarded as an almost risk free asset as it is backed by the government. Therefore, it has lowest volatility as compared to stocks. This is also a reason that people tend to invest in T-bills instead of stocks. 3. You see an advertisement for a book that claims to show how you can make RM1 million with no risk and with no money down. Will you buy the book? Why? Answer:

No. It is impossible to make RM1million with no risk and with no money down. This is because only a person who takes risk would be compensated with return. Even T-bills which is backed by the government also has low risk and it is impossible to earn RM1million with no risk at all. 4. You are bullish on Telekom stock. The current market price is RM50 per share, and you have RM5,000 of your own to invest. You borrow an additional RM5,000 from your broker at an interest rate of 8% per year and invest RM10,000 in the stock. a. what will be your rate of return if the price of Telekom stock goes up by 10% during the next year? (ignore dividend) Answer:

Return: 10,000 x 10%= RM 1,000
Interest to Pay: 5,000 x 8%= RM 400
Total Return: RM1,000- RM400= RM600
Rate of Return = [600/5,000] x 100%
= 12%
b. How far does the price of Telekom stock should have fall for you to get a margin call if your maintenance margin is 30% of the value of the short position? Answer:
RM10,000/50 = 200 shares
Let P be the stock price,
Value of Share= 200P
Equity = 200P-5000
|Margin=Equity/Current Market Value of shorted security |
(200P-5000)/200P =0.30
1-0.30 =5000/200P
200P =7142.86
P = RM 35.71 (Price When Margin Call Occurs)
5. The composition of the Fingroup Fund portfolio is as follows: |Stock |Shares |Price (RM) |
|A |200,000 |35 |
|B |300,000 |40 |
|C |400,000 |20 |
|D |600,000 |25 |
The fund has not borrowed any funds, but its accrued management fee with the portfolio manager currently totals RM30,000. There are 4 million shares outstanding. What is the net asset value of the fund? Answer:

Step 1: Market Value of Asset= [(200,000 X RM35)+(300,000 X RM40)+(400,000 X RM20)+(600,000 X RM25) =RM42,000,000
Step 2: Liabilities= RM 30,000 ; Shares Outstanding= 4,000,000 Step 3: Net Asset Value of the Fund (NAV)=
(Market Value of Asset –Liabilities)/ Shares Outstanding
= (RM42,000,000-RM30,000)/ 4,000,000
= RM10.49
6. You are considering the choice between investing RM50,000 in a conventional 1-year bank FD offering an interest rate of 5% and a 1 year “Inflation-Plus” FD offering 1.5% per year plus the rate of inflation. a. Which is the safer investment?

1 year “Inflation –Plus” FD is the safer investment because it guarantees the purchasing power of the investment. As real rate equals the nominal rate minus the inflation rate, so 1 year “Inflation –Plus” FD provides a real rate of 1.5% regardless of the inflation rate. b. Which offers the...
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