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FRIDAY:  21 May 2021.          Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are show n at the end of the question. Show ALL your workings.


1.           Modern financial markets employ a wide range of derivative instruments that could suit different needs of their clients.

In light of the above statement, describe four types of swaps available to market participants in your country. (4 marks)

2.         Examine live types of risks associated with trading derivatives.      (5 marks)

3.           Describe two uses of index futures.    (4 marks)

4.          The current price of a futures contract is Sh.212. The initial margin requirement is Sh.10 and the maintenance margin required is Sh.8.  An investor can go long            20 contracts, meet all margin calls but does not withdraw any excess margin.  The contract is purchased at the settlement price of that day, so there is no mark to market profit or loss on the day of purchase.

The investor has provided the table below:


Complete the table above.        (6 marks)

Determine the total gains or losses by the end of day 6.        ( 1 mark)

(Total:   20 marks)



1.         Highlight four features of a forward contract.   (4 marks)

2.         A 1 year semi-annual equity swap which is based on an index is at 985 and has a fixed interest rate of 4.4%. 90 days after the initiation of the swap, the index is at 982 and the London Interbank Offered Rate (LIBOR) is at 4.6% for 90 days and 4.8% for 270 days. The notional value of the equity swap is Sh.2 million.


The value of the swap to the equity payer.     (4 marks)

3.         An investor has an equity portfolio with a 60% allocation to small-cap stocks and a 40% allocation to large cap stocks.

The portfolio is currently valued at Sh.150 million. The investor wishes to reduce the small cap allocation to 45% and increase the large cap allocation to 55% for a period of nine months. The large cap beta is 1.15 and the small cap beta is 1.25.  A small cap futures contract that expires in nine months is priced at Sh.195,750 and has a beta of 1.12.  A large cap futures contract that expires in nine months is priced at Sh.215,750 and has a beta of 0.92.  Both contracts have multipliers of I.  After nine months, the large cap stocks are up 4.75% and small cap stocks are up 6.25%. The large cap futures price is Sh.223.762 and the small cap futures price is Sh.206,712.


The market value of the portfolio using futures to adjust the allocation.   (8 marks)

Citing two reasons, explain why the returns on the futures overlay strategy is not the same as that of a cash market strategy.    (2 marks)

4.          A spot price of an asset is Sh.50, the interest rate is 6.25%, the futures value of the storage cost is Sh.1.35 and the futures expires in   15 months.


Determine the futures price.      (2 marks)

(Total: 20 marks)



1.         Distinguish between “over the counter (OTC)” and “Exchange market” as used in derivatives trading.      (4 marks)

2.          Wazembo Limited’s share is trading for Sh.70 and pays a Sh.2.20 dividend in one month.  The one-month risk free rate is  10% quoted on an annual compounding basis.  The share (racks ex-dividend the same day the single share forward contract expires.


The one-month forward price for Wazembo Limited’s ordinary share.    (3 marks)

3.          A firm has entered into a receive-floating 6×9 FRA    – forward rate agreement at a rate of 0.86%, with a notionalamount of Sh.10 million LIBOR.  The six-month spot Shilling London interbank offered rate (LIBOR) was 0.628% and the nine-month Shilling LIBOR was 0.712%. The 6×9 FRA rate is quoted in the market at 0.86%. After 90 days have passed, the three-month Shilling LIBOR is 1.25% and the six-month Shilling LIBOR is 1.35%.


Calculate the value of the original receive-floating 6×9 FRA after 90 days.      (4 marks)

4.         Top-Tech Limited arranged a floating rate loan on  15 June 2019 to finance the construction of one of its factories. The company’s Chief Executive Officer (CEO) has approached you to help reduce the firm’s exposure to the risk of rising interest rates.  You respond by purchasing caplets and selling floorlets to establish a zero-cost position. Details concerning the loan transaction and hedging transaction are summarised below. The LIBOR rates and the number of days falling within each settlement period are also provided.


Calculate the effective interest due on   15 June 2020.    (7 marks)

Determine the caplet payoff on 15 June 2021.      (2 marks)

(Total: 20 marks)



1.       Outline three advantages and three limitations of the Black-Scholes-Merton (BSM) model.                (6 marks)

The underlying is priced at Sh.225 and the continuously compounded dividend yield is 2.7%. The exercise price is Sh.200. The continuously compounded risk free rate is 5.25%. The time to expiration is three years and the volatility is 0.15.


The price of a call option using the Black-Schole-Merton (BSM) model adjusted for cash flows on the underlying.       (4 marks)

2.           Tyson Mkubwa is a financial analyst and would like to obtain the value of a European call option with two years to expiration and an exercise price of Sh.100. The underlying bond is Sh.100 par value,   7% annual coupon bond with three years to maturity.

The interest rate at the start of the call option contract is 3% and it is expected to either go up to 5.99% or down to 4.44% in year 1. Interests rates are expected to change into 3 levels in years 2, that is, 8.56%,    6.34% or 4.7% respectively.

The bond price at the end of year 2 is expected to be Sh.98.56 at 8.56%, Sh.100.62 at 6.34% and 102.20 at 4.7% interest rates respectively.

Required :

Construct a two-period binomial tree for option price.  (8 marks)

Determine the option value today.    (2 marks)

(Total: 20 marks)



1.          Derivative contracts are largely classified into either forwed commitments or contingent claims.

Citing relevant examples, distinguish between “forward commitments” and “contingent claims”.     (6 marks)

2.           Proton Ltd. is a Kenyan company that issues a bond with a face value of Sh.1.2 billion and a coupon rate of 5.25%.

Proton Ltd. decides to use a swap so as to convert this bond into a dollar-denominated bond.

The current exchange rate is Sh.120/$.  The fixed interest rate on the dollar-denominated swaps is 6% and the fixed interest rate of the shilling-denominated swaps is 5%. All payments to be made annually.


1.           Assess how swap will be executed.     (3 marks)

2.           Identify the cash flows at start.    (2 marks)

3.          Generate all interest cash flows of each interest payment date.      (2 marks)

4.          Identify the cash flows at the expiration of the bond.    (2 marks)

3.          The following information is available on put and call options on an asset:

Call price                                                Sh.3.50

Put price                                                  Sh.9

Exercise price                                           Sh.50

Forward price                                           Sh.45

Days to option expiration                        175 days

Risk-free rate                                          4%


Using put-call forward parity, calculate prices of the following:

1.  Synthetic call option.     (1 mark)

2.  Synthetic put option.    (1 mark)

3.  Synthetic forward contract. ( 1 mark)

For each of the 3 synthetic instruments in  (i),  (ii) and (iii) above,  identify -any mispricing by comparing the actual price with the synthetic price.     (2 marks)

(Total: 20 marks)

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FRIDAY: 21 May 2021.    Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings.


1.          The Basel III accord is a set of financial reforms that was developed by the Basel Committee on Banking Supervision (BCBS), with the aim of strengthening regulation, supervision and risk management within the banking industry. Basel III was introduced to improve the banks’ ability to handle shocks from financial stress and to strengthen their transparency and disclosure.

In light of the above statement, explain three principles of Basel III accord.  (6 marks)

Explain two implications of Basel III accord on the banking industry.       (4 marks)

2.          Explain four methods of payment that could be used in international business.     (4 marks)

3.          Describe six ways that the central bank could use to intervene in the foreign exchange market in your country. (6 marks)

(Total: 20 marks)



1.          Examine two reasons why emerging economies adopt trade restrictions.      (4 marks)

2.           Mwangaza Enterprises is a company incorporated in Kenya with its core business being importation of high quality electronics from United Kingdom. The firm enjoys three month’s credit from the date it procures a consignment of the gadgets. On 1 February 2021, Mwangaza Enterprises imported a consignment worth 500,000 Sterling Pounds (£).


Additional information:

  1. The spot rate on 1 February 2021 and 1 May 2021 were as follows:

As at   1 February 2021, Shilling futures were forecasted to trade at  0.00675 (contract size   1,000,000) during the month of May 2021.


Demonstrate how Mwangaza Enterprises could have used a futures contract as a hedging tool, indicating any hedging gain or loss.     (4 marks)

The number of futures contracts that Mwangaza Enterprises could have purchased if the contract size was 1,500,000.  (2 marks)

3.       The following data has been provided by a foreign exchange market:

Spot exchange rate: United States dollar and Sterling pound ($:£)   = 1.3500 — 1.3550

Annual risk free interest rate (one-year maturity):

United Kingdom Sterling Pound (£)               1.50% — 1.56%

United States Dollar ($)                                    4.55% — 4.58%



The bid-ask quote for the one-year forward exchange rate between the United States  dollar and the Sterling pound ($:£).    (4 marks)

Paul Njoya is an international businessman. He wishes to calculate the cross rate between the Euro (€) and the South Korean Won (E:Won).

A major dealer on the Forex Market provides the following quotes:

United States Dollar/South Korean Won: ($:Won)                     1014.0 — 1015.0

Euro/United States Dollar: (€:$)                                                      1.52000 — 1.62500



The bid ask cross exchange rate between the Euro and South Korean Won (E:Won).      (4 marks)

Suggest two factors that could affect the bid-ask spread in  (i) and  (ii) above.    (2 marks)

(Total: 20 marks)



1.         Argue six cases why Multi-National Corporations (MNCs) engage in foreign direct investments (FDIs).  (6 marks)

2.         Analyse three methods that could be used to determine whether a transfer price between parents and subsidiaries is reasonable.     (6 marks)

3.          Mac Limited is a Kenyan based company that has just constructed a manufacturing plant in Rwanda.

The following additional information is provided:

  1. The construction cost is 9 billion Rwandese Francs (RWF).
  2. Mac Limited intends to leave the plant open for three years.
  3. During the three years of operation, Rwandese Francs cash flows are expected to be as follows:

Year                                                        1             2              3

Cash flows (RWF “Billions”)           3              3              2

  1. Operating cash flows will begin one year from today and are remitted back to the parent at the end of each year.
  2. At the end of the third year, Mac Limited expects to sell the plant for 5 billion RWF.
  3. The required rate of return is 14%.
  4. It currently takes 9 RWF to buy one Kenya Shillings (KES).
  5. Rwandan Franc is expected to depreciate by 5% per year.


Advise Mac  Limited whether it should undertake the project using the Net Present Value  (NPV) method. (8 marks)

(Total: 20 marks)



1.         PNK Limited, a Kenyan based Multinational Corporation (MNC) has subsidiaries in Eastern and Western African Countries.  The company intends to hedge its translation exposure due to fluctuations in the value of subsidiaries home country’s currencies.


Argue four cases against hedging translation exposure in the context of the above statement.     (4 marks)

2.         Assume that Victoria Limited, a company based in the United Kingdom (UK) imported goods from New Zealand and needs 100,000 New Zealand dollars (NZ$) 180 days from now.  The company is trying to determine whether to hedge this position. Victoria Limited has developed the following probability distribution for the New Zealand dollar:

Additional information:

  1. The 180-day forward rate of the New Zealand dollar is 1.52.
  2. The spot rate of the New Zealand dollar is £0.49.


A feasibility analysis table indicating the possible real costs of hedging.    (6 marks)

The probability that hedging will be more costly to the firm than not hedging.     (2 marks)

The expected value of the additional cost of hedging.       (3 marks)

3.           Summarise five benefits of a centralised cash management system to a multinational enterprise.   (5 marks)

(Total: 20 marks)



1.           Summarise five indicators of high country risk that a multinational corporation should consider when making international investment decisions.       (5 marks)

2.           The following information relates to Sigma Limited, a manufacturing company based in South Africa; South Africa Stock Exchange market index; and the world market index, together with the standard deviation (SD) of returns and the expected returns (ER):


The domestic country beta for Sigma Limited.      (2 marks)

The world beta.                                (2 marks)

The equity cost of capital for Sigma Limited using Capital Asset Pricing Model (CAPM). (Assume that South Africa Stock Exchange market is segmented from the rest of the world).     (2 marks)

Sigma Limited’s cost of equity capital using CAPM. (Assume that South Africa Stock Exchange market is integrated with the rest of the world).   (2 marks)

3.           Explain the meaning of the term “Green movement” as applied in International Finance.    (2 marks)

Describe five benefits that a multinational corporation could gain by embracing the green movement ideologies.    (5 marks)

(Total: 20 marks)

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THURSDAY: 20 May 2021.        Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings.


1.          Describe five qualities of a valid benchmark as used in evaluating portfolio performance.     (5 marks)

2.          BlackBrick Limited   (BBL) offers a defined benefit pension plan to its employees. Joshua Mutiso, a portfolio manager has collected the following details about BBL:

  1. The plan is fully funded.
  2. The average age of the participants is 38 years.
  3. The active to retired participant’s ratio is 3:1.
  4. The company has reported strong financial results in the current financial year.
  5. The discount rate used to determine the present value of future obligations is 8%.
  6. The duration of plan liabilities is 22 years.
  7. The sponsor has proposed a return objective of 8.5%.
  8. BBL offers a one-for-one inflation indexation through a cost of living allowance.
  9. Future benefits are twice as high relative to accrued benefits and are attributable to future real wage growth.
  10. BBL is considering the inclusion of an early retirement provision.


State BBL’s return objective.    (2 marks)

Identify two purposes which the sponsor may have in stating a return objective of 8.5%.          (2 marks)

Formulate the risk tolerance, liquidity and time horizon components for BBL’s investment policy statement (IPS).     (6 marks)

3.        Gibson Kipsang has recently inherited Sh.5 million and wishes to invest in equities.

He identifies and allocates the funds to a set of four managers each with their distinct investment styles as follows:


The portfolio’s active return with respect to the equities allocation.      (2 marks)

Determine the manager with the highest true active risk.       (3 marks)

(Total: 20 marks)



1.          Explain how each of the following behavioural factors could affect asset allocation:

Illusion of control.      (2 marks)

Mental accounting.  (2 marks)

Availability bias.   (2 marks)

2,          Rose Ambani is analysing the trading costs of her most recent purchase of 1,000 shares of Tambun Ltd.

She accumulates the following facts for her evaluation:

  1. The benchmark price was Sh.60 per share.
  2. The order was placed last Tuesday, when the shares of Tambun Ltd. closed at Sh.59.90 per share. 500 shares were purchased at a price of Sh.61.05 per share. Commission and fees were Sh.50.
  3. On Wednesday, 200 more shares were purchased at Sh.62.05 per share. Commission and fees were Sh.20. Shares of Tambun Ltd. closed at Sh.61.03 during the same day.
  4. On Thursday, no more shares were purchased and the order was cancelled. The market closed at Sh.62.00 per share.

Rose meant to use this data to calculate the implementation shortfall of her trade.


The total implementation shortfall for the trade in the shares of Tambun Ltd.    (4 marks)

Determine the contribution of the various cost components to the total implementation shortfall.     (4 marks)

3.         Sospeter Obonyo has gathered the following data to evaluate the performance of a portfolio manager:


The time weighted rate of return for the manager for the month of April 2021.     (6 marks)

(Total: 20 marks)



1.          Highlight three reasons why commodity returns are weakly correlated with stock and bonds returns.   (3 marks)

2.         Ruth Wangu is a high net worth (HNW) investor who invests with an equity manager with a quoted base fee rate of 0.50% of beginning asset under management (AUM) plus 30% of performance in excess of the NSE Index.

Four years later, Wangu evaluates the performance of the equity manager relative to the NSE index as a benchmark index.

The equity manager fund is subject to a high water mark (HWM).

* Gross of investment management fees.



Calculate the value of the high watermark, gross of investment management fees at the end of the third year.     (2 marks)

Determine the amount of fees which will be received by the equity manager in the fourth year.  (2 marks)

Discuss two relative strengths of adopting a performance fee based structure.     (2 marks)

Discuss two relative weaknesses of adopting a performance-fee based structure.   (2 marks)

3.          Moses Abongo is a financial analyst who has recently joined the graduate trainee scheme of a large buyside multi- asset investment manager. The scheme will involve Abongo spending time in all of the major divisions of the firm, first of which is the fixed income division.

Abongo initially works alongside Roberto James, a bond fund manager who specialises in dedication strategies designed to ensure that portfolios meet the future liabilities of investors. One of Roberto’s clients is Abdi Ali, a high net worth individual who is aiming to meet a personal liability due in 10 years’ time, the present value of which is equal to Sh.2,951,100.

Abdi Ali’s current portfolio consists of three bonds, details of which are displayed below. Each holding is of Sh.1 million.

Abdi Ali’s fixed income portfolio

Security                                    Price (Sh.)            Macaulay Duration     Modified duration

Bond 1                                             102.36                                  3.7                                      3.6

Bond 2                                             97.61                                    9.9                                      9.7

Bond 3                                             95.14                                   16.9                                    16.6

Roberto James also runs a portfolio for John Muturi. This portfolio is engaged in a dedication strategy known as contingent immunisation.

Details of the strategy are given below:

John Muturi contingent immunisation strategy

Current portfolio value                                                                            Sh.30 million

Portfolio modified duration                                                                    5.5

Liability to be repaid in 8 years                                                               Sh.40 million

Effective annual discount rate applied to liabilities                                  5%

Roberto James demonstrates to Moses Abongo how a derivatives overlay could be used to close the current duration gap on the portfolio run for John Muturi. He collects information on a relevant futures contract which is displayed below:

Futures Contract Information

National principal                                                                                    Sh.100,000

Coupon                                                                                                   6%

Range of maturities of deliverable bonds                                                8 years to 12 years

Basis point value (BVP) for one futures contract                                   Sh.76.22



1.            The current money duration of the Abdi Ali fixed income portfolio.      (4 marks)

2.          Determine whether or not Abdi Ali’s fixed income portfolio is immunised.       (3 marks)

3.          The number of futures contract required to close the duration gap.        (2 marks)

(Total: 20 marks)



1.           Explain three advantages of using futures instead of cash market instruments to alter portfolio risk.       (3 marks)

2.          You have been provided with the following information relating to a portfolio manager’s performance for the period ended 31 March 2021:


Compute the value added by the manager and comment on the performance.  (4 marks)

Using attribution analysis, break down the value added computed in  (i) above into allocation effect and selection effect.     (6 marks)

3.           Brian Kingi, a private investor has a total market value of an initial portfolio of Sh.30 million of which Sh.9 million is invested in the money market fund, a risk free asset. The remaining Sh.2 1 million is invested in risky securities, that is, Sh.11.34  in equity (E) and Sh.9.66 million in long-term bond (B). The bond and equity holdings comprise the risky portfolio.



1.          The weight of the risky and risk free investments in the complete portfolio.        (1 mark)

2.          The weights of equity and debt holdings in the risky portfolio.       (1 mark)

3.         The weights of equity and debt holdings in the complete portfolio.  (1 mark)

4.         Assuming that Brian Kingi wishes to decrease risk by reducing the allocation to the risky portfolio to 0.56, calculate the amount of the equity and bond holdings that must be sold to achieve this objective.      (4 marks)

(Total: 20 marks)



1.          Portfolio revision is the process of selling certain investments in portfolio and purchasing new ones to replace them.

Highlight three reasons for portfolio revision.       (3 marks)

2.          In relation to global credit bond portfolio management:

Explain the dominant type of structure in the investment-grade credit market.    (2 marks)

Determine three strategies portfolio implication of the dominant structure identified in  (i) above. (3 marks)

3.         Discuss three characteristics of best execution of a portfolio decision.        (6 marks)

4.         The spot exchange rate between the Brazilian real (BRL) and United States Dollar (USD) is 2.41. The interest rate in the two countries are 6% and 1% respectively.



Estimate the one year forward exchange rate for the Brazilian real.   (2 marks)

State the steps to initiate a carry trade.     (2 marks)

Calculate the profit on the trade if the spot exchange rate is unchanged and the trade is initiated by borrowing 100 currency units.    (2 marks)

(Total: 20 marks)

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THURSDAY: 20 May 2021.       Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings.


1.         Private investors use structured products to gain access to alternative investments.

In light of the above statement, cite four reasons for popularity of structured products in the recent past.   (8 marks).

2.          Explain the meaning of the following terms as used in commodities market:

Contract for differences (CFDs).       (2 marks)

Calendar spread strategy.     (2 marks)

3.           Stawi Fund is a hedge fund with a value of Sh.250 million at the beginning of 2018. The fund charges 2.5% management fees based on the asset under management (AUM) at the beginning of the year and a 25% incentive fee with a 7.51)/0 hurdle rate and uses a high water mark (HWM) provision. Incentive fees are calculated on gains net of management fees.

The closing values for each year before fees are as follows:

Year                                                        Amount


2018                                                           285,450

2019                                                           288,120

2020                                                           307,670



The total fees and investor’s net return for each of the three years.  (8 marks)

(Total: 20 marks)



1.           Highlight five disadvantages of investing in real estate as an alternative investment class.   (5 marks)

2.          Explain three incentives for hedge funds replication strategies in the context of hedge fund management (6 marks)

A hedge fund utilises a strategy which generates profits on assets of 0.3% per month. The interest expense on its leverage is 0.2% per month. The fund seeks a return on equity (ROE) of 0.8%.


Determine the leverage that the fund must utilise to generate the desired return on equity (ROE).      (3 marks)

3.           Webmill Group Limited manages a Sh.250 million private equity fund. Investors committed to a total of Sh.300 million over the term of the fund and a specified carried interest of 20% and a hurdle rate of 10%. Carried interest is distributed on a deal by deal basis. 60% of the Sh.250 million has been invested at the beginning of year 1 in Kimbo Ltd. with the remaining 40% invested in Tidco Ltd. Both firms are sold at the end of the third year, realising a Sh.45 million profit for Kimbo Ltd. and a Sh.35 million profit for Tidco Ltd.


The carried interest paid to the fund’s general partner for Kimbo Ltd. and Tidco Ltd.      (6 marks)

(Total: 20 marks)



1.           An appraiser has been asked to estimate the value of a warehouse and has collected the following information:

  1. Each adjustment is based on the unadjusted sales price of the comparable.
  2. Properties depreciate at the rate of 2% per annum.
  3. Condition adjustment; Good: + 5%, average: none, poor: —5%.
  4. Location adjustment: Prime — none, secondary —10%.
  5. Over the past 24 months, sales price has been appreciating at the rate of 0.5% per month.


Calculate the estimated value of the warehouse using the sales comparison method.      (10 marks)

2.         Abby Mutugi recently completed a Monte Carlo simulation analysis of a collateralised mortgage obligation (CMO) tranche. Abby’s analysis included six equally weighted paths, with the present value calculated using four different discounts rates, shown below:

Representative path              Present value if spread                 Present value if spread                     Present value if spread

is 50 basis points                         is 60 basis points                             is 70 basis points

1                                                                     70                                                68                                                         66

2                                                                      73                                                 70                                                        68

3                                                                      68                                                66                                                         64

4                                                                      71                                                 69                                                         68

5                                                                       77                                                 75                                                         73

6                                                                       75                                                 73                                                         71


The actual market price of the CMO tranche is 70.17.


The tranche’s option adjusted spread (OAS).     (4 marks)

3.          An investor currently holds the following structured products:

  • A fairly new home equity-backed asset backed security (ABS).
  • Automobile receivable-backed asset backed security (ABS).
  • Planned amortisation class (PAC) collateralised mortgage obligation (CMO).
  • Support bonds collateralised mortgage obligation (CMO).

He is concerned about the expected decline in interest rates:


Giving two reasons in each case, identify the cash flow of the ABS that will be more affected by the decline in interest rates and the ABS that will be less affected by a decline in interest rates.  (4 marks)

Explain the effects of decline in interest rates on the two types of collateralised mortgage obligations (CMOs).  (2 marks)

(Total: 20 marks)



1.           Discuss the lifecycle stages of a venture capital fund.        (10 marks)

2.           Explain the meaning of the following terms as used in alternative investments:

Rolling contracts.     (1 mark)

Marking to market.      (1 mark)

High water mark (HWM).   (1 mark)

Prepayment tranching.     (1 mark)

Credit tranching.      (1 mark)

3.          The following information relates to commodities futures contract traded at the derivatives exchange market:

                                          Futures prices                     Futures prices                   Changes in

Contract maturity        as at April 2021                 as at March 2021          spot price

                                                   Sh.                                          Sh.                                      Sh.

May 2021                                  1.445                                      1395                                   17.5

June 2021                                  1,425                                      1382.50                             17.5

July 2021                                   1,394                                      1350.50                             17.5



The roll return.   (3 marks)

Identify the term structure of the futures prices illustrated above.      (1 mark)

Demonstrate a futures strategy that will provide a positive return in  (ii) above.   (1 mark)

(Total:   20 marks)



1.           Francis Thuo has been appointed as a private equity manager at KKQ Limited a private equity firm and is interested in identifying a potential leveraged buyout firm to acquire.


Advise Francis Thuo on five characteristics of a well suited leveraged buyout (LBO) candidate.    (5 marks)

2.          Outside service providers provide professional services that are vital to the formation and continued operation of alternative investment funds.

In light of the above statement, identify four legal documents prepared by advocates in relation to hedge funds. (4 marks)

3.          An investment analyst has gathered the following data on three different real estate investment trusts (REITs):

Select REIT financial information (All figures in shillings):

The cost of equity capital for all REITs is 8% and the risk free rate is 4.0%. The analyst wants to value each REIT using four different methodologies:


Method 1: Net asset value (NAV).

Method 2: Discounted cash flow valuation using a two step dividend model.

Method 3: Relative valuation using property subsector price to funds from operations (P/FFO) multiple.

Method 4: Relative valuation using property subsector average price to funds from operations (P/AFFO) multiple.



Determine the value per share of the following:

REIT A using valuation method I.  (3 marks)

REIT B using valuation method 3.     (2 marks)

REIT C using valuation method 2.   (3 marks)

REIT A using valuation method 4.        (3 marks)

(Total: 20 marks)

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WEDNESDAY: 19 May 2021.         Time Allowed: 3 hours.

Answer ALL questions.   Marks allocated to each question are shown at the end of the question. Show ALL your workings.


1.          The promises of the issuer and the rights of the bondholders are set forth in great detail in a bond’s indenture. As part of the indenture, there are affirmative covenants and negative covenants.

In light of the above statement, highlight four affirmative covenants that could be captured in a bond indenture. (4 marks)

2.          Assess six types of risks that could be faced by fixed income investors.      (6 marks)

3.          The following information is provided for three bonds:

Bond A                           Bond B                           Bond C

Coupon rate                                         0%                                    10%                                  10%

Maturity years                                      15                                      20                                    20

Maturity value                                Sh.1,000                          Sh.1,000                        Sh.1,000

Required yield                                      9.4%                                   11%                               10%

Par value                                          Sh.1,000                          Sh.1,000                        Sh.1,000



The price of each bond, assuming interest is paid semi-annually.      (6 marks)

Comment on the results obtained in (c) (i) above.      (1 mark)

4.          The price of a five year, zero coupon bond is Sh.0.7835 for.Sh.1 par and the price of a two year, zero coupon bond is Sh.0.9426 for Sh.1 par.


Determine the three year forward rate two years from now.         (3 marks)

(Total:  20 marks)



1.          Explain four classifications of corporate bonds by issuer.     (4marks)

2.         Consider the following data relating to a convertible bond currently trading at Sh.104.80:

Par value                                                          Sh.1,000

Coupon                                                             4.50%

Maturity                                                           15 years

Conversion price                                            Sh.25 per share

The issuer’s shares are currently trading at Sh.19.50.


The number of shares into which the bond is convertible.        (1 mark)

The conversion value.       (1 mark)

The conversion premium.       (1 mark)

The effective conversion price.         (1 mark)

3.          A 5% coupon bond matures ten years from now. Its price is Sh.96.23119 and the yield is 5.5%. The modified duration is 7.64498.


The approximate price change assuming the yield rises or falls by 200 basis points.      (1 mark)

The convexity assuming yield changes by 200 basis points.     (2 marks)

The net percentage change in the price of the bond.       ( 1 mark)

Highlight two limitations of duration as a measure of term structure of a bond and interest rate risk. (2 marks)

4.         A corporate bond based on a 30/360 day-count conversion, with a coupon rate of 10% is maturing on    1 March 2022 and is purchased with a settlement date of 17 July 2020. The yield is 6.5%. The bond’s par value is Sh.100.


The bond’s clean price.       (6 marks)

(Total: 20 marks)



1.         Differentiate between a “credit score” and a “credit rating”.       (4 marks)

2.          John  Kisire,  a financial  analyst at Kawi  Ltd.  has gathered some  financial  information  for the year ended

31 December 2020. He has also projected the amounts for the year ending 31 December 2021:

Kawi Ltd.

End of year                                                                                                                   2020                         2021

                                                                                                                         Sh. “000”                Sh. “000”

Amortisation/depreciation                                                                                        250                            300

Interest expense                                                                                                          350                            350

Earnings before interest, tax, depreciation and amortisation (EBITDA)  1,250                           800

Kawi Ltd. is a company that specialises in power production.

John Kisire is concerned that the heavy rains and government expansion of geothermal source of power will affect Kawi Ltd.’s bond covenant compliance. The bond covenant requires an EBITDA coverage ratio of 3.5 times and an earnings before interest and tax (EBIT) coverage ratio of 2.0 times.



Explain whether or not Kawi Ltd. was in compliance with its EBITDA ratio at the end of year 2020. (2 marks)

The amount by which Kawi Ltd. needs to increase the EBIT in order to be compliant with its EBIT ratio for the year ending 31 December 2021.      (3 marks)

3. The yields and spot rates for an option-free, 5.25% bond with 3 years to maturity are as shown below:

Maturity (years)                     Yield to maturity (%)                Value                          Spot rate (%)

1                                                          3.5                                                      100                                     3.5

2                                                          4.0                                                     100                                     4.01

3                                                          4.5                                                     100                                     4.531


Construct a binomial tree for valuing an option-free bond with three years to maturity and a coupon of 5.25% and determine the value of the option free bond.    (7 marks)

4.         An investor buys a 10 year bond at Sh.85.503 and sells it in four years. The bond has a coupon rate of 8%. After the bond is purchased, the interest rate goes down from  10.40% to 9.40%. The bond has a par value of Sh.100.


Calculate the investor’s realised yield.       (4 marks)

(Total:  20 marks)



1.         Describe how the following factors could affect the value of a callable or putable bond:

Interest rate volatility.       (2 marks)

Level of interest rate.     (2 marks)

Shape of the yield curve.         (2 marks)

2.          A 7.5%, 15 year, annual pay option-free Zuraya corporate bond trades at a market  price  of Sh.95.72  per Sh.100 par. The government spot rate curve is flat at 5%.


The Z-spread on Zuraya’s corporate bond.      (4 marks)

3.         The following are the par rates of a government bond:

Year                                          Par rate (%)

1                                                   5.00

2                                                   6.00

3                                                   7.00



Determine the 3 year spot rate using bootstrapping.      (4 marks)


4.          The government par curve is provided below:

Maturity (years)                          Par rate (%)

1                                                5.00

2                                                 6.00

3                                                 6.50

4                                                 7.00

An analyst has a holding of a 4 year, 5% annual pay, Sh.100 par government bond.


The value of the government bond.      (6 marks)

(Total: 20 marks)



1.          Describe two classes of modern term structure models.    (4 marks)

2.          Caroline Nyawira oversees five fixed income portfolios for one corporate client. Nyawira believes that interest rates will change over the next year, but is uncertain about the extent and direction of this change.

She is confident that the yield curve will change in a non-parallel manner and has assembled the table of key rate durations shown below:


Key rate duration

Issue               Value (Sh.”million”)    3 month      2 year          5 year          20 year            30 year

Portfolio 1                     100                     0.03              0.14              0.49                1.59                              4.62

Portfolio 2                    200                     0.02              0.13              1.47               0                                      0

Portfolio 3                     150                    0.03              0.14              0.51               1.64                              2.38

Portfolio 4                    250                     0.06              0                    0                    0                                      0

Portfolio 5                     300                     0.00              0.88              0                    0                                     0


The total value of the portfolio is Sh.1,000,000,000.

The following key rates duration will change while the others will remain constant:

  • The 3 month rate increases by 20 basis points.

The 5 year rate increases by 90 basis points.

  • The 30 year rate decreases by 150 basis points.



The new total value of the portfolio after these key rate duration changes.   (8 marks)

3.         A 3 year, Sh.100 par, zero coupon bond has a hazard rate of 2% per annum. Its recovery rate is 60% and the benchmark rate curve is flat at 3%.


The bond’s credit valuation adjustment (CVA).     (8 marks)

(Total: 20 marks)

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WEDNESDAY: 19 May 2021.      Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question.



Tabs Group Limited (TGL) was established 50 years ago with the purpose of improving quality of life (human, animal and crops) across the African Region. Initially established as a family business, the group is now a public limited company with its head office in Kenya. TGL has operations in thirteen African Countries and a workforce of over 800 staff members.  Currently, the group has four subsidiaries; Metapharma Ltd. which deals with human medicines, Thrift Ltd. which deals with veterinary products, Cheminex Ltd. which deals with detergents, fertilisers, school equipment and industrial chemicals and finally Dwellings Ltd., a company which deals with real estate and affordable housing.

Expansion and growth across the continent has mainly been achieved through a mix of both greenfield and brownfield investments. The latest investment by TGL is a state of the art manufacturing facility for vaccines in Gabon. The facility will be used to manufacture Covid-19 vaccines to curb the spread of Corona Virus in Africa. It is feared that many vaccines in the market may not be effective especially on the South African Covid-19 variant. The group has outperformed its peers and sustained a compounded annual growth rate of 6% over the last five years. However, the performance of the real estate venture has been on a declining trend and the board has proposed divestiture in the next two years. The staff and management of Dwellings Ltd. are anxious about this new development.

TGL has an elaborate corporate governance framework that has drawn international accolades, including gaining recognition by the UN Global Compact for its transparency in reporting. TGL’s board comprises thirteen members, eight of whom are independent non-executive directors. The board has three committees: nominations, audit and remuneration. Similar structures are replicated by the subsidiary companies. Three directors of each subsidiary are executive directors recruited by the TGL leadership and with reporting responsibilities to the Group Chief Executive Officer (CEO) and the Chief Operations Officer (COO). In addition, TGL has a group executive committee (ExCo) which is the highest executive committee and advisory body to the Group CEO. The committee discusses matters that significantly impact on management, such as group management strategy and business executive policy. The ExCo holds a retreat annually to review group performance and formulate harmonised annual operational plans for each subsidiary. Most of TGL’s executive directors have served cumulatively for over ten years and their terms continue to be renewed by shareholders owing to their great confidence in them. However, there have been concerns regarding high turnover of non-executive directors in two of its subsidiaries in the recent past.

The group appreciates the stifling role of corruption to the realisation of Africa’s potential in terms of sustainable development, and the attendant spotlight on the private sector in the discourse on corruption. Particularly, the board of directors is concerned about the perception that public tenders are not awarded in a level playing field and fairly competed for in two of its countries of operations. As part of its corporate sustainability, TGL is committed to maintaining its strong internal systems and controls. The group has maintained practices of sharing internal policies, experiences and success stories with external stakeholders, in support of ongoing efforts by governments in the countries where it operates.

Additionally, the group has set up a foundation  (TGL Sustainability Foundation) to coordinate its corporate social responsibility initiatives. The foundation whose board is chaired by the Group COO, has set its eyes on three priority areas: participating in ventures aimed at increasing transparency in the supply of medication to vulnerable populations, supporting medical camps and finally supporting ethical disposal of medical waste. Overall, TGL plans to double its spending on corporate social responsibility to 1.5% of its gross turnover.

One of TGL’s subsidiaries, Metapharma Ltd. was recently embroiled in a public scandal regarding irregularities in procurement and supply of medical equipment for the Covid 19 response. Although the company directors were confident that Metapharma’s actions were above board, the attention and cross national interest that this matter attracted as well as the emotive rants which exploded on social media platforms, have potential to damage the firm’s reputation and image. The directors of TGL believe that they need to scale up their involvement in procurement matters so as to mitigate against such emerging risks.

Cognisant of the fact that TGL’s current five year strategy implementation period comes to an end in six months, the board commissioned an end of strategy term review, including operational review of its subsidiaries. The scope of the comprehensive review, undertaken by a renowned OECD governance and balance score card (BSC) consultant includes review of performance against the strategic plan targets, evaluation of board performance and risk management. The findings of the review will inform the next strategy formulation of an Enterprise Risk Management Roadmap and reconstitution of boards for the four subsidiaries. With regards to addressing the risks associated with corruption, the board is confident that the consultant will share experiences from OECD countries in the recommendations.


1.          Advise on four measures that TGL’s management could adopt to manage the staff anxiety and concerns as it pursues divestiture of Dwellings Ltd.    (8 marks)

2.        With regard to the Board of Directors of TGL and its subsidiaries:

Explain four roles of the nominations committee.        (4 marks)

Describe four ways in which TGL’s nominations committee could approach the task of nominating and appointing new directors to mitigate the high turnover of directors of its subsidiary companies. (4 marks)

3.          Explain five benefits of an elaborate corporate governance framework to TGL.       (5 marks)

4.         Discuss three roles of the board of directors with regard to procurement at TGL.      (6 marks)

5.          In the context of strategies adopted by TGL in expanding its operations to foreign countries:

Explain the concept of greenfield investment.         (2 marks)

Analyse three benefits that might accrue to TGL by adopting greenfield investment approach. (3 marks)

6.          Suggest eight topical aspects/items that the consultant hired by`TGL could incorporate in the evaluation of the effectiveness of the board of TGL and. the boards of its subsidiaries.       (8 marks)

(Total: 40 marks)



1.          Explain six reasons why companies establish and implement Codes of Conduct.       (6 marks)

2.           Hiring children in your business could be viewed as ethically wrong.

Assess the above statement from the following ethical perspectives:

Teleological (consequentialist) ethical perspective.     (2 marks)

Deontological (universal) ethical perspective.      (2 marks)

3.          Analyse the five steps of an organisation’s Enterprise Risk Management (ERM) process.      (5 marks)

(Total: 15 marks)



1.          Evaluation of an organisation’s strategy facilitates the assessment of efficiency and effectiveness of the chosen strategies.

With reference to the above statement, discuss three aspects that might be used to evaluate an organisation’s strategies before implementation.      (6 marks)

2.          Evaluate three roles of an Audit Committee with regard to the internal control system and the internal audit function.    (6 marks)

3.          Outline six steps that you might take when faced with an ethical dilemma.      (3 marks)

(Total: 15 marks)



1.          It has been argued that Non Executive Directors (NEDS) are ineffective in their role in an organisation.


Explain six possible causes of this ineffectiveness.     (6 marks)

2.         Summarise four roles of management in strategy execution.    (4 marks)

3.         An organisation has many actions and activities that demonstrate the existence and implementation of a

Corporate Social Responsibility policy.


Analyse five such actions and activities.       (5 marks)

(Total: 15 marks)



1.       With regard to contemporary theories of management, discuss three categories of Henry Mintzberg’s roles of management.    (9 marks)

2.        Highlight six ways in which a director of a company might vacate office.     (6 marks)

(Total: 15 marks)

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FRIDAY: 21 May 2021.     Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings.


1.         Differentiate between “correlation analysis” and “regression analysis”.        (2 marks)

2.         Compu World Limited assembles and sells computers. The company estimates that if it optimally assembles computers, it could sell between 1,100 and 2,000 computers per month and the monthly revenue (in thousands of shillings) over this range of sales could be represented by the function

The fixed cost of the company amounts to Sh.100,000 per month. If is assumed that all the computers assembled in a given month are sold within the same month.


The total cost function.       (2 marks)

The profit function,.       (2 marks)

The optimal monthly output.       (3 marks)

The maximum profit of the company.     (2 marks)

3.           The Registrar of Highfliers University has observed that the grade point aggregate of the University’s students is normally distributed with a mean of 2.75 and a standard deviation of 0.40.


The probability that a randomly selected student from the university has a grade point aggregate of between 2.00 and 3.00.     (3 marks)

The lowest grade point aggregate that should be obtained by a student for him/her to be among the top ten per cent of the students.      (3 marks)

Assuming that the university has a total of 10,000 students, determine the number of students having. a grade point aggregate of 3.70 or higher.     (3 marks)

(Total: 20 marks)



1.         Highlight two properties of each of the following probability distributions:

Binomial distribution.      (2 marks)

Poisson distribution.      (2 marks)

2.         Enumerate two advantages and two disadvantages of the ordinary least squares method of forecasting.                (4 marks)

3.         An investor intends to purchase shares in one of three companies, A, B and C. The three companies have varying

degrees of sensitivity to the state of the economy. There are three states of the economy classified as weak, moderate or strong.  The investor has constructed the following pay off table for the profits under the three states of the economy, in millions of shillings.

State of the economy

Company                                    Weak                            Moderate                     Strong


A                                             -4.0                                  3.5                                6.0

B                                             -2.0                                  2.5                                4.5

C                                             -2.4                                  2.8                                3.5

The probabilities for the three states of the economy are 0.2, 0.4 and 0.4 for weak, moderate and strong respectively.


Advise the investor on the best course of action based on the:

Maxmin criterion.    (2 marks)

Maxmax criterion.    (2 marks)

Minimax regret criterion.       (3 marks)

Expected value of perfect information.    (5 marks)

(Total: 20 marks)



1.           A baker makes and sells cakes to students through their cafeteria system.  The distribution of cakes produced and cakes sold for the last 250 weeks is as follows:

Number of weeks

                                                Cakes                                   Cakes

Number of cakes        Produced                                Sold

150                                           20                                              35

250                                            50                                              50

350                                            80                                              80

450                                            80                                              65

500                                           20                                              20

Each cake costs Sh.80 to make and is sold for Sh.120 if sold during the week of production, otherwise it is sold during the second week at Sh.60.  If not sold during the second week, the cake’s value drops to zero and the baker suffers the total loss of production. Weekly demand is satisfied from the week’s production and any demand remaining unsatisfied is satisfied from the stock of the previous week. A stock out costs the baker Sh.20 per cake.

The following random numbers are applicable:

Cakes produced                   33,      86,      50,      41,       31,     78,      30,     22,     26,     88

Cakes sold                            79,      03,       40,       13,      58,      61,     72,      49,     82,     86



Simulate the baker’s average weekly profit over an 8-week period.   (10 marks)

2.         Kazi na Bidii Ltd. sells four types of products. The resources needed to produce one unit of each product and the sales prices are given as follows:

Cost and resources requirements for Kazi na Bidii Ltd.

Resource                                         Product 1                      Product 2               Product 3             Product 4

Raw materials (units)                      2                                            3                                4                                7

Labour hours                                      3                                           4                                5                                6

Sales price (Sh.)                                 4                                           6                                7                                8


Additional information:

  1. Currently, 4,600 unfits of raw materials and 5,000 labour hours are available.
  2. To meet customers’ demand, exactly 950 total units must be produced and at least 400 units of Product 4 must be produced.
  3. A computer output of the above linear programming model has been given as follows:


The optimal solution to the problem.         (2 marks)

The optimal solution if the company raises the price of product 2 by Sh.0.50 per unit.    (2 marks)

The optimal Z-value if a total of 980 units must be produced.       (3 marks)

The optimal Z-values where 4,500 units and 4,400 units of raw materials are available.    (3 marks)

(Total: 20 marks)



1.          Enumerate eight applications of quantitative analysis in business.     (8 marks)

2.          The following is a pay-off matrix of a zero sum two person game:


The optimal plan for both players.      (5 marks)

3.           A beauty therapist has observed that the mean arrival rate in her beauty parlour is 6 customers per hour and the mean service rate is 8 customers per hour. The beauty parlour operates a 12 hour day.

A more efficient machine for use by the therapist is available for purchase. If the machine is purchased by the therapist, it would increase the average service rate at the parlour to 12 customers per hour. The cost of each hour lost due to a customer waiting for service is Sh.875.


The average waiting cost per day.      (3 marks)

Evaluate the effect of purchasing the more efficient machine on the average daily waiting cost. (4 marks)

(Total: 20 marks)



1.          Citing an example in each case, explain the difference between a continuous function and a discrete function. (4 marks)

2.       X Ltd. is considering undertaking a project which fequires the following resources:

The cost of crashing an activity per day is,Sh.1,000.


Using network analysis, determine:

The project’s normal duration, normal cost and critical path.    (8 marks)

The minimum time in which the project could be completed and the cost of the project.     (8 marks)

(Total: 20 marks)

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FRIDAY: 21 May 2021.       Time Allowed: 3 hours.

Answer ALL questions.   Marks allocated to each question are shown at the end of the question. Show ALL your workings.


1.           Highlight four benefits of investing in an index fund.    (4 marks)

2.          You have been appointed as a fund manager for a pension development fund for civil servants in your country.


Draft an investment policy statement (IPS) for the fund, clearly indicating the key sections.      (10 marks)

3.           Examine three key differences between “traditional finance” and “behavioural finance”.      (6 marks)

(Total: 20 marks)



1.            Felix Otieno, an analyst at Diamond Investment Fund has outlined the factor exposures of two stocks using macroeconomic factors as shown below:

Factor                                                 Stock A                          Stock B

Confidence                                                0.2                                     0.6

Time horizon                                             0.6                                     0.8

Inflation                                                 — 0.1                                  — 0.5

Business cycle                                          4.0                                     2.0

Market timing                                            1.0                                     0.7



Compute the factor exposures of a portfolio invested 50% in Stock A and remainder in Stock B. (3 marks)

Contrary to general forecasts, you expect strong economic growth with a slight increase in inflation. Recommend the stock that you should overweigh in your portfolio.    (2 marks)

2.          An investment advisor is counselling Susan Nkatha, a client who recently inherited Sh.l.2 billion and has above average risk tolerance (RA = 2) and wants returns that will outpace inflation in the long-term.

Susan expects to liquidate Sh.60 million of the portfolio in 12 months ideally without invading the initial capital. The alternative strategic asset allocation choices for Susan are as follows:

Investor’s forecasts

Asset allocation                                   Expected Return                    Standard deviation of return

A                                                                 10%                                                           20%

B                                                                 7%                                                              10%

C                                                                 5.25%                                                           5%



Determine the preferred asset allocation based on risk adjusted expected returns for the asset allocation. (5 marks)

Determine the shortfall level, RL, assuming that Susan’s desire is not to invade the Sh. 1.2 billion principal.  (2 marks)

Select the best asset allocation using Roy’s safety first criterion.     (3 marks)

3.           The following information relates to price movements of some selected shares:

Share                                Start of year 2020                                         End of year 2020

X                                                    110                                                                   130

Y                                                      76                                                                     72

Z                                                      95                                                                   100



Calculate the following types of means based on the holding period return:

Arithmetic mean.   (2 marks)

Geometric mean.    (2 marks)

Explain why a financial analyst is more likely to apply geometric mean as opposed to arithmetic mean. (1 mark)

(Total: 20 marks)



1.          Summarise six assumptions of the capital asset pricing model (CAPM).      (6 marks)

2.        An investor has decided to invest Sh.1 million in the shares of two companies namely Edulink (E) and Bookstore (B).

The projections of returns from the shares of the two companies along with their probabilities are as follows:

Probability                               Edulink (%)                             Bookstore (%)

0.20                                                      12                                                   16

0.25                                                      14                                                   10

0.25                                                     —7                                                   28

0.30                                                      28                                                  —2



Determine the proportion of each of the above shares required to formulate a minimum risk portfolio.        (8 marks)

3.           Jeremiah Kiragu owns a portfolio with the following characteristics:

                                                        Security A                    Security B                           Risk free security

Factor 1 sensitivity                                       0.80                                  1.50                                                   0

Factor 2 sensitivity                                       0.60                                  1.20                                                   0

Expected return                                             15%                                  20%                                                10%

It is assumed that security returns are generated by a two factor model.



Determine the sensitivity of Kiragu’s portfolio to the two factors assuming that he has Sh.l million to invest and sell short Sh.500,000 of security B and purchases Sh.1,500,000 of security A.     (2 marks)

Determine the sensitivity of the portfolio to the two factors assuming that Kiragu borrows Sh.1 million at the risk free rate and invest the amount he borrows along with the original amount of Sh.1 million in security A and security B in the same proportion as described in  (i) above.     (2 marks)

Calculate the expected return premium of factor 2.      (2 marks)

(Total: 20 marks)



1.          Explain the meaning of the following types of risks that could affect a portfolio:

Compliance risk.    (1 mark)

Operational risk      (1 mark)

Counterparty risk.     (1 mark)

2.         Summarise three ways that could be used by a portfolio manager to manage credit risks.       (3 marks)

3.          Propose two applications of trusts as an estate planning tool.      (4 marks)

4.         A consultant is analysing three investment managers for a new mandate.

The table below provides the managers’   ex-ante active return expectations and portfolio weights.

The last two columns include the risk and the ex-post, realised active returns for the four securities:

All the three managers claim to be good at forecasting returns and also claim to be efficient in portfolio construction.


Determine, using the full fundamental law of active management the following:

The manager that is best at efficiently building portfolios by anticipating future returns.    (5 marks)

The manager that is best at building portfolios to make full use of their ability to correctly anticipate returns.     (5 marks)

(Total: 20 marks)



1.          Analyse three standardised methods for estimating value at risk (VaR).      (6 marks)

2.          Evaluate four factors that could hinder a portfolio manager from investing internationally.       (4 marks)

3.          The following information relates to a fund manager’s annual return and the share index’s return for the last five years:

Year                             Fund Manager’s Returns (%)                      Share index’s Returns (%)

2020                                                         11.9                                                                       12.1

2019                                                       – 6.8                                                                      – 5.9

2018                                                          9.5                                                                         9.7

2017                                                            13                                                                       12.8

2016                                                          9.5                                                                       10.0


The fund manager’s tracking error.    (3 marks)

State whether the fund manager is making progress on his portfolio management strategy. Justify your answer.      (1 mark)

4.           As the Chief Investment Officer (CIO) of Uwezo Ltd., which is an all-equity financed company, you have over the years been investing in short-term projects that do not exceed one year to complete.

The company is considering investing in the following one year projects:


Project                          Initial Outlay                             Expected cash flow                                 Beta factor

                                           Sh.”000″                                             Sh.”000″

A                                            13,300                                                      14,600                                                    0.3

B                                            13,300                                                      15,100                                                    0.5

C                                            20,000                                                      23,700                                                     1.0

D                                           26,700                                                      31,800                                                     1.5

E                                            26,700                                                      32,000                                                    2.0


Additional information:

  1. The risk free rate is 8% and the expected return on the market portfolio is 15%.
  2. The market-equilibrium cost of capital is 18.5%.
  3. Neither of the projects is divisible.


The company’s beta factor.         (1 mark)

Required rate of returns for each project using the capital asset pricing model (CAPM).     (2 marks)

Expected returns for each project using undiscounted cash flows.    (3 marks)

(Total: 20 marks)

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THURSDAY: 20 May 2021.        Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings.


1.          Explain the following types of market organisation used in the securities market:

Auction market.    (1 mark)

Brokered market.    (1 mark)

Dealer market.    (1 mark)

2.          The following information relates to the central order book of Dolphin Ventures Limited, a company quoted at the Securities Exchange:

Sell orders                                                                                              Buy orders

Quantity         Limit (Sh.)                                                            Quantity                    Limit (Sh.)

5,000                       151                                                                             5,000                              146

20,000                     150                                                                             20,000                            144

10,000                    149                                                                              10,000                           143

5,000                       148                                                                             20,000                            142

5,000                       147                                                                              10,000                           141


Alfred Ngugi has entered a market order to purchase  15,000 shares of Dolphin Ventures Limited.

Advise him on the price at which he should buy the shares.       (2 marks)

Compute the average trade price of the shares based on your answer in  (i) above.    (1 mark)

Suppose that Alfred Ngugi had instead wanted to sell 10,000 shares of the company.

Determine the price at which he would sell the shares.        (2 marks)

Outline four macroeconomic indicators that could influence the securities market in your country. (4 marks)

3.          An analyst gathered the following information regarding Beta Ltd.:

Expected earnings per share for 2020                                           Sh.3.34

Retention rate                                                                                       0.40

Required rate of return                                                                       12%

Current share price                                                                              Sh.40

Dividends are paid out at the end of the year and are expected to grow at the rate of 6% into perpetuity.



The fraction of the company’s leading price to earnings ratio that comes from the present value of growth opportunities (PVGO).      (5 marks)

Explain three causes of a negative present value of growth opportunities (PVGO).     (3 marks)

(Total: 20 marks)



1.          Examine five steps that are involved in the equity valuation process.    (5 marks)

2.          Using relevant diagrams, explain three types of technical analysis charts that are used by equity analysts while forecasting the movement of the prices of shares.     (6 marks)

3.         An analyst gathers the following information about Zeb Limited shares:

Current market price per share                                                        Sh.22.56

Current annual dividend per share                                                 Sh.1.06

Annual dividend growth rate for years 1 — 4                                9.00%

Annual dividend growth rate for years 5 and above                    4.00%

Required rate of return                                                                       12%


Using the Two-Stage Dividend Discount Model, compute the intrinsic value of the share and comment on the results.  (5 marks)

4.         Smartprint Ltd. is a large-scale printing firm quoted on the Securities Exchange. The company is considering investing Sh.500 million in new printing equipment. The present value of the future after-tax cash flows resulting from the equipment is Sh.750 million. Smartprint Ltd. currently has 100 million shares outstanding, with a current market price of Sh.45 per share. Assume that this project’s new information is independent of other expectations about the company.


Determine the effect of the new equipment on the value of Smartprint Ltd.      (3 marks)

Comment on the effect of the results obtained in  (i) above on Smartprint Ltd.’s share price.       (1 mark)

(Total: 20 marks)



1.          Summarise four factors that could justify the use of the residual income model in the valuation of equity.   (4 marks)

2.         The following information relates to Sky Blue Ltd.:

Debt                                                                                                                         Sh.20,000,000

Long-term growth of revenues and after tax operating income                  5% annually

Gross profit margin                                                                                                40%

Depreciation                                                                                                              2% of sales

Other operating expenses                                                                                      Sh.4,000,000

Working capital required                                                                                        10% of additional revenues

Sales                                                                                                                            Sh.100,000,000

Corporation tax rate                                                                                                30%

Capital expenditure is expected to equal projected depreciation

expense plus 5% of incremental revenues



Explain whether a prospective investor should use reported earnings or normalised earnings in estimating the free cash flow to firm (FCFF) for Sky Blue Ltd.    (2 marks)

Calculate the forecast free cash flow to firm (FCFF) for Sky Blue Ltd. for the upcoming year. (5 marks)

3.          An analyst gathered the following data for TZ Construction Ltd.:

Recent market price per share                                                         Sh.30

Number of shares outstanding                                                         40 million


Market value of debt                                                                               120

Cash and marketable securities                                                              75

Investments                                                                                              200

Net income                                                                                                 160

Interest expense                                                                                           9

Depreciation and amortisation                                                               12

Taxes                                                                                                             48


Calculate the enterprise value to earnings before interest, taxes and depreciation (EV/EBITDA) multiple.   (4 marks)

4.         Wema Ltd. reported the following figures for the end of its financial year:

Revenues                                                                Sh.40.8 million

Pretax income                                                       3h.8.6 million

Assets                                                                     Sh.53.2 million

Liabilities                                                              Sh.27.8 million

Dividends per share                                            Sh.0.35

Number of shares outstanding                         8 million

Corporation tax rate                                            30%

The beta for Wema Ltd. is 1.2, the current risk free rate is 4.5% and the expected return on the market is   12.5%.



The value of the shares using a single-stage residual income model.    (5 marks)

(Total: 20 marks)



1.           Evaluate three momentum valuation indicators used in equity analysis.     (6 marks)

2.          Explain three applications of industry analysis in equity valuation.    (6 marks)

3.           Benson Mutisya has gathered the following data for a publicly quoted firm:


Net income                                                                              43,923

Sales                                                                                        423,474

Average total assets during the year                               486,203

Shareholders equity. beginning of the year                  397,925

Dividends paid                                                                       1,518



The firm’s sustainable growth rate using the Dupont Model.       (3 marks)

4.        Big Store Limited (BSL) produces electronic toys for children aged between 2 and  12 years. The most recent income statement for BSL is given below:

Sh. “million”

Revenue                                                                1,500

Cost of goods sold                                               630

Selling expenses                                                    120

Administrative expenses                                    330

Operating profit                                                     420


Allan Oketcli, a financial analyst, is forecasting BSL’s operating profit for the next financial year. He believes a new tax rate of 10% is going to be imposed on the revenue. Allan also believes that cost of goods sold and selling expenses are a fixed percentage of sales, while administrative expenses are fixed. BSL is expected to pass on the entire cost of the tax to the consumer. The price elasticity of demand for BSL toys is 0.75. that is, volume will decrease by 7.5% when the effective price increases by 10%.


The forecasted operating margin for the next financial year.    (5 marks)

(Total:  20 marks)



1.          Describe three disadvantages of using the price to book value ratio in equity valuation.   (3 marks)

A firm has a return on equity (ROE) of 18%, an estimated growth rate of 13% and its shareholders require a return of 17% on their investments.


Based on these fundamentals, calculate the appropriate price to book value ratio for the firm.   (2 marks)

2.          The margin and sales tradeoff for QT Ltd. for next year are provided below:

Firm            Strategy                                         Retention Rate               Profit margin              Sales/book value of equity

QT                 High margin/Low volume               20%                                    8%                                              125

QT                 Low margin/High volume               20%                                    2%                                             4.00

The book value of equity of the firm is Sh.80 and has a required rate of return of 10%.


Calculate the firm’s leading price to sales    (P/S) multiple assuming that it undertakes a high margin/low volume strategy.     (3 marks)

3.         Charles Magut is a financial analyst at Signature Investment Limited. He has compiled the following information about Reliant Properties Ltd.:

Growth  rate  of  free  cash  flow  to  firm   (FCFF)    –    8.8%   in   Stage    1   comprised   of  years   1  – 4, 7.4% in year 5, 6% in year 6 and 4.6% in year 7, 3.2% in year 8 and thereafter

Capital structure                                                  20% debt and 80% equity

Marginal tax rate                                                34%

Long-term debt                                                    Sh.1.518 billion

Cost of debt                                                          7.1%

Equity beta                                                            0.90

Risk-free rate                                                       5.04%

Equity risk premium                                          5.5%

Current FCFF                                                         Sh.745 million

Outstanding shares                                              309.39 million



The required return for equity.      (2 marks)

Weighted average cost of capital (WACC).      (2 marks)

Total value of Reliant Properties Ltd. using Three-Stage FCFF.   (6 marks)

Value per share of the company.         (2 marks)

(Total: 20 marks)

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THURSDAY: 20 May 2021.       Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings.


1.          Bidii Cement Company is listed in the local securities market. Some of the other listed cement manufacturing companies provide extensive disclosures in their external reports about their environmental policies and practices.


Discuss two reasons that may cause Bidii Cement Company to voluntarily disclose its environmental policies and practices as part of its annual reports.    (4 marks)

Explain three potential advantages of voluntary environmental disclosures to Bidii Cement Company. (6 marks)

2.          Milele Ltd. is a public limited company. As at 31 March 2019, Milele Ltd. had issued share capital of Sh.10 million.  The  shares  are denominated  at  Sh.0.25  each.  Milele  Ltd.’s earnings attributable to its ordinary shareholders for the year ended 31 March 2019 were also Sh.10 million giving an earning per share of Sh.0.25.

The following transactions took place during the year ended 31 March 2020:

  1. On 1 July 2019, Milele Ltd. issued eight million ordinary shares at full market value.
  2. On 1 January 2020, a bonus issue of one ordinary share for every four ordinary shares held was made.
  3. Earnings attributable to ordinary shareholders for the year ended 31 March 2020 were Sh.13,800,000.

Transactions for the year ended 31 March 2021 were as follows:

  1. On 1 October 2020, Milele Ltd. made a rights issue of share of two new ordinary shares at a price of Sh.1.00 each for every five ordinary shares held. The offer was fully subscribed.
  2. The market price of Milele Ltd. ordinary shares immediately prior to the offer was Sh.2.40.
  3. Earning attributable to ordinary shareholders for the year ended 31 March 2021 were Sh.19,500,000.


Earning per share (EPS) for the year ended 31 March 2020 including comparative figure for the year ended 31 March 2019.     (4 marks)

Earning per share (EPS) for the year ended 31 March 2021 including comparative figure for the year ended 31 March 2020.   (6 marks)

(Total: 20 marks)



1.         Operating segment information in a set of financial statements has been viewed by some investors as just too much information which may be difficult to understand. Some investors argue that this information is also costly to produce and its cost outweighs its benefits.


Describe three benefits that could be derived by investors from reviewing the operating segment disclosures accompanying financial statements when making decisions on investments.   (6 marks)

Explain two limitations of using operating segment information when making investment decisions. (4 marks)

2.         Drible Cable  (DC) experienced a period of rapid expansion in the six months following the launch of a new product on 1 July 2020. The following information is available from the books of DC:


Assume a 365-day year.


For each of the periods above, calculate the following ratios:

Inventories turnover period.   (1 mark)

Payables turnover period.   (I mark)

Receivables turnover period.   (1 mark)

Current ratio.      (I mark)

Quick ratio.      (1 mark)

Gross profit margin.  (1 mark)

Using the calculations in  (i) to (vi) above, comment on the financial performance of DC.          (4 marks)

(Total: 20 marks)



1.          Duka Limited owns a piece of machinery and entered into an agreement to lease the machinery on 1 January 2017 In the lease contract, the company requires four annual payment of Sh.28,679 starting on 1 January 2017. The present value of the lease payments using a 10% discount rate is Sh.100,000 and the fair value of the equipment is Sh.90,000. The useful life of the machinery is four years and its salvage value is zero.


Duka Ltd.’s cumulative income related to the lease.      (8 marks)

Distinguish between reporting a lease as an operating lease or as a finance lease in the financial statements. (4 marks)

Jane Mara, a financial analyst is seeking to identify companies with potential unrecorded leases. She studied the 2020 annual report of Basket Ltd. which reported an operating lease from 2020 to 2025 as shown below:

Basket Ltd.

Operating lease payments

Year                                           Amount


2020                                                215

2021                                                 I86

2022                                                 160

2023                                                 141

2024                                                 136

2025                                                 136

Jane Mara noted that Basket Ltd. had issued a bond with an effective interest rate of 6% per annum.


The present value of the operating lease commitment.     (4 marks)

2.         The following information relates to Minoh Ltd.’s pension plan as at 31 December 2020:

  1. The present value of a company’s defined benefit obligation is Sh.5,485 million and the fair value of the pension plan asset is Sh.5,798 million.
  2. The company has unrecognised transition liabilities of Sh.50 million, unrecognised actuarial losses of Sh.59 million and unrecognised past service costs of Sh.70 million.
  3. The present value of available future refunds and reductions in future contribution is Sh.3 I3 million.


The amount of the pension asset to be reported as at 31 December 2020 in the statement of financial position. (4 marks)

(Total: 20 marks)



1.          International  Accounting Standard  (IAS)   10,  Events  After the  Reporting  Period, shall be applied  in the accounting for, and disclosure of, events after the reporting period.


Explain the term “events after the reporting period”.    (2 marks)

Highlight two types of events that are identified under the standard.     (2 marks)

2.         White Ltd. (WL) has a number of investments in subsidiary and associate entities. During the year ended 30 June 2020, WL acquired an investment in QB Ltd.

The statements of financial position of WL, group for the years ended 30 June 2020 and 30 June 2019 are shown below:


Additional information:

  1. During the year ended 30 June   2020, there was no disposal of property, plant and equipment. Depreciation charged for the year ended 30 June 2020 was Sh.1,200,000.
  2. WL’s share of the associate’s profit for the year ended 30 June 2020 was Sh.1,800,000.
  3. The total comprehensive income attributable to non-controlling interest for the year ended 30 June 2020 was Sh.350,000.
  4. WL acquired 75% of the equity share capital of QB on 1 January  2020 for a cash consideration of Sh.300,000 and the issue of 1,000,000 ordinary shares of Sh.1 each in WL. WL’s shares had a deemed value of Sh.2. 15 per share at the date of acquisition.
  5. The fair value of the net assets of QB acquired on 1 January 2020 were as follows:


  1. WL did not acquire or dispose of any other investments in the year. The group policy is to value non controlling interest at acquisition at its proportionate share of the fair value of the net assets acquired.
  2. In the year ended 30 June 2020, QB paid a dividend but WL did not pay any dividend.


Extracts from the consolidated statement of cash flows for WL for:

Cash flows from investing activities for the year ended 30 June 2020.     (8 marks)

Cash flows from financing activities for the year ended 30 June 2020.     (8 marks)

(Total: 20 marks)



1.           On 1 January 2020, Berry Ltd. acquired 90% of the outstanding shares of Cherry Ltd. in exchange for shares of Berry Ltd. with a fair value of Sh.180 million. The fair market value of Cherry Ltd.’s ordinary shares on the date of the exchange was Sh.200 million.

The following is a summary of the financial information of the two companies as at 31 December 2019:


The value of goodwill and the value of the non controlling interest on     1 January 2020 under the partial goodwill method.    (3 marks)

Consolidated statement of financial position as at  1 January 2020.      (7 marks)

2.         RTZ Ltd. operates in country N and has established the NSh as its functional currency. RTZ Ltd. acquired a piece of machinery from an international supplier on    20 November 2020. The invoice remained unpaid at the year ended    31 December 2020:

Relevant exchange rates (where NSh/KSh 2.00 means Nsh 1 = Ksh.2.00) are:

20 November 2020                                                      Nsh/Ksh2.00

31 December 2020                                                      Nsh/Ksh2.15



In accordance with International Accounting Standard  (IAS)  21, The Effect of Changes in Foreign Exchange Rates:

Distinguish between “functional currency” and “presentation currency”.  (4 marks)

Highlight two factors that RTZ Ltd. might have considered when establishing Nsh. as its functional currency.    (2 marks)

Calculate the amounts to be included in the financial statements of RTZ Ltd. for the year ended 31 December 2020 in respect to the above transaction.     (4 marks)

(Total: 20 marks)