Q1 to Q5

Question 1 (a) Discuss how to reduce/solve the problems arising from moral hazard. (10 marks) (b) Explain the main implications of the presence of market-based versus bank-based financial systems. (10 marks) Question 2 (a) Explain the concept of the yield curve for bonds and distinguish between the main theories of the term structure of interest rates. How different theories imply the shape of the yield curve? (10 marks) (b) Comparing the term of loans and deposits at a bank, which one typically has longer maturity? When yield curve is now steeply upward sloping or when it is flat, which case would lead to higher profitability for banks? Explain. (10 marks) Question 3 (a) Explain how moral hazard affects equity contracts and discuss why moral hazard is lower for debt contracts compared to equity contracts. (10 marks) P. 1 of 2 (b) When a financial crisis begins, would the problem of adverse selection and moral hazard in financial markets worsen? Give explanations. (10 marks) Question 4 (a) Explain the process of securitization that is carried out by banks and discuss the reasons why banks may wish to engage in such a process. (10 marks) (b) Discuss the role of securitization in the 2007/8 global financial crisis. (10 marks) Question 5 (a) Explain how banks are able to act as intermediaries by reconciling conflicting requirements of lenders and borrowers and reducing costs. (10 marks) (b) Give two reasons why financial intermediaries are the most important source of external funds in the market. (10 marks)