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QUESTION ONE Recently the economic conditions of the country have been weakened. Even though inflation has not increased in the last year. Price of crude
QUESTION ONE
Recently the economic conditions of the country have been weakened. Even though inflation has not increased in the last year. Price of crude oil on the international market has increased by 15% last month. As a measure in controlling inflation in the country, the Monetary Policy Committee (MPC) of the Bank of Ghana has decided to restrict the supply of money and increase the target policy rate by 100 basis points (1%):
a. As a finance student, do you support the decision made by the monetary committee? Explain (not exceeding 6 lines of explanation). (4 marks).
b. Explain how prices of debt securities would change in response to this policy? (not exceeding 6 lines of explanation) (4 marks).
c. Assume the Monetary Policy Committee decides to reduce the target policy rate by 1.5% today and this decision is not backed by any financial market expectations. Will this change in policy directive affect yields paid by firms when they issue corporate bonds? Explain your answer. (4 marks).
d. In the last month, the 91day treasury bill rate (risk free rate of return) has increased from 10% to 15% per annum. What are the potential (theoretical) reasons for this large increase? (8 marks). (Total: 20 marks)
QUESTION TWO
a. Assume you are a potential investor in Ghana and based on your analysis of the Ghanaian financial market, you are expecting interest rate to rise in the long term. How will this expectation affect:
i. Investors behaviour with respect to their choice for short or long-term assets.
(3 marks)
ii. The shape of the yield curve in Ghana today. (3 marks)
iii. Borrowers who plan to issue securities in the financial market. (4 marks)
b. Financial institutions are exposed to various types of risk. With practical examples, discuss any four types of investment risk that commercial banks are exposed to. (Your answer should not exceed 800 words) (10 marks)
Total: 20 marks
QUESTION THREE
i. Calculate the value of Macaulays duration for a 10-year, $1000 par value bond purchased today at a yield to maturity of 14% and a coupon rate of 10%. (6 marks)
ii. From the answer in (i) calculate the modified duration of the bond assuming the prevailing interest rate is still 14%. (2 marks)
iii. Now suppose the market interest rate on comparable bonds falls to 13 percent. What will be the approximate percentage change in the bond price.? (Hint: use the modified duration for your computation in (ii)) (2 marks)
iv. Given the information in (i), did the bond sell at a discount or premium? (1 marks)
v. One of the most important structural changes affecting the banking community in Ghana is the drive towards consolidation. Discuss three benefits of this move to the Ghanaian economy.(You answer
should not exceed 600 words)
(9 marks) Total: 20 marks
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