3. Which of the followings is not the principle of insurance? A. Insurable interest B. Utmost good faith C. Subrogation D. Historical background

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1 Section A. Multiple Choice (20 marks) 1. Which of the following statements about mutual fund is wrong? A. It is a kind of investment tool B. The investment is managed by a fund manager C. A fund fact sheet is provided to describe the investment object D. Only bond and currency funds are offered 2. Which of the following descriptions about income funds is untrue? A. Emphasize on income B. Emphasize on capital growth C. Unit price is fluctuated D. Investment portfolio mainly consists of investment grade bonds 3. Which of the followings is not the principle of insurance? A. Insurable interest B. Utmost good faith C. Subrogation D. Historical background 4. Indemnity is one of the principles of insurance. Which of the following ways of compensation would not generally used by the insurers? A. Paying cash B. Repairing C. Reinstatement D. Abandonment 5. Which of the followings is not the feature of investment linked insurance A. Fixed premium B. No investment options C. Annual report is provided D. Separate investment account 2

2 6. Currency rate is the price of one country's currency expressed in another country's currency. If the exchange rate for one euro in terms of one yen rises, the relative value of the yen. A. decreases B. increases C. is unchanged D. All of the above are incorrect 7. Which of the followings is not the major participant in the foreign exchange market? A. Central banks B. Investment banks C. Multi-national enterprises D. Public investors 8. Which of the followings is not the major influencing factor of currency rate? A. Economic situation B. Interest rate C. Price index D. Natural environment 9. Coupons are the of bonds payable to the bondholders. A. interest B. principal C. initial payment D. total cash value 10. If the face amount of a bond is $1,000 and its coupon rate is 10%, payable semi-annually to the bondholders. Then how much would the bondholder receive every half year? A. $50 B. $100 C. $500 D. $1,000 3

3 Section B. Matching (20 marks) Preferred stock Common stock Floating rate bond Arbitrage Mandatory Provident Bearer bond European option Carry trade Fund Authority American option Callable bond Convertible bond Currency swap Financial Terms Carry trade Common stock Mandatory Provident Fund Authority Convertible bond Preferred stock Arbitrage American option Callable bond European option Currency swap Definitions A strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate. It usually entitles the owner to vote at shareholders' meetings and to receive dividends. It established under the Mandatory Provident Fund Schemes Ordinance (MPFSO) to regulate and supervise the operations of provident fund schemes. It gives bondholders an option to exchange each bond for a specific number of shares of common stock of the firm. It generally does not have voting rights, but has a higher claim on assets and earnings than the common shares. The simultaneous purchase and sale of an asset in order to profit from a difference in the price. This usually takes place on different exchanges or marketplaces They can be exercised at any time up until maturity. It allows the bond issuer to repurchase the bond at a specific call price before the maturity date. They can only be exercised at maturity. It involves the exchange of principal and interest in one currency for the same in another currency. 4

4 Section C. Short Questions (50 marks) 1. Please state three differences between shares and bonds. (9 marks) Shareholders have ownership interests in a corporation or financial asset and receive dividends. But bondholders do not have ownership interests. They loan money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. The dividends of shares are fluctuating but the bond coupons are promised to pay at a specific rate of interest during the life of the bonds. Common shareholders are entitled to vote at shareholders' meetings but the bondholders do not have such rights. Shareholders have no rights to claim the wound-up company. They can only receive the residual value after repaying all debts. However, bondholders have higher priority in claiming the company. 2. Please give an example of exchange trade fund. Tracker Fund. In Hong Kong, we can trade Tracker Fund in the Hong Kong Exchange through brokers and banks. ETF is a security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold. 3. State the advantages of public listing of Companies. Enter the financial market; Increase the capital basis; Acquire capital to explore opportunities of future development; Diversify the risk among large number of shareholders; Enhance the reputation of the enterprise; Save interest expense; Increase the loyalty of employees. 5

5 4. Explain the differences between the contracts and the investment objectives of futures and options. (12 marks) Right and obligation there is a contractual obligation between two parties (buyer & seller) of future contract. But option buyer has right but no obligation whereas op[tion seller has obligation but no right. Risk and return buyer and seller of future bear the same level of risk and the potential risk and return are unlimited. However, the risk and return of option buyer and seller are asymatrical. Option buyer has limited loss (premium) but unlimited profit. Op[tion seller has unlimited loss but limited profit (premium). Option trading is a zero-sum game. Margin requirement both buyer and seller have to pay the initial deposit and keep the maintenance margin. However, option buyer pays only premium to the seller and the seller has to pay initial deposit to the broker and keeps the maintenance margin with mark-to-market. 5. List out three differences between stocks and warrants. (9 marks) Stock is a unit of ownership interest in a corporation or financial asset. Shareholders is usually entitled to vote at shareholders' meetings and to receive dividends. Warrant does not consist of ownership interest in a corporation or financial asset. Warrant holder does not have the right to vote and to receive dividend. Stock has no expiry date and warrant has. Warrant becomes worthless after the expiry date. Warrant investment has leverage effect but stock trading does not. 6. State and explain three reasons for investors to invest in futures market. (12 marks) Directional trading (speculation) buy or sell futures in order to profit from an anticipated asset price movement. Hedging investor uses futures to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security. Arbitrage - In a futures spread, the goal is to profit from the change in the price difference between two futures contracts while hedging against risk. However, future spreads occur infrequently and when they can be identified, the opportunity for arbitrage is quickly removed though a shift of supply and demand conditions. 6

6 Section D. Case Study (10 marks) 1. Peter, aged 35, wants to apply for a life insurance policy for his mother. He is the beneficiary of the policy. Will the insurance company accept the application? Mary, aged 38, applies a life insurance policy for herself and the beneficiary is her son of 5 years old. In this case, will the insurance company accept the application? Please explain. (3 marks each) Peter is an adult and according to the laws of Hong Kong, there is no insurable interest between adult children and parents. If there is no insurable interest at the inception of the policy, the policy is void. Therefore, the insurance company will not accept the application of Peter. The insurance company will accept the application of Mary because according to the laws of Hong Kong, insurable interest exists between parents and minor children. Moveover, there is no need for insurable interest between the insured and the benficiary. 2. Mr. Kwok was a smoker for eight years. From the insurance proposal, he realized that the premium charged for non-smokers is lower. So he declared himself as non-smoker in his application for the life iinsurance. The insurance company issued a policy with face amount $1 million to him. After two years, he died of lung cancer. The autopsy report revealed the fact that he was a smoker and died of terminal stage of lung cancer. How much do you think the insurance company should pay to the beneficiary of the insurance policy? State your reasons. The insurance company would not pay any money to the beneficiary because Mr. Kwok has breached the utmost good faith principle of insurance. The policy was revoked. ~The End~ 7