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FEO810S-FINANCIAL ECONOMICS-2ND OPP-JULY 2024 |
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nAm I BIA un IVERSITY
OF SCIEn CE Ano TECHn OLOGY
FACULTY OF COMMERCE, HUMAN SCIENCESAND EDUCATION
DEPARTMENT OF ECONOMICS, ACCOUNTING AND FINANCE
QUALIFICATION: BACHELOR OF ECONOMICS HONOURS
QUALIFICATION CODE: 0SBECH
LEVEL: 8
COURSE CODE: FEO810S
COURSE NAME: FINANCIAL ECONOMICS
SESSION: JULY 2024
PAPER: THEORY
DURATION: 3 HOURS
MARKS: 100
SECOND OPPORTUNITY EXAMINATION QUESTION PAPER
EXAMINER(S) Ms Kasnath Kavezeri
MODERATOR: Dr Reinhold Kamati
INSTRUCTIONS
1. Answer ALL the questions.
2. Write clearly and neatly.
3. Number the answers clearly.
PERMISSIBLE MATERIALS
1. Pens/pencils
2. Calculator
3. Ruler
THIS QUESTION PAPER CONSISTS OF 4 PAGES (including this front page)
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QUESTION 1
[25 Marks]
1. You invest 50% of your money in security A with a beta of 1.6 and the rest of your
money in security B with a beta of 0.7. Calculate the beta of the resulting portfolio.
(3)
2. Security Z has an expected rate of return of 0.11. It has a beta of 1.5. The risk-free rate is 0.05
and the market expected rate of return is 0.09. According to the Capital Asset Pricing Model, is
this security priced fairly, underpriced, or overpriced? Show your calculations to justify your
answer.
(3)
3. Compute the price of a share of stock that pays a N$1 per year dividend and that you
expect to be able to sell in one year for N$20, assuming you require a 15% return. (2)
4. Assuming that the rational expectations theory is the correct theory of the term
structure, calculate the interest rates in the term structures for maturities of one to
five years, and plot the resulting yield curves for the following series of one-year
interest rates over the next five years:
a) 5%, 7%, 7%, 7%, 7%
(6)
b) 5%, 4%, 4%, 4%, 4%
(6)
c) Briefly discuss the rationale behind the expectations theory
(5)
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QUESTION 2
[25 Marks]
1. What basic principle of finance can be applied to the valuation of any investment asset?
(1)
2. Which regulatory authority in Namibia supervises the business of the following
institutions?
(4)
(a) Medical Aid funds
(b) Commercial bank
(c) Pension funds
(d) Investment companies
3. Differentiate between the primary market and secondary market in the context of
financial markets structure.
(6)
4. How can the existence of asymmetric information provide a rationale for government
regulation of financial markets?
(4)
5. Suppose that you are the manager of a bank that has N$15 million of fixed-rate assets,
N$30 million of rate-sensitive assets, N$25 million of fixed-rate liabilities, and N$20
million of rate-sensitive liabilities.
a) Conduct a gap analysis for the bank and show what will happen to bank profits if
interest rates rise by 5 percentage points.
(6)
b) What action could you take to reduce the bank's interest risk?
(4)
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QUESTION 3
[25 Marks]
1. Write short notes on each of the following concepts:
(a) Eurobonds
(2)
(b) Eurocurrencies
(2)
(c) Mortgages
(2)
2. How can the provision of several types of financial services by one firm be both
beneficial and problematic?
(4)
3. Briefly discuss the implications of behavioral finance.
(5)
4. discuss five money market instruments.
(10)
QUESTION 4
[25 Marks]
1. How does the free-rider problem aggravate adverse selection and moral hazard
problems in financial markets.
(10)
2. Explain the process forcing the price of the futures contract into equality with the
price of the underlying asset during the delivery period.
(15)
TOTAL = 100 MARKS
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