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Financial Institutions And Markets Question Paper
Financial Institutions And Markets
Course:Bachelor Of Commerce
Institution: Kabarak University question papers
Exam Year:2009
INSTRUCTIONS
(1) Answer question ONE and any other TWO questions
(2) Apart from question ONE; all other questions carry equal marks. Marks for subdivisions are
shown in brackets.
(3) Calculators are allowed in the examination room provided they are not programmable and can
store or recall information.
(4) Marks will be awarded to candidates who demonstrate clarity and accuracy of presentation.
(5) Diagrams should be used where helpful.
QUESTION 1
a) i. What sort of features distinguishes one financial market from another? (6mks)
ii. Classify the following as either primary or secondary market transactions.
Explain your answers
§ Exxon sells one million shares of stock to finance purchase of new
equipment.(2mks)
§ Packer calls her broker and tells him to sell 100 shares of Exxon. (2mks)
b) Stocks, corporate Bonds, and Government Bonds are examples of financial assets.
i. Which one of the three financial assets has the highest risk and why? (2mks)
ii. Which one of the three financial assets has the least risk and why? (2mks)
c) Consider the investment returns of holding a Bond. Which of the following would be
more valuable to you?
i. Bonds that rise in value when income rises or Bonds that rise in value when your income
falls? Why? (2mk)
ii. A Treasury bond with maturity of 30 years or Treasury bond with maturity of 15 years?
Why? (2mk)
d) Explain moral hazard problem in debt market and possible solutions (6mks)
e) Define a financial asset and explain its characteristics (6mks)
QUESTION 2
a) How can the adverse selection problem explain why you are more likely to make a loan
to a family member than to a stranger? (4mks)
b) Distinguish between mutual funds and money market mutual funds (4mks)
c) i. State and explain the factors that influence the portfolio decision by the management
of financial intermediaries. (4mks)
ii. What is financial intermediaries’ portfolio equilibrium? (3mks)
QUESTION 3
a) Explain the importance of money market to both lenders and borrowers. (4mks)
b) Distinguish between letter of credit Banker’s acceptance (3mks)
c) Explain the positive relationship between T-bill discount yield and the market/current
rate of interest (4mks)
d) The current discount yield of a treasury bill is quoted at 11%.
i. Calculate the price of a newly issued 90 days treasury bill for Ksh 100,000 (2mks)
ii. Compute its yield to maturity(1mks)
iii. Assuming that the interest rate remains the same, what will its price be when there are
36 days left to maturity? (1mks)
QUESTION 4
a) ‘‘Since firms do not receive money when their securities are sold in the secondary
financial markets, they are less important than primary financial markets’’. Do you agree?
Explain your answer. (6mks)
b) Define the third Market and explain its importance. (3mks)
c) Distinguish between the following terms
i. Initial Public Offering and secondary offering/ issues (3mks)
ii. Firm commitment underwriting and best efforts underwriting (3mks)
QUESTION 5
a) Why does the calculation of a ‘present value’ of a security involve discounting? (3mks)
b) With interest rates at 9%, what is the market price of a government bond with a 10%
coupon rate, par value of Ksh 100,000 and two years to maturity? (3mks)
c) i. Distinguish between Current yield and yield to maturity (3mk)
ii. Consider a loan of ksh 1000 repayable in one year together with ksh 100 in interest
income. Compute simple interest rate and yield to maturity. (3mks)
d) Why would investors choose to buy long term fixed income investments when there is
an inverted yield curve which indicates that investors expects to receive less compensation
from taking on more risk? (3mks)
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