FIN 5213 FINANCIAL MARKET AND INSTITUTION FIRST SEMESTER 2021/2022SQL

Java Python FINAL EXAM RE-SIT

FIRST SEMESTER 2021/2022

FIN 5213

FINANCIAL MARKET AND INSTITUTION

SET B

(FIN5213- Financial Market and Institution)

This paper consists of PART A and PART B. Students are compulsory to answer a question in PART A which carries 30 marks. Meanwhile, students need to answer 3 out of 4 questions in PART B which carry 60 marks for this part. Total marks for both parts are 90.

PART A (30 marks): Compulsory to answer.

1.   A $1,000 face value corporate bond with a 6.5 percent coupon (paid semiannually) has 15 years left to maturity. It has had a credit rating of BBB and a yield to maturity of 7.2 percent. The firm has recently gotten into some trouble and the rating agency is downgrading the bonds to BBB. The new appropriate discount rate will be 8.5 percent. What will be the change in the bond’s price in dollars and percentage terms?                                             (12 marks)

2.   A stock you are evaluating just paid an annual dividend of $3.30. Dividends have grown at a constant rate of 1.9 percent over the last 15 years and you expect this to continue.

a)   If the required rate of return on the stock is 13.4 percent, what is its fair present value? If the stock sell at RM30.00, should you buy the stock? Justify your answer.              (7 marks)

b)   If the required rate of return on the stock is 16.4 percent, what should the fair value be four years from today?               (5 marks)

3.   Please refer to the information about the two securities of the capital market above in (1) and (2). In your opinionwhich securities is best for your investment. Please explain your decision using 3 reasons.   (6 marks)

PART B (60 marks): This part consists of 4 questions. Please answer ONLY 3 questions from this part.

Question 1 (20marks)

1.   You have written a call option on Tesco common stock. The option has an exercise price of $75, and Walmart’s stock currently trades at $73. The option premium is $1.30 per contract.   (15 marks)

a)   How much of the option premium is due to intrinsic value versus time value?

b)   What is your net profit if Tesco’s stock price decreases to $71 and stays there until the option expires?

c)   What is your net profit on the option if Tesco’s stock price increases to $81 at expiration of the option and the option hol FIN 5213 FINANCIAL MARKET AND INSTITUTION FIRST SEMESTER 2021/2022SQL der exercises the option?

2.   Why would a financial institution holding Tesco stock consider buying a put option on that stock rather than simply selling it?          (5 marks)

Question 2 (20marks)

1.   Why do commercial banks hold investment securities?                                                    (5 marks)

2.   Explain the dilemma faced by banks when determining the optimal amount of capital to hold. A bank’s capital is less than 10 percent of its assets. How do you think this percentage would compare to that of manufacturing corporations? How would you explain this difference?   (6 marks)

3.   Explain how the uniform. capital requirements can discourage banks from taking excessive risk.  (5 marks)

4.   Why do you think some banks suffered larger losses during the credit crisis than the other banks? Explain your answer.   (4 marks)

Question 3 (20marks)

1.   How does a public offering differ from a private placement?                                          (4 marks)

2.   There is a specific term use for Islamic insurance. What is the term use for the insurance for Muslim? Please explain 3 features that make the product of conventional and Islamic life insurance differ.   (7 marks)

3.   Do all commercial borrowers receive the same interest rate on loans?                            (4 marks)

4.   According to research, have mutual funds outperformed the market? Explain. Would mutual funds be attractive to some investors even if they are not expected to outperform the market? Explain.   (5 marks)

Question 4 (20marks)

1.   How might expectations of higher global oil prices affect the demand for loanable funds, the supply of loanable funds, and interest rates in the United States? Will this affect the interest rates of other countries in the same way? Explain.                                 (5 marks)

2.   Assume that commercial paper is presently offering an annualized yield of 7.5 percent, while Treasury securities are offering an annualized yield of 7 percent. Economic conditions have been stable, and you expect conditions to be very favorable over the next six months. Given this situation, would you prefer to hold T-bills or a diversified portfolio of commercial paper issued by various corporations? (5 marks)

3.   If the federal government planned to expand the space program, how might this affect interest rates? (5 marks)

4.   In a weak economy, the government commonly implements a stimulative monetary policy to lower interest rates, and presumes that firms will be more willing to borrow