FIN - 301 - Tutorial Questions Set 1 - 2023

FIN 301 Financial Institutions and Markets
September/October 2023
Tutorial Questions Set 1

QUESTION 1
Financial markets have been segmented depending on the method of financing. One of the
facts on this issue is that indirect financing is a widely used method of financing by both
individuals and businesses.
i. Compare and contrast the two methods of financing, and show why the benefits of
financial intermediation outweigh the benefits of direct financing.
ii. Describe the different classifications of financial markets, and give examples
iii. Explain the five components of financial system
iv. Explain the three types of financial intermediaries (with examples) that operate in the
financial system including their assets and liabilities
QUESTION 2
You need money to start a business, and a financial expert advised you that you need to raise
an additional P5 000 from the money that you expect to get from your Motshelo at the end of
the year. You have approached your bank for a four-year payable loan of P5 000. But there is
existing alternative of floating a P5 000 par value special guaranteed coupon bond. Both
alternatives carry annual interest rate of 9 percent.
Required:
(a) Calculate the yearly payments you will have to make under the two alternative
financing schemes.
(b) Construct payments schedule for both financing alternatives.
(c) State which financing alternative you would recommend for the vendor. Fully justify
your choice.
(d) If interest rates go up to 13% and down to 7%, what effect will this have on the price
of the bond and the bank loan, and ultimately your decision? Justify your answers
mathematically.
QUESTION 3
(a) A 5 year, 8% annual coupon bond with a face value of P3,000 is currently selling for
P2750.
i) Compute your rate of return if you sell the bond next year for P2890.
ii) Calculate the current yield
iii) Compute the total return
(b) You have been told that the nominal interest rate is 10% and expected inflation rate is
18% over the course of the year? The tax rate is 25%.
Calculate the following;
i. the real interest rate using the general fisher equation
ii. the real interest rate with the assumption that the effect of inflation doesn’t
accumulate in an additive manner
iii. the effective real interest rate
iv. Interpret your answers
(c) What is the price of a perpetuity that has a coupon rate of P50 per year and a yield to
maturity of 2.5%? If the yield to maturity doubles, what happens to its price?
(d) Calculate the duration of a P1000, 5% coupon 10 year bond with 4 years remaining to
maturity. Assume all market rates are 8%. What would be the % change in price if
interest rates (i) rise to 10% and (ii) fall to 6%?
(e) A 2-month treasury bill sells for a price of P750. Calculate the yield on discount basis
on this bond if the face value is P1000.
(f) A bond with a face value of P2000 is currently selling at a price of P1950. What is the
current yield on this bond if the coupon rate is 6%?
QUESTION 4
Kelly owns a P5000 par 10% coupon bond that has 6 years remaining to maturity. She plans
on selling the bond in one year and believes that the required yield next year will have the
following probability distribution;
Probability Required yield (%)

0.1 6.70
0.2 6.85
0.3 7.10
0.2 7.30
0.1 7.55
0.1 7.75
a. That is the expected return (ke) and standard deviation/risk of the bond?
b. What is the expected price of the bond at the time of sale if YTM= expected return
(ke)?
c. Calculate the duration of the bond if YTM= expected return (ke),
d. What is the percentage change in price if the YTM changes to 15%? Comment on
your answer.
QUESTION 5
In 2005, RPC Data, a BSE listed company, floated a 20-year bond at a par-value of P2000 at
a coupon rate of 10%. Now, with 14 years to maturity, an investor offers to sell you the bond
at P1 850. Your research indicates that securities that carry a similar level of risk yield a
return (YTM) of 12%.
i. Would you accept or reject the offer? Justify your answer.
ii. Over the course of the 20 years in the bond’s duration, its market price will
fluctuate to levels above or below its par value. Discuss conditions that would
result in the bond selling at a discount and premium.
QUESTION 6
a. An economy cannot operate without Secondary Financial Markets. Arguably,

Secondary Financial markets are more important that Primary financial markets.
Discuss the role of Secondary financial markets, over and above those of Primary
financial markets.
b. Also discuss the importance or contribution of secondary financial markets to the
development of any economy.

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FIN 301 Financial Institutions and Markets

Tutorial Questions Set 1

Probability Required yield (%)

a. An economy cannot operate without Secondary Financial Markets. Arguably,

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