Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Global financial system wikipedia , lookup
Monetary policy wikipedia , lookup
Currency War of 2009–11 wikipedia , lookup
Foreign-exchange reserves wikipedia , lookup
Balance of payments wikipedia , lookup
Modern Monetary Theory wikipedia , lookup
Currency war wikipedia , lookup
Okishio's theorem wikipedia , lookup
Interest rate wikipedia , lookup
FINANCIAL MARKETS I MAY 2010 SUGGESTED SOLUTIONS 1 a. Inflation is measured by grouping all goods and services into a single price index b. Demand Pull inflation: it occurs when the economy is buoyant and there is a high aggregate demand which is in excess of the economy’s ability to supply. Because: i. aggregate demand exceeds supply, price will rise ii. since supply needs to be raised to meet the high demand there will be an increase in demand for factors of production and so factor rewards (wages, interest rates) will also rise. c. CPI is based on the chosen basket of items which consumers purchase. A weighting is decided for each according to the average spending on the item by the consumers. RPI is intended to measure the change from month to month in the cost of goods and services of the sort bought by a typical household. The relative importance attached to each various goods and services is revised each year using latest available results of the family expenditure. d. i. Expected return from equity Investment = 11.00% Dividend paid = k0.15 Market value per share = Dividend paid Expected return = 0.15/11.00% = K1.46 ii. Require return = 9.00% Dividend paid = K0.15 Therefore Market value = K0.15/9.00% = K1.67 2. A. i. Debenture: is a fixed interest bearing security issued by a company. It represents a promise by the issuer to pay interest as specified and repay the nominal value at the maturity. (2 marks) 1 ii. Convertible bond is a bond which can be converted into shares of common stock. This feature permits bondholders to share in the firm’s good fortunes if the stock price rises. (2 marks) iii. Over-the-counter is a non regulated market in which listed companies can sell its shares. This market is not organized in the sense of having a building where trading takes place. (2 marks) iv. Rights issue: when a listed company wants to raise capital it might wish to offer additional shares to its existing shareholders at a discount (2 marks) v. Bankers acceptance is an order to pay a specified amount of money to the bearer on a given date. They are used to finance goods that have not yet been transferred from the seller to the buyer. (2 marks) b. the investor will do the following: I. Fill the Reserve bank of Malawi bid form with the necessary information II. Face value and the bid price, i.e. MK1, 050,000.00 as face value with its bid price of say 97.0254. Face value is the maturity value that RBM will credit back into the account from which it collected the funds. III. Send the bid form to RBM through fax. (1, 000,000.00 x 25/100x91/365) = interest for 91 days Face Value = principal + Interest earned from the stated period = K1, 000,000.00+ (1, 000,000.00 x 25/100x91/365) = K1, 062,328.77 (5 marks) 3 a.Households are the net saver and thus the net provider of loanable or investment fund to the other sectors. Households deposit their savings to a financial institution. In the case whereby an individual needs some funds s/he can obtain a loan facility from a financial institution of which inturn he will pay interest on top of the loan principal. Since businesses need vast capital they borrow from financial institution in order to raise the required capital. Also, they offer their shares to the public so that they raise capital (Initial Public Offering). If shares are bought by investors i.e. households inturn they receive dividends. 2 Government borrows from a financial sector. They also impose tax on businesses thus collecting more revenue. Individual investors also pay tax inform of Withholding Tax, Pay As You Earn (PAYE) and many more forms of taxation. Businesses earn profits and hence pay provisional tax to government, pay dividends to investors, bond interest etc. (8 marks) b.Risk transformer: instead of an individual lending directly to a business a bank creates a deposit or current account with relatively low risk for the investor’s savings. Lending directly to the firm the saver would demand compensation for the probability of default on the loan and therefore the business would have to pay a very high interest which would inhibit investment. Volume transformer: many institutions gather small amounts of money from numerous savers and repackage these sums into larger units/ bundles for investment in the business sector. It is uneconomical for an investor with K100.00 per month who wants to invest in shares to buy small quantities periodically. Unit trusts gather together hundreds of individuals’ monthly savings and invest in a broad range of shares, thereby exploiting economies of transactional costs. (4 marks) c. Broker: an intermediary (go between), someone who marches up a provider of finance with a user of funds. It is useful for reducing the search costs for both parties. Examples of brokers are; stockbrokers Malawi Ltd, CDH stockbrokers, FDH stockbrokers, African Alliance Ltd. A broker makes it easy for investors wanting to buy shares in a newly floated company. They also have skills in collecting information on a firm and monitoring its activities, saving the investor time. They also act as middle men when the investor wishes to sell shares. (3 marks) 4 a. Value of share = Dividend per share paid (Rate of return – div growth) = 0.97 . 3 (0.175 – 0.10) = K12.93 b. i. DPS 1 = DPS o (1 + g) = 0.97 x (1.0.10) ii. Value of share = DPS o (1 + g) (r – g) = 97 x (1 + 0.10) (0.175 – 0.10) = K14.23 (1 Mark) (2 Marks) (1 mark) b. Types of preference shares Cumulative: dividend is cumulative if the company does not earn sufficient profit to pay the dividend i.e. if a dividend is not paid in one year it will be carried forward to successive years. Non Cumulative: it the company is unable to pay the dividend on preference shares because of insufficient profits, the dividend is not accumulated. Preference shares are cumulative unless expressly stated otherwise. Participating: participating preference shares, in addition to their fixed dividend, share in the profits of a company at a certain rate. Convertible: apart from earning a fixed dividend, convertible preference shares can be converted into ordinary shares on specified terms. Redeemable: redeemable preference shares can be redeemed at the option of the company eiher at a fixed rate on a specified date or over a certain period of time. 5 a. spot rateis a rate quoted immediately while a forward rate is a spot price ruling on the day a forward exchange contract is made (2 marks) b. for i,ii,and iii a customer buys while the bank sells I. US $ 1 month 4 Spot rate Less: Premium (1 month) 1.5200 (0.0032) 1.5168 . Currency required by customer = $14, 000.00 Cost in Sterling = 14,000 / 1.5168 = ₤9, 229.96 II. Spot rate = 1.8630 Currency required by customer = Can $25, 000.00 Cost in Sterling = 25,000 / 1.8630 = ₤13, 419.22 III. Spot rate = 72.20 Add:discount = 0.45 72.65 Currency required by customer = Belg Fr 75, 000.00 Cost in Sterling = 75, 000 / 72.65 = ₤1, 032.32 IV, V and VI the customer sells and the bank buys IV. Guilder 1 month Spot rate Less: Premium 4.06 ¼ 0.01 7/8 4.04 3/8 Currency for sell by customer = Guilders 28, 000 Value in Sterling = 28,000 / 4.04 3/8 5 = ₤6,924.27 V. Kroner 3 months forward Spot rate = 13.02 Add: discount bank’s buying rate = 0.19 ¾ . 13.21 ¾ Currency for sell by customer = Kroner 20,000 Value in sterling = 20,000 / 13.21 ¾ = ₤1,513.15 VI. DM 1 month forward Spot rate Less: premium = 3.07 ½ = 0.01 ½ 3.06 . Currency for sell by customer = DM 6, 000.00 Value of sterling = 6, 000 / 3.06 = ₤1,960.78 6 a. capital market also known as Equity capital Market (ECM) is a market that exists between companies and financial institutions that is used to raise equity capital for companies. (2 marks) MSE is important to both listed and unlisted companies in Malawi. - it regulates the equity market it conducts trading sessions on the dealing table daily at 11.00am it provides a fair dealing groundto all brokers registered with it it helps in disseminating trading results into the market it helps not-listed companies to get listed through an IPO 6 - it gives public awareness in share investments (8 marks) b. Criteria to be satisfied I. II. III. IV. a subscribed capital of atleast K100million not less than 30,000,000 equity shares in issue a satisfactory profit history for the proceding three financial years 25% of each class of equity shares be held by the public unless otherwise agreed with the committee V. The number of public shareholders of listed securities shall be atleast 300 for the equity shares, 25 preference shares and 10 for debentures VI. The minimum initial price of securities shall not be less than 100 tambala per security unless agreed with the committee. (10 marks) 7 a. In April 2009 the share price was at K6.00. By the end of the year, December 2009 the share price moved upwards i.e. to K7.00. This represents an increase in the share price of K1.00 per share. The difference between the two prices with the date ranges referred to is called Capital gain. Contrary to the above, where in December 2009 the share price was K7.00 and as of April 2010 the price moved downwards to K5.00 per share it is called Capital Loss. The share price has lost K2.00 per share. As of April 2009 the share price was K6.00 while April 2010 the price fell to K5.00 , representing K1.00 below, which symbolizes that more difficult times have been experienced by the company. This can be due to many factors such as global crisis (global melt down), interest rate fluctuation, inflation, exchange rate fluctuations etc. Observation: marks shall also be awarded accordingly to any student who gives an answer which best describes what the market forces of demand and supply for shares comes into effect since availability and no availability of shares have an influence on the share price. For instance if shares are readily available and in large quantities but few takers/buyers then prices fall and the opposite is true. 7 b. i. To shareholders Shareholders will always love to see their portfolio increase in value with help of capital gains, i.e. from K6.00 to K7.00.Investors will always smile and hence keep the shares / hold on to their shares. On the contrary if the share price has fallen investors will tend to get rid of their holding ASAP, i.e. sell off their shareholding in order to reduce the likely anticipated loss in future. In addition, any arguments to do with supply and demand can be considered as solutions,marks can be awarded. ii. to the company’s performance Any share price movement will have no any direct effect on the performance of the company because company’s performance is independent of its share performance at the stock market (3 marks) d. Profit for the company = MK8million Dividend policy = 50% = 50% x MK8m = MK4M No. of ordinary shares = 4, 000,000 shares Dividend per share = MK4M / 4 million = MK1.00 per share 8 a. Currency depreciation is the decrease in the value of the local currency against other nation’s currencies. Currency appreciation is the increase in value of the local currency against the other nation’s currency If the exchange rate for the $1.00 against the Malawi Kwacha (MK) is MK142.00 (as of January 28th 2010) and come May 28th 2010 the exchange rate for the US $ 1.00 against the Mw Kwacha is MK145.00 then in this case the Mw currency has depreciated. It takes one to cough K145.00 to purchase a single dollar than the MK142.00. 8 If the exchange rate for the US$1.00 against the MW Kwacha is MK145.00 (as of 28th January 2010) and on May 28th 2010 the exchange rate for the US$1.00 against MW kwacha is MK142.00 then in this case the Mw currency has appreciated in value. You only pay MK142.00 for a single dollar. b. cross rate is a bilateral exchange rate calculated from two bilateral exchange rates Pound-dollar cross = Mk x 230 x GBP Mk x 140 x US$ = 1.6197 Dollar-pound cross = 1 / 1.6197 = US$0.6174 / GBP C. Investors:- if an investor wants to invest in machinery which Mw is not able to produce,i.e. Ice plant, s/he will be forced to buy it from abroad (import) and hence need for forex. Traders:- a lot of goods are not produced locally and hence imports drain foreign currency hence demand for currency Students:- foreign examining bodies such as ACCA, CIMA, SAIFM, ABMA are paid in US$ & Pounds hence students acquiring knowledge from these bodies seek forex in order to pay for examination fees, subscription fees and many more expenses as may be required from time to time. ii. The interaction between the demand for the currency and the supply of the currency determines the currency’s market value if the exchange rate is free to change then the currency’s value adjusts to its equilibrium through the market clearing process. 9