Financial Institutions and Markets
(a) Explain how financial intermediation exposes banks to risk and explain what those risks are. [10 marks]
(b) Examine the main solutions a bank can adopt to manage credit risk and identify how the solutions impact on the adverse selection and moral hazard problems associated with lending. [15 marks]
(c) Explain operational risk as it affects banks. Give examples of this risk. [8 marks]
[Total: 33 marks]
(a) Compare and contrast the characteristics of ordinary shares and corporate bonds from the perspective of both an investor and a firm issuing the securities. [10 marks]
(b) Consider the following two financial assets:
(1) an ordinary share that is expected to pay a dividend of £5 next year with dividend growth expected to be 3% per annum thereafter;
(2) a corporate bond with an annual coupon rate of 5%, par (face) value of £100, and maturity in 4 years time.
If the required return on similar US equities is 10% and on similar US bonds Is 5%, calculate the value of the US stock and the US bond. [8 marks]
(c) Using the data given above and assuming an annual discount rate, calculate the duration of the corporate bond. [5 marks]
(d) Explain why the duration of a bond paying coupons is always less than its maturity.
(e) Distinguish between primary and secondary capital markets. [5 marks]
[Total: 33 marks]
Discuss the causes and consequences of the 2008 global financial crisis.
(a) Discuss the advantages and disadvantages of inflation targeting.
(b) Explain the transmission mechanism of monetary policy (i.e. the channels by which a change in interest rates can affect inflation). [10 marks]
(c) Discuss the reasons for the adoption of policy of quantitative easing by the Bank of England in 2009 and explain how this policy works. [13 marks]
- [Total: 33 marks]
(a) Explain what capital and liquid assets are in the context of banking and explain their role in ensuring the stability of a bank.
- [10 marks]
- (b) Explain the Basel 3 capital adequacy regime and discuss how it can help prevent a future financial crisis. [23 marks]
[Total: 33 marks