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Financial Institutions And Markets Y3s2 Question Paper

Financial Institutions And Markets Y3s2

Course:Bachelor Of Commerce

Institution: Kabarak University question papers

Exam Year:2010

COURSE CODE: FNCE: 324
COURSE TITLE: FINANCIAL INSTITUTIONS & MARKETS
STREAM: Y3S2

INSTRUCTIONS:
1. Answer questions ONE and any other TWO questions only.
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 recall information.
4. Marks will be awarded to candidates who demonstrate clarity and accuracy of
presentation.

QUESTION 1
a) (i) Define a financial system and explain how savings flow in this system from savers to the
borrowers. (8 marks)
(ii) Explain why direct finance is unpopular means of lending in the financial system. (4 marks)
b) Which of the following financial assets has the greatest risk and why.
(i) Treasury bill and Treasury bond. (3 marks)
(ii) Corporate Bond and Common stock. (3 marks)
c) Distinguish between security brokers and security dealers and explain why the latter is referred to
as market marker. (5 marks)
d) Explain the importance of secondary markets to both borrowers and lenders. (7 marks)

QUESTION 2
a) Explain the various classifications of financial institutions. (6 marks)
b) Explain the asymmetric information problem in a loan contract and how financial intermediaries
help in reducing it. (6 marks)
c) What is meant by financial intermediaries’ portfolio equilibrium? (3 marks)
d) “Financial intermediaries must create assets which are attractive to the lenders. At the
same time, they, have to supply the needs of borrowers in an attractive way”.
Explain this statement.(5 marks)

QUESTION 3
a) Define money and explain why it’s referred to as money market? (4 marks)
b) Define Banker’s acceptance and explain its origin. What are advantages of Banker’s acceptance to
the exporter? (7 marks)
c) The current discount yield of a Tbill is quoted at 11%
(i) Calculate the price of a newly issued 90 days Tbill for 100,000. (2 marks)
(ii) The interest rate currently quoted on a 3 month Time deposit is 11.5%. Is this better or
worse than the return on Tbill? Explain your answer. (2 marks)
d) Define Debt: Equity ratio and explain why companies with high Dept: Equity ratios are regarded
as riskier than those with low Debt: Equity ratios. (5 marks)

QUESTION 4
a) What is a basis point and why are basis points used in financial markets? (4 marks)
b) State and briefly explain the various types of credit market instruments. (5 marks)
c) Why can’t you simply calculate your expected wealth by adding up the income you expect to earn
over the coming years. (6 marks)
d) Show that the return rate on a bond is not necessarily equal to its interest rate? (5 marks)

QUESTION 5
a) Explain the factors that influence the demand for an asset according to the theory of asset
demand. (8 marks)
b) (i) Distinguish between Risk structure and Term structure of interest rate. (3 marks)
(ii)Explain how Degree of risk (default risk) determines risk structure of interest rate. (4 marks)
c) Explain the (Unbiased) Expectation Theory/Hypothesis of the term structure
of interest rate.( 5 marks)

Financial Institutions And Markets Y3s2 Question Paper

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