Principles of Banking and Finance
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UL18/0194 Page 1 of 4 D0
Principles of Banking and Finance
Candidates should answer FOUR of the following EIGHT questions: ONE from Section
A, ONE from Section B and TWO further questions from either section. All questions
carry equal marks.
A calculator may be used when answering questions on this paper and it must comply
in all respects with the specification given with your Admission Notice. The make and
type of machine must be clearly stated on the front cover of the answer book.
PLEASE TURN OVER
SECTION A
Answer ONE question and NO MORE THAN TWO further questions from this section.
1. (a) Explain how a bank can become (i) insolvent and (ii) illiquid. Discuss the role of capital in
preventing a bank becoming insolvent and illiquid. (12 marks)
(b) Explain liquidity risk in banking and critically evaluate the methods a bank can use to
manage liquidity risk. (13 marks)
2. (a) Briefly outline the moral hazard problem as it affects financial contracts. (3 marks)
(b) Compare the moral hazard problem in equity and debt contracts and explain why moral
hazard is generally lower for debt contracts. (9 marks)
(c) Outline the Diamond model of delegated monitoring. (13 marks)
3. (a) Distinguish between weak-form, semi-strong form and strong-form levels of market
efficiency. Discuss the implications of weak, semi-strong and strong form efficient equity
markets for investors. (6 marks)
(b) Explain the joint-hypothesis problem encountered when testing for informational
efficiency of a market. (7 marks)
(c) Discuss the evidence relating to weak-form efficiency of equity markets. (12 marks)
4. (a) Discuss the advantages and disadvantages of unregulated banking. (12 marks)
(b) Explain the causes, consequences and solutions for the problem of banks being ‘too big
to fail’. (13 marks)
SECTION B
Answer ONE question and NO MORE THAN TWO further questions from this section.