The candidate must choose one question (out of the two) and attempt all its sub questions.
Word count: Students should not exceed more than 1500 words for this paper.
INSTRUCTIONS TO CANDIDATES: 1. A template answer sheet has been provided on the KEATS page, you should complete the cover sheet and then write your answer to the question below. 2. Use the Harvard referencing style. 3. If you have a PAA cover sheet, you should include this in addition to the template answer sheet 4. Save your work regularly, at least every 15 minutes.
ONLINE SUBMISSION INSTRUCTIONS: 1. Your answer sheet should be submitted via the Turnitin submission link on the module KEATS page. 2. Ensure your document is submitted through Turnitin with the title CANDIDATE ID – MODULE CODE- e.g. AB12345-7QQMM203 3. Once submitted please check you are satisfied with the uploaded document via the submission link. 4. If you experience technical difficulties uploading your assessment to KEATS please email a copy to [email protected] with the subject of the email as CANDIDATE ID- MODULE CODE- COURSEWORK ASSESSMENT. You should attach supporting evidence of technical issues where possible.
Question 1
a. Give the fair price of a bond paying a coupon C each year, with a face value of F. Discuss. Under what condition would you buy the bond? Discuss. (30 marks)
b. Show that the price of a stock may be seen as the discounted value of the stream of future dividends. Give the formula for the price of a stock (1) if dividends are expected to be constant through time, and (2) that if dividends grow at a constant rate, g. If you had only these two assets, how would you compose your portfolio? Discuss. (40 marks)
c. The current price of stock A is £90. You know that this stock pays £10 as dividend every year, and that dividends are going to be constant. The default probability of the firm is zero. The discount rate is 9 percent. c.1. Is it worth to buy the stock? Discuss. (10 marks)
c.2. Assume that stock B is also available. The price is £80. The default probability of this firm is zero. Stock B is expected to pay £9 as dividends every year. How would you compose your portfolio. (10 marks)
c.3. At which discount rate the stock A is not worth to buy? How does your answer change if dividends are expected to grow at 1 percent per annum forever? And what if they are expected to decline at 1 percent per annum forever? Discuss. (10 marks)
Question 2
a. What are the mechanisms through which financial markets and institutions enhance the economic growth. Discuss. (25 marks)
b. There are many individuals involved in financial transactions. What is the most vulnerable category and why? Discuss. What protection mechanisms does the financial system provide? Discuss. (25 marks)
c. In the paper Levine, R., Loayza, N., Beck, T., 2000. Financial intermediation and growth: Causality and causes. Journal of Monetary Economics 46, pp 31-77, the authors study the link between financial markets and economic growth.
c.1. What are the factors which determine a well-functioning financial system? How are they linked to economic growth? Discuss. (25 marks)
c.2. Discuss the technical issues related to the research question? Explain how the authors address these technicalities. (25 marks)