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Financial Markets And Institutions Question Paper

Financial Markets And Institutions

Course:Bachelor Of Commerce

Institution: Kenyatta University question papers

Exam Year:2010

KENYATTA UNIVERSITY
UNIVERSITY EXAMINATIONS 2009/2010
SECOND SEMESTER EXAMINATION FOR THE DEGREE OF
BACHELOR OF COMMERCE

BAC 305: FINANCIAL MARKETS AND INSTITUTIONS

DATE:
Friday 16th April 2010

TIME: 11.00a.m – 1.00p.m

INSTRUCTIONS
? Answer ALL Questions
? Marks allocated are shown at the end of each question

Question One
a)
The present governance structure of the Nairobi Stock Exchange does not meet the international best practices and standards for sound corporate governance requirements. Discuss. [10marks]
b)
With respect to the operations of the stock market explain the meaning of the following terms
i)
Backwardation [1mark]
ii)
Stock market index [1mark]
iii)
Floor [1marks]
iv)
Parri Pasu [1mark]
v)
Random walk [1mark]

Question Two
a)
A financial manager of a Kenyan Company has Kshs 25M that he can invest for one year. He is considering the possibility of investing in Japan where a one year investment yields an interest rate 12% or in Kenya where a one year investment produces an interest rate of 9%. The current exchange rate is Kshs 85/yen.

Required:
Calculate the one year forward exchange rate that will make the financial manager indifferent between investing in Kenya or Japan. [5marks]
b)
The purpose of long term foreign exchange management is not to cover a given foreign exposure dealings on the forward markets, but to minimize and if possible, eliminate such exposures before they become critical and therefore costly to cover.

Required:
Comment on the above statement and suggest what actions the financial manager should take in both the long and short term in order to reduce rises from foreign currency transactions. [10marks]

Question Three
a)
The annualize yields on commercial paper is 3.75%. The face value is Kshs. 200,000 and it matures in 51 days. Determine the most amount you can pay for it today. [4marks]
b)
State and explain the reasons why the money market in Kenya is not as well developed as the capital market. [6marks]
c)
The Central Bank monitors the performance of financial institutions in Kenya. Some could argue that such actions are contrary to a free market economy. Comment.[10marks]

Question Four
a)
Explain the main purpose for which the IMF was established as per Article one. [5marks]
b)
The term structure of interest rate defines the relationship between maturity and annualized yield, holding all other factors constant. Discuss any TWO of the main theories that have been sold to explain this relationship.
c)
Briefly explain the relationship between the government’s budgeting requirements and interest rates prevailing in the financial market. [2marks]
d)
“The risk premium that is always associated with information asymmetry will be solved. It is the end of the serial defaulters, it the end of those who used information asymmetry to their own advantage. These are the remarks made by the Central Bank of Kenya Governor, Prof. Njuguna Ndung’u while launching the first credit reference bureau in Kenya, Credit Reference Bureau African Limited, recently.

Required:
In light of the above remarks explain what a credit reference bureau is and why it is an essential component of the financial markets. [7marks]

Financial Markets And Institutions Question Paper

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