1.

Tahmeed Company currently has a mortgage on its office building through a savings
institution. It is attempting to determine whether it should convert its mortgage from a floating
rate to a fixed rate. Recall that the yield curve is currently upward sloping. Also recall that
Tahmeed is concerned about a possible slowing of the economy because of potential Fed actions
to reduce inflation. The fixed rate that it would pay if it refinances is higher than the prevailing
short-term rate, but lower than the rate it would pay from issuing bonds.
a) What macroeconomic factors could affect interest rates and therefore affect the mortgage
refinancing decision? 3 marks
Mortgage refinancing normally occurs when interest rates change to get a better rate and increase
cash flow as much as possible. Inflation, gross domestic product (GDP) and money supply cause
changes to the interest rate and hence initiates mortgage refinancing.
b) If Tahmeed refinances its mortgage, it also must decide on the size of a down payment. If it
uses more funds for a larger down payment, it will need to borrow more funds to finance its
expansion. Should Tahmeed use a minimum down payment or a larger down payment if it
refinances the mortgage? Why? 3 marks
To pay larger down payment Tahmeed needs to borrow more funds, so he should choose a
minimum down payment. Larger down payment means higher interest expenses, which can
further increase cost of financing if interest rates rise. Higher cost of financing negatively affects
company performance.
2. As an investment manager, you frequently make decisions about investing in stocks versus
other types of investments, and about types of stocks to purchase.
You have noticed that investors tend to invest more heavily in stocks after interest rates have
declined. You are considering this strategy as well. Is it rational to invest more heavily in stocks
once interest rates have declined? 3 marks
When corporate bonds and government bonds give low yield due to lower interest rates stocks
become a better investment option with higher yield. Also money supply increases, so now
people have more money. So the stock prices go up as demand rises. Now higher yield comes
with higher risk and it is rational to invest heavily in stocks when a high return is guaranteed.
3. As a consultant to an insurance company, you have been asked to assess the asset composition
of the company.
a. The insurance company has recently sold a large amount of bonds and invested the proceeds in
real estate. Its logic was that this would reduce the exposure of the assets to interest rate risk. Do
you agree? Explain. 3marks
I agree to the logic. If interest rate decreases people will take more mortgage loans to buy homes
so as demand of real estate increases value will also increase and vice versa. Nevertheless real
estate value is not only affected by interest rate but also the location and ease of purchase of the
asset. So for instance if the location is good the value might not be affected if the interest rate
increases. Normally value of real estate increases due to inflation which is also a fact that comes
to play.
b. This insurance company currently has a small amount of stock. The company expects that it
will need to liquidate some of its assets soon to make payments to beneficiaries. Should it shift
its bond holdings (with short terms remaining until maturity) into stock in order to strive for a
higher rate of return before it needs to liquidate this investment? 3marks
Rate of return in case of stocks is higher than bonds. The company should shift its bond holdings
to stocks. The risks associated with stocks are higher than bonds. For example, there is a chance
of default or credit risk but no interest rate risk. With higher risk comes higher return, so the
company can strive for a higher return if they invest in stocks.
4. Writing Put Options. A put option on Indiana stock specifies an exercise price of $23. Today
the stock’s price is $24. The premium on the put option is $3. Assume the option will not be
exercised until maturity, if at all. Complete the following table: 5 MARKS
Assumed Stock Price at the Time Net Profit or Loss per Share to Be Earned
The Put Option Is About to Expire by the Writer (Seller) of the Put Option
$20 20+3-23=0
$21 21+3-23= (+) 1
$22 22+3-23= (+) 2
$23 23+3-23= (+) 3
$24 23+3-23= (+) 3
$25 23+3-23= (+) 3
$26 23+3-23= (+) 3
5. Select any mutual fund company (local or international). Use the company's prospectus to
answer the following:

1) What is the investment objective of this fund? Do you consider the fund to have low,
medium or high risk and why? 3 marks
2) what was the return on the fund last year? What was the average annual return over the last
three years? 3 marks
3) what are the key economic factors that influences the return on this fund? 3 marks
4) what are the fees applicable when buying or selling this fund? What kind of fund is this e.g
open-end; closed-end etc. 3 marks
5) what the expense ratio for this fund was over the last year? Does this ratio seem too high to
you? 3 marks

Answer to question #5
Link of prospectus:
https://www.op.fi/documents/20556/62177/Rahastoesite_30_10_2020_EN/2a630e73-7c04-2e98-
bc5b-500c33237604
Link for financial statements (2020):
https://www.op.fi/documents/209474/34303255/OP+Financial+Group+Interim+Report+Q1+202
0.pdf/4c686bde-7f3a-7f19-3f9b-3c1e9418308e

#1
Moderate fund of OP Financing group is a balanced fund which invests in equity and assets in
the global market. Moderate fund is
The OP moderate fund is an A-class and the risk is medium as 50% of the money is invested in
assets and the rest invested into equity markets. Income received from investing in this fund is
reinvested back in the fund. The reason there is a risk is because it has higher equity weighting
which increases expected return and also risk.
#2
Return on the funds for 2020 is EUR 150 million
Average return of the 2018, 2019 & 2020
(146+148+150)/3=148
#3
Moderate fund have a mixture of several indexes. As the fund is diversified into assets and
equity, GDP, interest rate and governance of a country are the 3 economic factors that affect this
fund. The fund is not appropriate for investors willing to withdraw money in 4 to 5 years. The
fund is not appropriate for investors willing to withdraw money in 4 to 5 years.

#4
OP-Moderate Fund an open ended fund mostly used for hedging.
Cost of subscription: 0.001% of total amount of fund
Cost of redemption: 0.5%% of total amount of fund

#5
Year 2020 expense ratio = (518000000/146876000000)*100 = 0.353%
The expense ratio low meaning it is good as only 0.353% of the total value of assets were the
expenditure in that year.