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Fnce 324: Financial Markets And Institutions Question Paper
Fnce 324: Financial Markets And Institutions
Course:Bachelor Of Commerce
Institution: Kabarak University question papers
Exam Year:2010
COURSE CODE: FNCE 324
COURSE TITLE: FINANCIAL MARKETS AND
INSTITUTION
STREAM: Y3S2
INSTRUCTION
Answer question one (compulsory) and any other two questions.
QUESTION ONE
a) What are financial markets ? .Distinguish between primary and secondary financial markets
(2mks)
b) There are certain features that distinguish money markets from capital markets. Describe
any three of these characteristics. (6mks)
c) Since its inception in 1954, the Nairobi Stock Exchange has being issuing shares of listed
companies to both new and existing shareholders. Discuss any three methods of issuing new
shares to new shareholders which the stock exchange can use. (6mks)
d) Nakuru Automobiles limited is a newly registered company whose main objective is
importation of second vehicles from Japan. The management has not being involved in
import business before.
i. Advise the management on the benefits of using derivatives to them as importers.
(6mks)
ii. Explain to the management the various classifications of options available in the
global financial markets (6mks)
e) One of the sources of Government’s funds is borrowing in the domestic market in case of a
budget deficit. Describe any two instruments which the Kenyan government uses to borrow
from Kenyan financial markets. (4mks)
(30 MARKS)
QUESTION TWO
An American importer knew on 8th October 2009 that he would have to make a payment of 50
million Yen to a Japanese exporter on March 2010.
The exchange rate on 8th October 2009 was US Dollar 0.008258 per Yen.
a) Calculate the dollar payment if by march 2010 the exchange had not changed
(2mks)
b) Suppose the exchange rate had changed by March 2010 to, US Dollars 0.01 per Yen.
What would it cost the American importer in US Dollars. (2mks)
The following additional information was available on 8th October 2009.
i. March future contract for Yen settlement price on 8th October 2009 is US Dollar
0.008441 per Yen.
ii. The Yen future contract is for 12, 500, 000 Yen.
c) i. Suppose the American importer decided to hedge using the March futures contract,
how much would he pay? (4mks)
ii. Calculate the gain or loss assuming the initial exchange rate didn’t change (2mks)
d) Financial Institutions play a crucial role in the economic development of any
country. Explain any five functions of financial institutions in Kenya’s economy.
(10mks)
(20 MARKS)
QUESTION THREE
a) Peter wants to buy a house on mortgage terms. The house costs Sh. 100, 000 and a down
payment of 25% is required by the mortgage lender. He wants to obtain a 30 year loan at
8%. Calculate his monthly mortgage payment (6mks)
b) Peter’s daughter will be joining university in four years time. He would like to accumulate
sh 200,000 at the end of four years from now. How much should he deposit each year at an
interest rate of 6% so that it grows to sh 200, 000 at the end of the fourth year?
(4mks)
c) Since independence a number of financial institutions in Kenya have collapsed. In the
light of this, explain the risks faced by financial institutions. (10mks)
(20 MARKS)
QUESTION FOUR
a) According to the Nairobi stock exchange report published in the local dailies in Kenya,
the prices of securities keep on fluctuating. Explain five factors that may account for the
price fluctuations of these securities in the stock market. (10mks)
b) Onyango, an investor is considering the purchase of a five year Sh. 10, 000 par value
bond, bearing a nominal rate of interest 6% per annum. His required rate of return is
10%. What should he be willing to pay to purchase the bond if it matures at par?
(6mks)
c) What would be the present value of the above bond if the required rate of return is 8%
(4mks)
(20MARKS)
QUESTION FIVE
a) A call option has the following characteristics.
Exercise price – Sh. 100,
Premium per call option – Sh. 10.
Time remaining to maturity 3months,
Calculate the value of the call option at maturity if:-
i. The market price of the security = Sh. 80
ii. The market price of the security = Sh. 110 (4mks)
iii. Indicate if it is in the money, at the money or out of the money in each case.
(2mks)
b) A put option has the following characteristics.
Exercise price – sh. 50
Premium per option – sh. 5
Option period – 6 months Calculate the value of the put option at maturity if
i. The market price of the security is sh. 20
ii. The market price of the security is sh. 65 (4mks)
iii. Indicate if it is in the money, at the money or out of the money. (2mks)
d) The capital markets authority is one of the major government regulatory agencies in the
Kenyan financial system. Explain the role and objectives of this institution in Kenya’s
economy. (8mks)
(20MARKS)
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