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    Week 1

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    Arunim Yadav
    This document provides the answers and explanations for 10 questions related to financial markets and bonds. Q1 discusses how financial markets promote economic efficiency by channeling funds from savers to investors. Q2 states that an equity holder is a residual claimant only and has claims on funds left over after all lenders are paid off. Q3 explains that the higher a security's price in the secondary market, the more funds a firm can raise by selling securities in the primary market due to increased demand. Several questions address the distinguishing features of capital markets versus money markets. Capital markets deal in long-term debt/equity, while money markets deal in short-term debt and are used for maintaining steady cash flows rather than long-

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    Week 1

    Uploaded by

    Arunim Yadav
    26 views4 pages
    This document provides the answers and explanations for 10 questions related to financial markets and bonds. Q1 discusses how financial markets promote economic efficiency by channeling funds from savers to investors. Q2 states that an equity holder is a residual claimant only and has claims on funds left over after all lenders are paid off. Q3 explains that the higher a security's price in the secondary market, the more funds a firm can raise by selling securities in the primary market due to increased demand. Several questions address the distinguishing features of capital markets versus money markets. Capital markets deal in long-term debt/equity, while money markets deal in short-term debt and are used for maintaining steady cash flows rather than long-

    Original Description:

    Swayam Nptel - Economics Of Banking And Finance Markets -Assignment 1 with solutions.

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    This document provides the answers and explanations for 10 questions related to financial markets and bonds. Q1 discusses how financial markets promote economic efficiency by channeling funds from savers to investors. Q2 states that an equity holder is a residual claimant only and has claims on funds left over after all lenders are paid off. Q3 explains that the higher a security's price in the secondary market, the more funds a firm can raise by selling securities in the primary market due to increased demand. Several questions address the distinguishing features of capital markets versus money markets. Capital markets deal in long-term debt/equity, while money markets deal in short-term debt and are used for maintaining steady cash flows rather than long-

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    26 views4 pages

    Week 1

    Uploaded by

    Arunim Yadav
    This document provides the answers and explanations for 10 questions related to financial markets and bonds. Q1 discusses how financial markets promote economic efficiency by channeling funds from savers to investors. Q2 states that an equity holder is a residual claimant only and has claims on funds left over after all lenders are paid off. Q3 explains that the higher a security's price in the secondary market, the more funds a firm can raise by selling securities in the primary market due to increased demand. Several questions address the distinguishing features of capital markets versus money markets. Capital markets deal in long-term debt/equity, while money markets deal in short-term debt and are used for maintaining steady cash flows rather than long-

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 4

    Week 1: Assignment 1: Solutions

    Q1. Financial markets promote economic efficiency by

    A. channelling funds from investors to savers.


    B. channelling funds from savers to investors.
    C. creating foreign debt.
    D. reducing investment.

    Answer: B. channelling funds from savers to investors.

    Explanation: Financial markets channel funds from the group that have surplus of it (savers)
    to the group that have shortage it to invest in their business or other projects. Financial
    markets promote economic efficiency because these funds, those who have surplus funds, but
    do not know how to make the best use of this capital. It transfers funds to the borrowers who
    utilize these funds in productive activities.

    Q2. An Equity holder

    A. is a residual claimant only.


    B. gets first preference on assets and income of the borrower.
    C. trades his access funds in the market for loans and mortgages.
    D. is subjected to less risk than a debt holder.

    Answer. A. is a residual claimant only.

    Explanation: In the case of a default, lenders of the company have the first claim on the
    assets and income of the borrower, not on the equity holder. The Equity holders have claims
    on the funds that are left after all the lenders are paid off.

    Q3. The higher a security’s price in the secondary market the ________ funds a firm can raise
    by selling securities in the ________ market.

    A. less; tertiary
    B. less; primary
    C. more; primary
    D. less; second

    Answer. C. There is a high correlation between the price the stock in secondary market and
    the price of the IPO; When the shares of a company are performing better in the secondary
    market that means there is the more demand for the shares of the company. Therefore, the
    company can issue new IPOs in the primary market.

    Q4. Which of the following is not a feature of capital markets?

    A. Capital Market deal in long term debt and equity instruments.


    B. Refers to the entirety of the stock and bond markets.
    C. Money raised here is for long term operations.
    D. Money raised here is used by corporations to maintain steady cash flows.

    Answer: D. Money raised here is used by corporations to maintain steady cash flows.

    Explanation: Capital Market deal in long term debt and equity instruments. Funds to
    maintain steady cash flows are required for short term only.

    Q5. Which of the following is not a feature of money markets?

    A. Money Market deal in short term debt and equity instruments.


    B. Money markets are not very liquid.
    C. Money raised here is for short term operations.
    D. Money raised here is used by corporations to maintain steady cash flows.

    Answer: B. Money markets are not very liquid.

    Explanation: Money markets deal in short term debt instruments, mostly less than 1 year.
    So, these are markets for highly liquid, very safe, and are for short-term transactions.

    Q6. What is the present value of $10000 to be paid in two years at an interest rate of 10%?
    Select the most appropriate option from below.

    A. $9070.29
    B. $8264.46
    C. $5000
    D. $12100

    Answer: B. $8264.46

    Explanation: Present Value = (Principal amount)/(1+Interest rate)Time :

    Principal amount = 10000, interest rate = 10% or 0.1, Time (number of years) = 2. Put the
    values in the formula and Present Value will turn out to be $8264.46
    Q7. A $10,000 8 percent coupon bond that sells for $10,000 has a yield to maturity of

    A. 14 percent.
    B. 9 percent.
    C. 0 percent.
    D. 10 percent.

    Answer B. 9 percent.

    𝐶 𝐹
    Explanation: P =1+𝑖 + 1+𝑖

    • P = 20000 (selling price),


    • F = 20000 (Face Value),
    • C = 9% of 20000 = 1800 (yearly coupon payment)

    Putting the values in the formula will give the value of i = 9% (yield to maturity)

    Q8. A rise in interest rates is associated with a _____ in bond prices, resulting in capital
    _____ on bonds whose terms to maturity are longer than the holding periods.

    A. fall; losses
    B. rise; losses
    C. fall; gains
    D. rise; gains

    Answer: A. fall; gains

    Explanation: Interest rates and bond prices have a negative relationship. A rise in interest
    rates means a fall in bond price. When the bond price falls it incurs a capital loss to the bond
    holder.

    Q9. Fisher equation states that nominal interest rate equals the real interest rate plus the
    ______

    A. Expected rate of inflation


    B. Exchange rate
    C. Average bond prices
    D. Repo rate

    Answer: A. Expected rate of inflation


    Explanation: As per the fisher equation nominal interest rate is equal to real interest rate plus
    expected inflation rate.

    Q10. A movement along the bond demand or supply curve occurs when ________ changes.

    A. income
    B. bond price
    C. wealth
    D. expected return

    Answer: B. bond price.

    Explanation: Higher the price of the bond (lower interest rate), higher will be the quantity
    supplied of the bond in the market and vice-a-versa. This signifies a movement along the
    bond demand or supply curve. Changes in all the other factors except bond price will shift the
    demand or supply curve.

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