Economics – Financial Markets & Institutions

Economics – Financial Markets & Institutions

Economics – Financial Markets & Institutions B1 Yellow Bank borrows $25,000 through a loan with Purple Bank (transaction A) and issues $10,000 bonds to Dr Orange (transaction B).  Dr Orange is a rich widow who paid for the Yellow Bank bonds with the money of the rents she earned from her property investments in Sydney, money that was sitting in her transactional bank account in Purple Bank.

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Yellow Bank buys  $400,000 shares just issued by Winnie Company, a honey producer that needs funding to renew its stock of beehives (transaction C). Winnie Company has its transactional bank account in Yellow Bank.

  1. a) Draw the changes in Yellow Bank’s balance sheet and in Purple Bank’s balance sheets resulting from transactions A, B and C. [Clearly indicate the name of the item affected in the balance, the change in the value and between brackets the letter of the transaction.] No explanation is required. Only draw the two balance sheets.

(2.5 marks)

Economics – Financial Markets & Institutions

  1. b) Represent the diagram of flow of funds for all the transactions above. [Clearly indicate the financial instruments, the financial markets, the type of money involved, the creation and destruction where relevant] Do NOTrefer to SSU, DSU or financial intermediary. Do NOTinclude the central bank. No explanation is required.

(4 marks)

 

  1. c) Indicate which part of the story is a case of channelling of funds in the financial system and which $value is channelled. Clearly identify the SSU, the DSU, and if relevant, any financial intermediary.  Assess if there is transit of funds. Explain your answer in details.

(1.5 marks)

 

  1. d) Indicate which part of the story is a case of funding of economic activity by net creation of private money and which $value is created. Clearly identify how the net creation of money occurs in the banking system in this story.  Explain your answer in details.

(1.5 marks)

 

Economics – Financial Markets & Institutions

B2

When the Australian government issues government bonds during a tender, the cumulative aggregate/total  demand by bidders is the following:

Yield Total cumulative aggregate demand (in AUD million face value)
2.20% 2,200
2.15% 2,050
2.10% 1,950
2.05% 1,900
2.00% 1,820

 

The Australian government is intending to sell AUD million 2,000 face value bonds using a variable discriminatory tender. The money of the issue will be paid on the Australian government account in the RBA, Australia’s central bank.

  1. Show the effect of this tender on the Australian government’s balance sheet if the tender is successful. [Hint: we will need to discuss and make some assumptions to fully complete the task.]

(1 mark)

 

  1. Determine the cut-off yield of the tender above. Explain in details the process you have followed to select the cut off yield.

(2 marks)

 

  1. Calculate the ratio that will be used to calculate the allocation of government bonds to the bidders who bid the cut-off yield. Explain in details the process you have followed to calculate the ratio.

(1.5 marks)

 

  1. Consider the following bids by 9 institutional investors (II):

 

Yield in the bid Quantity in the bid (AUD million face value)
2.20% II9:100; II8: 50
2.15% II7: 40; II6: 60
2.10% II5: 30; II4: 20
2.05% II3: 80
2.00% II2: 920; II1: 900

 

Determine the quantity of government bonds allocated to each institutional investor. Justify your answers.

(3 marks)

  1. Calculate the volume weighted average winning yield of the tender.

(1 mark)

 

 

 

 

 

B3 

On 4th October 2022, an open-ended managed fund had 8,420 units on issue, and held the portfolio described in the table below. The price for each share is the market price that day at 4:00pm.

 

Share Shares owned (quantity) Price
Company 1 1,000 $  2.03
Company 2 5,000 $51.37
Company 3 2,800 $29.08
Company 4 10,000 $67.19

 

  1. a) Calculate the managed fund’s unit price that newinvestors will pay if they placed a purchase order for 580 units on 4th October 2022 before 4pm.

(2 marks)

  1. b) Investors who joined on the 4th October 2022 (from question a) paid for their 580 units on the 5th October 2022. Assume their money was received at once by the managed fund but was not invested in shares yet.

Due to the announcement of company 4’s bad performance, the value of share 4 dropped to $50 by the end of the 5th October 2022. The prices of shares 1, 2 and 3 remained unchanged during that day. Existing investors placed a sale order for 50 units before 4pm on the 5th October 2022. Calculate the price that applied to their sale order.

(2 marks)

  1. c) Ignore the events that have been described in b) and consider this alternative scenario instead.

Investors who joined on the 4th October 2022 (from question a) paid for their 580 units on the 5th October 2022. Assume their money was received at once by the managed fund but was not invested in shares yet.

On the 5th October 2022 all 4 shares in the porfolio increased by 50% of their 4th October original values. Existing investors placed a sale order for 50 units before 4pm on the 5th October 2022. Calculate the price that applied to their sale order. Explain why the price of the unit on the 5th October 2022 has increased by less than 50% compared to its 4th October original value.

(2 marks)

  1. d) Purple Bank is the responsible entity for the above managed fund. Describe one form of earning that Purple Bank gets from managing the fund. Indicate under which part(s) of Purple Bank’s income-expense statement will be affected by this income .

 (1 mark)

 

 

C1 – Critical writing

For each of the statements below, assess whether the statement is TRUE (always correct),  FALSE (always wrong) or UNCLEAR (meaning correct under some circumstances, wrong under other circumstances to define). In 4 to 6 sentences, provide an explanation / illustration of why this is the case. Without an explanation or with an explanation that is off topic or with an explanation that shows serious confusion and misunderstanding, you will receive 0 marks, even if your conclusion was correct.

Your answers must be entirely in words with no balance sheet, no diagram and no equations. The answer must reflect the content of the course and cannot use an outside source. Using copy/paste is strictly forbidden.

 

  1. a)  The spread strategy of hedge funds can generate a gain in spite of share market prices going down.

(2 marks)

  1. b) The pool of securitised loans is divided into several tranches with different levels of credit risk.

(2 marks)

Write your answers in the box below. If your answer exceeds 6 sentences, the marker will ignore the content of the rest of your answer.

 

 

 

 

 

C2 

Read carefully the extracts from the following article “Is it Fair to Blame Fair Value Accounting for the Financial Crisis?” by Robert C. Pozen published in Harvard Business Magazine.
Is It Fair to Blame Fair Value Accounting for the Financial Crisis.pdf
Complete the following tasks.

 

  1. a)  In 120 words with 10% margin [108 -132 words] summarise the opinion Robert C. Pozen and his argumentation about the responsibility of mark to market accounting (also called fair value accounting) in banks’ insolvency during the financial crisis.

Marking considerations

You are not authorized to copy paste sentences from the original text; this will be penalised; it is expected that you rewrite in your own words the relevant ideas of the article, ignoring what is off topic for the question.  Of course  you are expected to keep the wording of Pozen for the essential technical accounting terms.

You are allowed to search the Internet to help to clear some confusion you are facing during your preliminary work.  However, the summary ultimately must only reflect the content of the article, not the information you found in another source. Introducing elements not in the article will be penalised.

 In addition to the selection of the relevant ideas, the marking guide will award marks for the logical order of the sentences; therefore resort to the use of expressions, such as “as a result” “consequently”  “therefore” “for example” “an exception” “the reason is”  “because” “however” “nevertheless” “by contrast” “similarly” “agree” disagree” “like” “unlike” etc. to make explicit the logical links between your sentences. The list provided is just an illustration and of course not all of these words need to appear in your answer. 

Answers that are not in the required word limit range will bear a penalty and the ideas expressed after the 132 word threshold will simply be ignored by the marker. Type the draft of your answer in a word document so you can easily check the word count. 

(2.5 marks)

  1. b) Pozner writes “Any decrease in the fair market value of a bank’s traded assets reduces the equity on its balance sheet and flows through its income statement as a loss.” Complete that statement with more details on how the process described by Pozner unfolds.

Your explanations need to be only in words like for a C1 question.

(1 mark)

  1. c) When explaining the treatment of available-for-sale securities, Pozen uses the concept of OCI and accumulated OCI. Attempt to reconcile the terminology that Pozen uses with the terminology we use in the course. Indicate clearly where you see an equivalence between the concepts OCI /accumulated OCI and the course content and mention the clues that suggest that equivalence.  Indicate if you see a contradiction in the explanations of Pozen about available-for-sale securities [At least try to articulate what puzzles you in his explanations]. Check other sources of information in the Internet to help you decide which interpretation is valid or how they can be reconciled.  Provide the webpage addresses where you find the information you use.

Marking considerations

You are authorized to quote information that you find from the Internet provided that you give the source and it is relevant. it would be a mistake to have long quotes from an outside source with irrelevant content or without analysing how it helps you to progress in your analysis.

An important component of the mark will be the comparisons between the content of the article and your knowledge from the course; therefore they cannot be presented separately and need to be integrated.

(2 marks)

  1. d) According to the article, what is an alternative explanation, if not the market fluctuations, for banks’ insolvency during the financial crisis? Use the clues in the article.

(0.5 mark)

Answer in the box below. Indicate the word number for question a).

 

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