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Dfi 303: Financial Institutions And Markets Question Paper

Dfi 303: Financial Institutions And Markets

Course:Bachelor Of Commerce

Institution: University Of Nairobi question papers

Exam Year:2011

UNIVERSITY OF NAIROBI
MODULE II DEGREE PROGRAMME 2010/2011(NAIROBI EVENING)
THIRD YEAR EXAMINATIONS FOR THE DEGREE OF BACHELOR OF COMMERCE
DFI 303: FINANCIAL INSTITUTIONS AND MARKETS
DATE: DECEMBER 13, 2011 TIME: 6.00 P.M. -8.00 P.M.

INSTRUCTIONS
1. Attempt ALL questions, clearly showing all workings.
2. Marks are as indicated for each question

QUESTION ONE

a) Briefly discuss the key services provided by the financial system showing how both financial markets and financial intermediaries contribute. (15 marks)

b) Under what circumstances does financial regulation improve the efficiency of the financial system?

QUESTION TWO

a) Clearly distinguish between moral hazard and adverse selection. (5 marks)

b) "Moral hazard prevents financial markets from functioning smoothly"

i) Explain the above statement in relation to (a) above. (7 marks)
ii) How may the problems caused by moral hazard be resolved in relation to:

i) Equity financing.
ii) Debt financing. (8 marks)

c) Clearly distinguish between an organized exchange and an over the counter (OTC)
market. (5 marks)

QUESTION THREE

a) Yields on treasury bonds are normally lower than those on corporate bonds even when they have the same terms to maturity. Why? (3 marks)

b) Discuss and evaluate the expectation hypothesis of term structure of interest rates.
(10 marks)

c) You have obtained a 30 year loan at 14 percent with the Cooperative Bank on sh.100 million for financing your new home. The cost of constructing the new home is sh.120 million with a down payment of sh. 10 million. Assuming you will be required to be paying the amount on a monthly basis 30 years period. Determine the fixed payment on the loan per month. (12 marks)

QUESTION FOUR

a) Briefly explain the key roles and activities of the following financial institutions.

i) Investment banks.
ii) Security dealers/brokers.
iii) Pension funds.
iv) Insurance companies.
v) Financial companies.
vi) Mutual funds. (15 marks)

b) Why would a manager of a financial institution care about movements in exchange rates?
(5 marks)

c) Distinguish between the primary market and the secondary market for securities.
(5 marks)

Dfi 303: Financial Institutions And Markets Question Paper

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