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FEO810S-FINANCILA ECONOMICS-1ST OPP- JUNE 2024 |
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n Am I BI A u n IVE Rs I TY
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: OSBECH
LEVEL: 8
COURSE CODE: FEO810S
COURSE NAME: FINANCIAL ECONOMICS
SESSION: JUNE 2024
DURATION: 3 HOURS
PAPER: THEORY
MARKS: 100
FIRST 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/erasers
2. Calculator
3. Ruler
THIS QUESTION PAPER CONSISTS OF 4 PAGES (Including this front page)
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QUESTION 1
[25 Marks]
1. What is the real interest rate if the nominal interest rate is 12% and the expected
inflation rate is 7%?
(2)
2. Compute the expected return for a one-year discount bond with a face value of N$1,000
but sells for N$900.
(4)
3. Compute the price of a share of stock that pays N$1 per year dividend and that you
expect to be able to sell in one year for N$50, assuming you require a 15% return. (2)
4. The current price of a stock is N$65.88. The dividends are expected to be N$1 per share
for the next five years, and the required return is 10%.
(a) Write down the formula that is used to calculate what the price of this stock
should be in 5 years when you plan to sell it.
(3)
(bl If the dividend and required return remain the same, and the stock price is
expected to increase by N$1 five years from now, does the current stock price
also increase by N$1? Why or why not?
(4)
5. Suppose that the one-year interest rate over the next five years is expected to be 2%,
3%, 4%, 6%, and 7%, while the liquidity premiums for one-to five-year bonds are 0%,
0.5%, 2%, 2.25%, 3.6%, respectively. Using the liquidity premium theory of the term
structure, calculate the one-to five-year interest rates on the bonds.
(10)
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QUESTION 2
[25 Marks]
1. Security X has an expected rate of return of 13% and a beta of 1.15. The risk-free
rate is 5% and the market expected rate of return is 15%. According to the capital
asset pricing model, is security X priced fairly, underpriced, or overpriced? Justify
your answer by showing your calculations.
(6)
2. You invest N$1,200 in security A with a beta of 1.5 and N$800 in security B with a beta
of 0.90. Compute the beta of this formed portfolio.
(3)
3. The risk-free rate and the expected market rate of return are 5% and 15% respectively.
According to the capital asset pricing model, what is the expected rate of return on
security X if the beta is 1.2?
(5)
4. Briefly discuss the importance and applicability of the capital asset pricing model. (4)
5. Differentiate between systematic and unsystematic risk.
(6)
6. What do you think will happen to interest rates on a corporation's bonds if the
government guarantees today that it will pay creditors if the corporation goes bankrupt
in the future?
(1)
QUESTION 3
[25 Marks]
1. What do we call the relationship between yield and maturity of the same type of
security?
(2)
2. Why are financial markets important to the health of the economy?
(3)
3. State the two main sources of cash flows for a stockholder.
(2)
4. What effect might a fall in stock prices have on business investment?
(2)
5. If you expect that a company will go bankrupt next year, would you rather hold
bonds issued by the company or equities issued by the company? Give a reason for
your answer.
(2)
6. Which two basic facts about financial structure are best explained by the presence of
the lemons problem in securities markets?
(4)
7. Compare the rights and obligations of the buyer and seller of a call option with the
rights and obligations of the buyer and seller of a futures contract.
(10)
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QUESTION 4
(25 Marks]
1. Explain why bonds that have the same maturities might have different interest rates, or
yields to maturity?
(10)
2. Briefly discuss the three theories that attempt to explain why yield curves take on
different shapes at different times.
(15)
TOTAL = 100 MARKS
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