Financial markets are key in the provision of a number of economic functions such as the

price discovery function, liquidity function and the function of reduction in transaction

costs. The transaction costs committed to economic functions are determined and mostly

influenced by asset specificity, uncertainty and frequency of occurrence.

Financial systems of nations therefore play a key role in an economy by stimulating

economic growth, influencing economic performance of the actors, affecting economic

welfare among other key responsibilities. These are achieved by financial infrastructure

in which entities with funds allocate those funds to those who have potentially more

productive ways to invest those funds.

These systems of any economy largely consist of three main components: financial

markets, financial intermediaries or institutions and financial regulators.

Required:

A$.$ Outline how the liquidity function of markets affect the overall role of treasurers in

Zambia. $[15$ Marks$]$

B$.$ A value or price of a bond with the following structure; a market rate for bonds is $15\%,$

maturity period $10$ years, coupon rate at $10\%$ and par value is K$1000$; would be

approximately K$832\mathrm{.}39$ when such a bond is five years after it was issued.

I. Critically outline the importance of the Time Value of Money to a Treasurer

seeking to actively trade in the secondary market of bonds such as on the

Lusaka Stock Exchange. $[5$ Marks$]$

II$.$ Explain what it means when a bond is trading at a discount and at a premium.

$[5$ Marks$]$

III. Using the formula: Value of a Bond $=$ Sum $[$C$/(1+$r$)$t $+$ C$/(1+$r$)$t $+$ C$/(1+$r$)$t $+....+$

M$/(1+$r$)$t

$]$ and the bond data above, find the values of the bond when it is six

years and eight years on the market after it has been issued. $[5$ Marks$]$

IV$.$ Evaluate the effect of bonds trading on the cash$-$flow management of bank$$s

treasury units. $[10$ Marks$]$

$[$TOTAL: $40$ MARKS$]$