All questions carry equal marks. Where questions are divided into parts, weightings are indicated in brackets (in percentages).
Answer ANY 2 (two) questions, each question for 1000 words
Question 1:
Some financial institutions are first and foremost involved in direct lending and borrowing of funds, and also provide monetary services, and these are their financial function. Examples of such institutions are the banks.
- Describe the commercial banks. Your answer should compare and contrast the different types and their features, focussing on their balance sheet structure, the services they provide and banking channels they use.
(60% of question marks)
- Explain systemic risk and answer how it relates to the risks faced by banks.
(40% of question marks)
(Total 100% marks)
Question 2:
Transfer of funds in the financial system carried out by several means, one of which is by money markets. LIBOR is an important component of these markets. Explain what the LIBOR is and the role it plays in the financial system. Explain how LIBOR is calculated and its components.
(Total 100% marks)
Question 3:
This question concerns financial intermediaries and mutual funds.
- Why do financial intermediaries exist? The answer should address the problems with direct financing.
(70% of question marks)
- Explain what mutual funds are and what types of securities mutual funds invest in?
(30% of question marks)
(Total 100% marks)
Question 4:
This question concerns regulation and regulatory capture.
- Is regulation “red tape” or the necessary protection of vulnerable stakeholders? You should include examples and very briefly discuss why each of the following stakeholders might be vulnerable in some circumstances: (I) minority shareholders, (ii) suppliers, (iii) customers, and (iv) society as a whole.
(50% of question marks)
- Explain the concept of regulatory capture and give examples. Why might society be unaware of regulatory capture?
(50% of question marks)
(Total 100% marks)
Question 5:
Credit rating agencies provide credit ratings, which represent their forward-looking opinions about the creditworthiness of a debt issuer or the risk of debt securities going into defaults.
- What is “investor pay” model and “issuer pay” model? Describe how the industry evolved from one model into another and describe the reasons for the transition. Critically analyse the advantages and disadvantages of the issuer-pay model versus the investor-pay model in the credit rating market.
(70% of question marks)
- Using the data in the tables below, predict the 2013 rating for sovereign X. Identify whether sovereign X bonds are speculative securities or rated as investment grade. The answer should include the explanation of these two terms.
Table 1
| Factor | Coefficient | 2010 | 2011 | 2012 |
| Inflation (%) | -0.031 | 12.8 | 13.01 | 11.53 |
| CA Balance/GDP (%) | 0.048 | -8.7 | -6.95 | -3.25 |
| GDP growth (%) | 0.079 | 6.06 | 5.83 | 6.02 |
| GDP per capita (USD) | 0.0001 | 1402 | ||
| Gross debt/GDP (%) | -0.003 | 45.73 | ||
| WGI score | 1.059 | 0.53 | ||
| Fiscal balance/GDP (%) | 0.026 | -2.84 | -3.09 | -3.28 |
| Default | -1.359 | 0 |
Table 2
| Rating | Cut-off points |
| AAA | >3.91 |
| AA | 2.7 – 3.91 |
| A | 1.43 – 2.7 |
| BBB | 0.29 – 1.43 |
| BB | (-0.89) – 0.29 |
| B | (-2.69) – (-0.89) |
| CCC | (-3.23) – (-2.69) |
| <=CC | < (-3.23) |
30% of question marks)
(Total 100% marks)
END OF EXAMINATION QUESTIONS
