Institute of Actuaries Faculty of Actuaries
EXAMINATIONS
September 1997
Subject E — Investment and Asset Management
Paper One
Time allowed: Three hours
INSTRUCTIONS TO THE CANDIDATE
1. You have 15 minutes at the start of the examination in which to read the
questions. You are strongly encouraged to use this time for reading only but
notes may be made.
2. You must not start writing your answers in the booklet until instructed to
do so by the supervisor.
3. Write your surname in full, the initials of your other names and your
Candidate’s Number on the front of the answer booklet.
4. Mark allocations are shown in brackets.
5. Attempt all 19 questions, beginning your answer to each question on a
separate sheet.
AT THE END OF THE EXAMINATION
Hand in BOTH your answer booklet and this question paper.
In addition to this paper you should have available
Actuarial Tables and an electronic calculator.
ã Institute of Actuaries
E1—S97 ã Faculty of Actuaries
E1(S)—2
1 Describe briefly the main types of domestic sterling debt securities which have
been issued by United Kingdom corporate borrowers. [5]
2 A large UK building society with gross assets of £15 billion is issuing a £200
million irredeemable fixed interest stock.
Discuss the factors which a large UK life office should consider before
subscribing for the issue for part of its fixed income portfolio. [7]
3 A FTSE 250 index stock in the food processing business has a strong balance
sheet and a good cash flow record. Five years ago it issued a convertible loan
stock the details of which are as follows:
·  coupon of 11% is payable annually on 1st September in each year - the
annual dividend is payable on the same date each year
 
·  on 1 September 2002, each £100 par value of the convertible issue can be
converted into 100 ordinary shares of the company
 
·  the current (1 September 1997) ordinary share price is £1.04 and the
current price of the convertible £120
 
·  the current dividend on the ordinary stock is 2p and it has been
growing at a rate of 10% p.a. for the past 5 years
 
·  the current five-year gilt is yielding 7.5% p.a.
Calculate the theoretical price of the convertible bond and explain briefly why
it may be different from the actual price of the convertible bond. [11]
E1

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