FIN 2700 MONEY, BANKING, AND FINANCIAL MARKETS

MID 2/2012

PART I: Short Essays. (35 MARKS) Answers without supporting calculation will not be graded.
Question 1 (5 marks) ABAC Company had raised capital by selling million shares of stocks in the past years. Today, ABAC Company raises capital by selling 5 million newly issued common stocks in the market.
1.

2. 3. 4. 5.

The money can be transferred from the surplus units to the deficit-spending units through two avenues via financial intermediaries; this avenue is referred to ______.(1 mark) (indirect credit market) The market that 5 million shares of stocks will be sold is called _________. (1 mark) (primary market) If the investment banker form several investment banking firms (syndicates) in underwriting securities, its risk will be _________. (1 mark) (lower) The market that provides the investors the liquidity is classified as ______.(1 mark)(secondary market) The Stock Exchange of Thailand has a trading floor nearby Queen Sirikrit Convention Center; the exchange is classified as _________(1 mark) (Organized Exchange)

Question 2 (5 marks) 2.1 Analyze the risk, liquidity and return with regards to money market and capital market. (3 marks)

Money market: lower risk, higher liquidity, lower return. (0.5 for each answer = 1.5) Capital market: higher risk, lower liquidity, higher return. (0.5 for each answer = 1.5)

2.2 If US Dollars are deposited in Bangkok Bank branched in New York City, does this call Eurodollar? Explain. (1 mark) No (0.5), dollar (bank) is in USA. (0.5) 2.3 Explain why deposits saved at depository institutions face no market risk. (1 mark) Deposits do not fluctuate in nominal value. (1) Question 3 (5 marks) 3.1 The difference between indirect and direct credit market is not about having or not having a broker or dealer to match savers with lenders. It is about who hold the primary and secondary claims. Explain the role of financial intermediaries in an indirect credit market. Under the indirect credit market, identify who (savers and banks) hold which claims and also provide one example of such claim. (3 marks)

Role: match saver and borrowers (1) Saver: hold secondary claims (0.5), example: deposits (0.5) Bank: hold primary claims (0.5), example: corporate bond from borrowers (0.5)

3.2

How much should be the price of $1,000 par value-Treasury bill with 200 days to maturity if an investor requires rate of return is 7.5 %? (2 marks) P = 1000 [1000(.075)(200)]/360 = 958.33
(0.25) (0.25) (0.25) (0.25) (0.25) (0.75)

Question 4 (5 marks) 4.1 When drivers tend to drive carelessly due to a full car insurance coverage from their policies, this problem is called _________. (2 marks) moral hazard 4.2 Explain why depository institutions need high liquidity in their asset management. (1 mark) DIs need to prepare money to meet the customers withdraws OR deposits are S-T and can be withdrawn on demand (1)
1

This exam paper is ABACs property and cannot be distributed or duplicated without proper authorization.

FIN 2700 MONEY, BANKING, AND FINANCIAL MARKETS

MID 2/2012

4.3 Explain why fire and casualty insurance companies need more liquidity than life insurance companies. (2 marks) Their claims (events, outflows) are less predictable (2) Question 5 (5 marks) Interest rates exhibit a pro-cyclical pattern. Mr. Bright is curious about what this statement means. 5.1 Explain the meaning of the above statement to Mr. Bright. (2 marks)

Positive relationship between interest and business cycle (2) OR Interest rates raise during expansion (1) and fall during recession (1) 5.2 What is the type of Monetary Policy applied if the economy grows too fast? (1 mark) What will be the impact of such policy on the loanable funds and interest rate? (2 marks) Tight or contractionary monetary policy (1) the supply of loans is less / the supply curve of loans shift left (1) interest rates increase (1) Question 6 (no marks)

Question 7 (5 marks) 7.1 Under pure expectation theory, explain why investors have no preferences for particular maturities. (2 mark) L-T investment = S-T investment (covering the same investment period) OR Long-term or short-term investment will give the same return if you have the same investment period (2) 7.2 Under liquidity premium theory, explain why a long-term interest is higher than a short-term interest. (1 mark) What type of yield curve is expected under this theory? (1 mark) B/C L-T interest includes term premium (1) Upward sloping (1) 7.3 Under term structure of interest, explain why interests on securities having the same quality are different. (1 mark) The maturity is different (1)

This exam paper is ABACs property and cannot be distributed or duplicated without proper authorization.

FIN 2700 MONEY, BANKING, AND FINANCIAL MARKETS PART II: Problems Solving. (20 MARKS) Answers without supporting calculation will not be graded.

MID 2/2012

Question 1 (10 marks) Sandy Soon has a plan for her retirement. Now, she is 25 years old and plans to have 20,000 baht for monthly expenses at the end of each month for 20 years after she retires at 60. Moreover, she also needs to give herself a big treat when she reaches age of 60 with the 200,000 baht trip, or may be donation. Assume that through the period from 25 years to 80 years, the annual interest rate is 6%. How much money should she save every month? (5 marks)

PVA
(0.5)

= PMT (PVIFA) i = 6/12, n*m =240

(0.5). (0.5) (0.5) (0.5) (0.5) (0.5) (0.5)

= 20,000 (139.5808) =2,791,616.00 FVA

(0.5)

= 2,791,616.00 +200,000 =2,991,616.00

(0.5) (0.5) (0.5)

2,991,616.00= PMT (FVIFA) i = 6/12, n*m =420

(0.5) (0.5) (0.5) (0.5) (0.5)

PMT =2,991,616.00/ ( 1424.7103)

(0.5) (0.5)

= 2,099.81
(0.5)

Question 2 (5 marks) After examining the various personal loan rates available, you find that you can borrow funds from: Finance Company A at 12 percent compounded monthly, Finance Company B at 13 percent compounded annually, or Bank C at 10 percent compounded quarterly Which alternative is the most alternative? Explain and show calculation for each alternative. (5 marks) A: FV = $1 (FVIF 1%,12)
(0.25) (0.25)

= 1(1.1268) = 1.1268
(0.25) (0. 25)

(0.25) (0.25)

B: FV = $1 (FVIF 13%,1)
(0.25) (0.25) (0.25) (0.25) (0.25) (0.25) (0.25) (0.25)

= 1 (1.13)
(0.25) (0.25)

= 1.13
(0. 25) (0. 25)

C: FV = $1 (FVIF 2.5%,4)

= 1 (1.1038) = 1.1038

Choose Bank C(0.25) because charges lower cost. (0.25)

Question 3: (5 marks) In January 2008, a 10-year corporate long-term debt instrument at face value $1,000 with AAA credit rating was issued. John Doe, the investor, wants to buy this security on January 2012, which it is now trading at $900. Calculate and answer questions below: 3.1 mark) Will he have capital gain or loss if he buys the bond at its current market price? (0.5

Capital loss (0.5)

This exam paper is ABACs property and cannot be distributed or duplicated without proper authorization.

FIN 2700 MONEY, BANKING, AND FINANCIAL MARKETS

MID 2/2012

3.2 Given the above situation, should this bond have lower/higher coupon rate than the investors required return? (0.5 mark) Lower: Coupon rate < Kb (i) (0.5) 3.3 Calculate value of the bond if the coupon rate is 6% and the market interest is 7%. (3 marks) Vb = 60 (PVIFA 7%,6) + 1,000 (PVIF
(0.25) (0.25) (0.25) (0.25)

7%,6)

(0.25) (0.25)(0.25),(0.25)

Vb = 60 (4.7665) + 1,000(.6663)
(0.25) (0.25)

Vb = 285.99 + 666.3 Vb = 952.29

(0.5)

3.4 From the value of bond calculated above, comparing to the bonds trading price of $900, should he buy this bond? (0.5 mark) Explain. (0.5 mark) Yes / buy (0.5) Explain: Market price is less than Vb OR underpriced Bond OR cheap to buy (0.5)
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THE END *****

This exam paper is ABACs property and cannot be distributed or duplicated without proper authorization.