The Hindu Business Line : For the MAFA-miffed

QUESTION 1(a) is a problem on capital budgeting, on whether to lease a machine or purchase it outright by borrowing funds. It also covers economic viability from the viewpoint of the lessor. A problem deserving 14 marks.

1(b): Again, a capital budgeting problem. This is on risk analysis.

2(a): This 12-mark question on mutual funds lacks clarity. One is not sure whether the annual return in the problem is on an average basis or for a particular year, say, 2004-05. But the redemption/sale has taken place by July 31, 2005.

It is rather odd to ask candidates to calculate return on investment made by April 1, 1995, as information regarding the plan is given only from July 28, 1999 till July 31, 2005. What is the base year to find the annual rate of return? If a 10-year period is taken to compare maturity value with initial investment by 1995, then the rate of return can be ascertained only with the help of the annuity factor table.

The calculations under various plans and for all the three investors would take a lot of time. Considering the calculations and the time involved, more than 12 marks should have been assigned to this problem

2(b): This query on bonus debenture, a new instrument introduced by Hindustan Lever, is welcome. But the statement "10% bonus debenture... " in the problem should have read "bonus 10% debenture..." Such debenture should be bought back, say, after five years are so. Though this information is not given, info on when buyback will be effected would have clarified the situation. The candidates are supposed to assume that debenture-holders would be paid interest at 10 per cent. The question is basically on finding the mean return and the standard deviation of the securities, as also the viability of buyback of debentures. So it should be assumed that the debenture would be bought back immediately.

3(a): This is a theory question on risk analysis on government securities and repurchase option.

3(b): This is a on the strategy a forex dealer should adopt. This question took most of the students by surprise. From the syllabus and the ICAI's study material and revision test papers (RTPs) one gets the impression that knowledge of forward cover, currency swaps, interest rate swaps, and so on, as hedging tools is required basically from the standpoint of the ultimate users and not the dealers.

The question has been taken from past exam papers of CAIIB, which is a core competency test for bankers for their day-to-day operations. It would not have been difficult to handle if areas such as dealers' problems and so on were included in the syllabus. Question 4(c) again is on how a forex dealer can make a profit out of a quote given to a customer. The entire syllabus looks at the forex market from the importer/exporter angle and not the dealer.

3(c): A problem on mergers and acquisition, which deserves more than eight marks considering its complexity.

4(a): A theory question on mutual funds, requiring the candidates to spell out the rights and obligations of the investors.

4(b): This query on portfolio value and computation of revised duration for two different situations is again a question from a banker's point of view.

Even faculty members would have found it difficult to handle this question under examination conditions. There is nothing in the syllabus or the study material about investment in bonds by a banker.

5(a): This question on finding market price, duration and volatility of a bond deserves the eight marks allotted to it. But at least two more marks should have been assigned to the additional sub-question on the expected market price if the basis points were increased by 75 points.

5(b): This is a straightforward theory question on SEBI guidelines on ESOP and ESOS.

5(c): This is the third time such a question has been asked in CAPM.

6(a): This is on securitisation, a hot topic in the field of finance.

The Institute should clarify the various options/alternatives to the paper evaluators. Also, the Institute should release the suggested answer much before the announcement of results.

This will help students start preparation if they feel they have not done well.

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