EFIM10029 Financial Markets, Institutions and Instruments MOCK EXAM
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MOCK EXAM PAPER -- SCHOOL OF ACCOUNTING AND FINANCE
MOCK EXAM
EFIM10029
Financial Markets, Institutions and Instruments
SECTION A
Question 1
The ECB sells €20m of short-term government securities through an open market operation and makes a €5m loan to Bank Gamma through its marginal lending facility.
REQUIRED
Explain what happens to the total assets of the banking system and to the amount of reserves held by banks.
Total 12 marks
Question 2
Suppose that this is the initial situation of the limit order book for stock X.
|
BUY ORDERS |
|
SELL ORDERS |
£20.00 |
100 shares |
|
|
£20.50 |
50 shares |
|
|
|
|
|
|
|
|
£20.70 |
50 shares |
|
|
£20.75 |
100 shares |
The following three new orders arrive, sequentially: (1) Market order to sell 20 shares; (2) Limit order to sell 60 shares at £20.80; (3) Limit order to buy 40 shares at £20.50.
REQUIRED
a) How does the limit order book look like after the three orders are handled? Explain your reasoning.
(12 marks)
b) Focusing on the orders that are executed, at what price are they executed?
(6 marks)
Total 18 marks
SECTION B
Question 3
There are two corporate bonds from two different issuers, with the same bond indenture. Bond A has maturity 2 years, face value £1,000, coupon rate 11%, and price £862.5. Bond B has maturity 2 years, face value £1,000, coupon rate 20%, and price £1,000. Coupon payments are paid annually for both bonds.
REQUIRED
You must say whether the following statement is true or false and provide an explanation for your answer. (Answers without an explanation get zero points.)
Statement: Bond B is riskier than bond A.
Total 20 marks
Question 4
Commercial banks fear that a recession is approaching and, therefore, increase sharply their demand for reserves.
REQUIRED
You must say whether the following statement is true or false and provide an explanation for your answer. (Answers without an explanation get zero points.)
Statement: In this situation, the Central Bank can keep the interbank rate stable by making an open market sale of securities.
Total 20 marks
SECTION C
Question 5
REQUIRED
Explain how government safety nets can create both an adverse selection problem and a moral hazard problem.
Total 30 marks
2022-01-13