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Question 1 Knowledge of financial products (20 marks) Your friend's mother wants to invest some money (about HKD 100,000) and you went with her to meet a bank's investment advisor. The advisor recommended three products, the details of which are given below: Product Issuer Bond A Hong Kong Government 2 years Zero coupon Bond B Structured Note C Bank Y Company X 2 years on Maturi Coupon 2 years | 4.50%p.a., pays | 6%pa, pays once ce a year at a year at each each year's end $100 ar's end Face value at maturity $100 Price toda $10000 To be decided $10000 $94.50 There is an extra condition for Structured Note C Product Extra condition Structured Note C If share price of Hang Seng Bank (stock code 0011) is below $100 at maturity, you would get back 100 shares of Hang Seng Bank instead of the face value of $10000 i. (2 marks) Calculate the annualized yield and duration of Bond A ii. (2 marks) Calculate the price and duration of Bond B, given the yield of this bond is 3.50%pa. (annual compounding convention) iii. (4 marks) Using an interest rate of 3%pa. to discount the cash flows and given that the price of 100 Hang Seng Bank options is worth $850 today, calculate the bank's commission charge for Structured Note C as of today iv. (4 marks) Assume that you have chosen Structured Note C and you could re-invest the coupon that you received at the end of year 1 at an interest rate of 4%p.a. for 1 year. Calculate the realized compound yield of Structured Note C, assuming that Hang Seng Bank's share price is HKD 96 at maturity v. (8 marks) Knowing that Structured Note C is linked to the performance of share prices while she heard that it is easy to make money in the stock market, your friend's mother thought that the Note is very attractive and the yield could be much higher than the other two products. She has dreams of becoming rich in two years time. The advisor said nothing against this and is keen to sell the product. You feel uncomfortable about the situation and think that something doesn't sound right. Which product would you recommend to your friend's mother? Your answer should include an analysis of the potential gain/loss of each product and the risks involved You should also comment on the scenarios if your friend's mother needs to withdraw the money before the maturity of the product is reached Question 1 Knowledge of financial products (20 marks) Your friend's mother wants to invest some money (about HKD 100,000) and you went with her to meet a bank's investment advisor. The advisor recommended three products, the details of which are given below: Product Issuer Bond A Hong Kong Government 2 years Zero coupon Bond B Structured Note C Bank Y Company X 2 years on Maturi Coupon 2 years | 4.50%p.a., pays | 6%pa, pays once ce a year at a year at each each year's end $100 ar's end Face value at maturity $100 Price toda $10000 To be decided $10000 $94.50 There is an extra condition for Structured Note C Product Extra condition Structured Note C If share price of Hang Seng Bank (stock code 0011) is below $100 at maturity, you would get back 100 shares of Hang Seng Bank instead of the face value of $10000 i. (2 marks) Calculate the annualized yield and duration of Bond A ii. (2 marks) Calculate the price and duration of Bond B, given the yield of this bond is 3.50%pa. (annual compounding convention) iii. (4 marks) Using an interest rate of 3%pa. to discount the cash flows and given that the price of 100 Hang Seng Bank options is worth $850 today, calculate the bank's commission charge for Structured Note C as of today iv. (4 marks) Assume that you have chosen Structured Note C and you could re-invest the coupon that you received at the end of year 1 at an interest rate of 4%p.a. for 1 year. Calculate the realized compound yield of Structured Note C, assuming that Hang Seng Bank's share price is HKD 96 at maturity v. (8 marks) Knowing that Structured Note C is linked to the performance of share prices while she heard that it is easy to make money in the stock market, your friend's mother thought that the Note is very attractive and the yield could be much higher than the other two products. She has dreams of becoming rich in two years time. The advisor said nothing against this and is keen to sell the product. You feel uncomfortable about the situation and think that something doesn't sound right. Which product would you recommend to your friend's mother? Your answer should include an analysis of the potential gain/loss of each product and the risks involved You should also comment on the scenarios if your friend's mother needs to withdraw the money before the maturity of the product is reached

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