Q$.1$

i$.$ Briefly explain the distinction between private and public financial markets for

investors and firms.

ii$.$ Briefly explain how financial markets may fulfil the functions of facilitating

price discovery and consumption smoothing.

iii. For both equities and bonds, distinguish between the primary market and the

secondary market in terms of their functions.

Q$\mathrm{.}2$

i$.$ Why do we discount future cash flows? Explain how using discount factors

$($based on discount rates$)$ enables us to do this consistently.

ii$.$ Give a short account of the key issues in measuring asset returns meaningfully.

iii. Explain what we mean by $$safe assets$$ and how returns on these assets may be

used to compute the risk premium.

Q$\mathrm{.}3$

i$.$ Explain briefly how the key features of a typical bond facilitate lending and

borrowing in public markets.

ii$.$ Explain the method you would use to arrive at a price for the following

government bond: it has a coupon of $3\%$ payable annually, has a term to

maturity of $5$ years, and currently yields $5\mathrm{.}5\%.$

iii. What would happen to the bond$$s yield to maturity $($YTM$)$ in part $($ii$)$ above

$($a$)$ if the coupon were lower

$($b$)$ if the bond$$s price were lower?

Q$\mathrm{.}4$

i$.$ What are the advantages of the yield to maturity $($YTM$)$ as opposed to the

current yield as a measure of a bond$$s return? Are there disadvantages to the

YTM$?$

ii$.$ Give a short account of two types of bond yield spreads as indicators of

conditions in credit markets.

iii. Define the yield curve, and explain how and why the slope of the yield curve

may vary over time.