a) The Capital Markets Authority has put in place several tax incentives to encourage investments in Capital Markets.Highlight, with local examples, some of the tax incentives by Capital Markets Authority.

b) Discuss economic advantages created by the existence of:

(i)Portfolio management firms.

(ii)Secondary markets.

c) Assume that the Central Bank's primary goal is to correct a weak economy.

(i)Explain the ways it uses open market operations to achieve the goal.

(ii)What is a possible adverse effect on this action by the Central Bank

d) Suppose that the Treasury decides to finance its deficit with mostly short term funds.How could this decision affect the term structure of interest rates?If short term and long term markets were segmented, would the Treasury decision have a more or less pronounced impact on the term structure?Explain.

QUESTION TWO

(a) Aisha needs to choose between investing in a one-year Municipal bond with a 7% yield and a one-year corporate bond with an 11% yield.If Aisha's marginal income tax rate is 30% and no other differences exist between these two securities.Which one would you advise Aisha to invest in?

(b) Explain the relationship between systematic risk and commercial paper market.

QUESTION THREE

Explain how valuation of a stock is affected by:

(a) Economic growth.

(b) Expected inflation.

(c) Exchange rates.

QUESTION FOUR

Assume that:

(i)Investors and borrowers expect to contract and inflation to decline.

(ii) Investors seek lower liquidity premium from longer investments.

(iii) Bond markets are partially segmented and the National Treasury currently has apreference for borrowing in short term bond markets.

Required:

(a) Explain how each of the above forces would affect the term structure of interest rates, holding other factors constant.

(b) Explain the effect on the term structure overall.

QUESTION FIVE(20 MARKS)

(a) (i)What is a stock market index?

(ii)Outline five draw backs of NSE Index.

(b) Discuss the benefits of Central Depository System (CDS) to the following stakeholders:

(i)Capital Market Authority and NSE.

(ii)Investors.