Buss 322: Money Banking &Amp; Finance Question Paper
Buss 322: Money Banking &Amp; Finance
Course:Money Banking & Finance
Institution: Kenya Methodist University question papers
Exam Year:2008
KENYA METHODIST UNIVERSITY
END OF SECOND TRIMESTER 2008 EXAMINATIONS
FACULTY : BUSINESS AND MANAGEMENT STUDIES
DEPARTEMENT : BUSINESS ADMINISTRATION
COURSE CODE : BUSS 322
COURSE TITLE : MONEY BANKING & FINANCE
TIME : 2 HOURS
INSTRUCTIONS:
• Answer three questions from Section A and Two questions from Section B
SECTION A
Question 1
a) What are financial intermediaries? (1marks)
b) Highlight three roles that financial intermediaries play in the Kenyan economy?
(3marks)
c) Give three examples through which financial intermediaries affect the circulation of money through indirect finance. (6marks)
Question 2
The primary market provides an avenue through which companies and the government raise additional sources of capital for financing of projects and various capital investment initiatives.
a) Give three distinguishing traits between primary and secondary markets. (3marks)
b) Highlight three reasons why the government would choose to offer Treasury Bonds over Treasury bills in an attempt to finance its annual budget. (3marks)
c) Highlight for advantages of how a company would benefit from raising money in the capital market, over the money market. (4marks)
Question 3
The introduction and transition of money from trading in currencies, to paper currency and fiat money, has created a uniform and standard means of trading all over the world. But as we move into the 21st century, electronic payments (e-cash, ATMs, Smart Cards) have completely revolutionarized the payment process.
a) Define fiat money and highlight three advantages over the use commodity money as means of trade. (3marks)
b) Highlight four attributes that made paper money and use of commodities over the barter system, as an effective means of trade. (4marks)
c) Discuss three advantages of using electronic payments over the use of paper currency.
(3marks)
Question 4
In the summer of 1998, Russia defaulted on its debt obligation, triggered a financial panic in some emerging markets, as people no longer wanted to hold debt, preferring less risky assets.
a) Briefly explain what effect it had on:
i) Demand for treasury bills?
ii) Bank lending rate?
iii) Stocks. (3marks)
b) Give four examples of how the investors can diverge from involving themselves in defaulted debt obligations, by opting for less risky forms of financing. (4marks)
c) Give three examples of near money , briefly defining each. (3marks)
SECTION B
Question 5
The past four months has seen the fastest gain in inflation since 1992. Inflation has risen by 18.2% since the beginning of the year. Back in 1992 the government was faced with excessive rate of inflation, due to the Goldenberg scandal, that involved the excess money supply after the CBK ponied up more than 1bn shillings over fictitious gold imports. The Central Bank of Kenya was faced with a crisis that would necessitate its intervention in controlling the rate of inflation, through the use of monetary and fiscal measures.
a) The CBK employed three quantitative measures in regulating the rate of inflation. Discuss. (6marks)
b) Discuss three qualitative measures that the CBK would have employed in order to regulate the rate of inflation. (6marks)
c) During the 1992 inflation crisis, the price of bread rose by a staggering 75% over a period of only 4 months. This is a case of galloping inflation. Discuss briefly three other types of inflation (with regards to the intensity), giving an example of each.
(8marks)
Question 6
In the evolution of money, the banker goldsmith contributed a lot to the development of the banking system and central banks.
a) Discuss this statement. (10marks)
b) Discuss the relationship between M0, M1 and M2 in the transaction and liquidity approach to money supply in the Kenyan Economy. (10marks)
Question 7
Below is a balance sheet for Kenya Commercial Bank for the year ending 31st December 2001.
Assets Liabilities
Total Reserves 400,000 Demand deposits 2,000,000
Excess 0
Loan(s) 1,600,000
2,000,000 2,000,000
Assuming that on Jan 1st 2002, the government issued an order to the CBK to buy securities worth 500,000 and an initial deposit made in favor of KCB.
a) Assuming that the reserves ration of 20% and the only other four banks are Co-op Bank, Equity, Stanbic and Barclays Bank, show the credit creation process among these four banks. (8marks)
b) Determine the deposit multiplier and hence the total deposit at the end of the credit creation process. (4marks)
c) Highlight the assumptions of the credit creation process. (4marks)
d) Provide four limitations that commercial banks face while trying to create credit.
(4marks)
Question 8
In the first half of 1997/98, fiscal policy, instituted by the treasury, was tightened, together with the second half of 1997/98, and further in 1998/99. As a result, the overall deficit was reduced from 3.9 percent of GDP in 1996/97 to 2.5 percent in 1997/98 and to 0.7 percent of GDP in 1998/99, compared with a targeted overall balance of zero. The state owned National Bank of Kenya, faced a near certain collapse, due to increase losses, amounting to over 2bn in 1999. The international monetary foundation (IMF) in 2000 assessed Kenya’s economic and financial performance to have “deteriorated significantly in the 1990s because of stop-go macroeconomic policies, slow structural reform, and pervasive governance problems that resulted in bouts of financial instability, a rapid buildup of short-term debt, and high real interest rates” In July 2008, National Bank after-tax profits of 1.6bn, up from 990 million in 2007.
a) Discuss measures that might have been instituted by the Management of National Bank to uplift it from financial delinquency. (12marks)
b) In light of the diagnosis made by the IMF, give four changes that the government may have introduced to make the economic conditions viable for NBK’s recovery.
(8marks)
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