Money banking & Financial market

Q1. a) Describe three types of money market instruments. b) Consider the following: i. Suppose you plan to take out a loan to purchase a car. Which financial intermediary would you use and why: a commercial bank; pension funds or an investment bank? ii. Suppose that Honda sells yen-denominated bonds in Tokyo. Is this debt instrument considered a Eurobond? Would your answer change if the yen-denominated bonds were sold in London? c) Explain why the financial system is highly regulated.

Q2. a) Using supply and demand for both the bond market and money market, show how an economic recession would affect interest rates and the quantity of bonds. b) The demand and supply curves for one-year discount bonds with a face value of 1,000 are represented by the following equations: Bd: Price = 0.5 * Quantity + 1500 Bs: Price = Quantity + 300 i. What is the equilibrium price and quantity in the bond market? ii. Calculate the equilibrium interest rate in this market. iii. Calculate the rate of return if the discount bond is sold after one year for 1,200. The coupon rate is 4%.

Q3. a) Using the one-period valuation model describe how the following might affect share prices: i. An increase in interest rates ii. Reduction in the riskiness of equity investment b) Distinguish between the following: i. Adaptive expectations and Rational Expectations ii. Economic bubbles and Market fundamentals c) Compute the current price of a stock if the dividends of the firm are expected to grow at 20% on average and the required return is 25%. The firms last dividend was 1.80. d) Assume that the price of a share for Tesco plc last year was 2.44 and a 50p dividend was paid out at the end of the year. Calculate the rate of return required for equity investment next year. Tesco plc share price is expected to be 3.00.

Q4. a) Explain with the aid of appropriate graphs the effect of the following on exchange rates in the short-run: i. A decrease in the domestic interest rate. ii. An increase in the foreign interest rate. iii. An increase in the expected domestic price level. b) Explain the impact of the following factors on the exchange rate in the long run: i. A decrease in trade barriers. ii. A decrease in demand for a countrys imports.