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Tutorial Week 10

Day 3 of the S&P 500 would be considered the most bullish according to the Arms/trin index. It had a value of 0.54, meaning declining volume was less than advancing volume. Period 4 of the corporate bond market data was the most bullish, with the lowest yield spread of 25 basis points. An advance/decline ratio of 1.2 means for every stock that declined, 1.2 issues advanced. The no load fund returning 10% is better than the 3% load fund returning 12% by $136.

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Ann Joy
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49 views

Tutorial Week 10

Day 3 of the S&P 500 would be considered the most bullish according to the Arms/trin index. It had a value of 0.54, meaning declining volume was less than advancing volume. Period 4 of the corporate bond market data was the most bullish, with the lowest yield spread of 25 basis points. An advance/decline ratio of 1.2 means for every stock that declined, 1.2 issues advanced. The no load fund returning 10% is better than the 3% load fund returning 12% by $136.

Uploaded by

Ann Joy
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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FIN223

Week 9
P 9.1:
• Compute the Arms/trin index for the S&P 500 over the following three
days: Which of the three days would be considered the most bullish?
Explain why.
Answer to P9.1
volume.declining
number.declining
trin 
volume.advancing
number.advancing

TRINDay 1 = (420 mn/150)/(850 million/350) = 2.80 mn/2.43 mn = 1.15


TRINDay 2 = (725 mn/225)/(450 million/275) = 3.22 mn/1.64 mn = 1.96
TRINDay 3 = (420 mn/240)/(850 million/260) = 1.75 mn/3.27 mn = 0.54
Higher TRIN values are interpreted as being bad for the market because even
though more stocks rose than fell, the trading volume in the falling stocks was
greater.

 
P 9.2:
• Listed below are data that pertain to the corporate bond market. (Note:
Each “period” below covers a span of six months.)
Answer to 9.2
•   Period 1 Period 2 Period 3 Period 4

Yield on high-grade bonds 5.30% 5.70% 5.10% 4.65% ?

Average bond yield 6.50% 7.25% ? 6.00% 4.90%

Yield spread (basis points) 120 155 90 25


Average yield/high-grade yield

Confidence Index 81.54% ? 78.62% 85.00% ? 94.9%


High-grade yield/average yield
Answer to 9.2
• The higher Confidence Index suggests that investors are more
confident about future economic conditions. The market seems to be
the most bullish in Period 4, where the yield spread was only 25 basis
points.
P9.5:

• You hear a market analyst on television say that the advance/decline


ratio for the session was 1.2. What does that mean?
Answer to P 9.5

• For every stock that declined, 1.2 issues advanced. Or, put another
way, for every five stocks that declined, six advanced.
P9.6:
At the end of a trading day you find that on the NYSE 2,200 stocks advanced
and 1,000 stocks declined. What is the value of the advance-decline line for that
day?
Answer to P9.6:

• Advance - Decline = Number of issues advancing - Number of


issues declining:
•
2,200 - 1,000 = 1,200.
FIN223
Week 10
Question 1

• Suppose you consider investing $10,000 in a load fund from which a fee
of 3% is deducted and you expect the fund to earn 12% over the next year.
Alternatively, you could invest in a no load fund which is expected to earn
10% and which takes a 0 percent redemption fee.

• Which fund is better and by how much?


Answer to Question 1

• Load Fund: Amount after 1 –year = 10,000(1-0.03)(1+0.12)=$10864


• No Load Fund: Amount after 1-year = 10,000(1.1) =$11000
• No load fund is better by $136.
 
Question 2: Computing NAV
Total number of units: 5,430,000

Year 1 Year 2
 
Portfolio value of $73,531,570 $86,526,570
Cash 3,542,000 2,873,000
Expenses 730,000 830,000
   
a) Find the NAV in both the years
b) Compute the growth rate in year 2 over year 1
• 
Answer to Question 2: Computing NAV
Year 1:
 
Portfolio value of $73,531,570
Cash 3,542,000
Expenses (730,000)
Net Asset Value $76,343,570 /5,430,000 = $14.06
   
Year 2:
 
Portfolio value of $86,526,570
Cash 2,873,000
Expenses (830,000)
Net Asset Value $88,569,570 /5,430,000 = $16.31
 
a) NAV $14.06 in year 1 and 16.31 in year 2
b) Growth rate = ($16.31 - $14.06)/$14.06 = 16.0%
• 
Additional questions on valuation
of shares
Two stage method
• An investor plans to invest in shares of ABC Limited
• Current dividend Year 2021 $ 4.00
• Future dividends expected
• 2022 #.4.80
• 2023 5.20
• 2024 6.00
• Expected growth in dividend in 2025 and
beyond is 4%
• Expected rate of return is 14%
• Calculate the value of share is 2021
Answer
• PV of dividends
• Year Div PV
• 2022 4.80 4.21
• 2023 5.20 4.00
• 2024 6.00 4.05
• Total 12.26
• Price of shares at the initial of the growth period i.e. 2024
• P2024 = D2025 / (r-g) = D2024 x (1+g)/ (r-g)
• = 6.00 (1.04)/(0.14 – 0.04)
• = 6.24/0.10
• Value as at 2024= $ 62.40
• PV of share = 62.40/(1.14)3
• = $ 42.12
• Value of share = PV of share price in 2024 + PV of dividends
• = $ 42.12 + 12.26 = $ 54.38
P/E ratio
• Current EPS $4.40
• Expected EPS to grow by 15%
• P/E ratio 18 times
• Find the value
Answer
• Expected EPS
• 4.40 x 1.15 = $5.06
• P/E ratio = 18
• Price = 5.06 x 18 = $ 91.08

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