Nov 28, 2020 in Coursework

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Financial Market

Exercise 1

A country that has no financial markets will lag in the economy and will suffer from poor revenue margins hence leading to less revenue allocation in the countries economy. Financial institutions in the country will close down due to the lack of businessmen who come to acquire loans from them. This will result in the lack of workplaces hence the government taxpayers reduce leading to minimal taxes and no developments in the country. Some citizens are employed at the financial institution and without such institutions, many people will be hustling. This will lead to reduced local government revenue due to reduced number of taxpayers. An increase in the number of jobless citizens leads to problems related to poverty. The job seekers will find other means of earning their living. This will result to increase in crime rate and sociological problems.

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Securities and loans also contribute to countries economic growth. Lack of grants and loans will prevent the country from investing in foreign countries. The country will not be able to get loans from the World Bank because for a state to qualify for a World Bank loan it should be carrying out financial business. The loan helps in developing and facilitating government projects which could not be afforded. Any country which does not have a financial market faces a lot of problems ranging from financial, social, psychological and to physical ones. They do not have much development and remain behind all other countries in terms of technology.

Exercise 2

T Bills provide a sense of security and are very simple and reliable. Their wide range of importance-bills is advantageous to an individual who acquires it due to its early maturity over a short period of time and the profit that the person gets within the duration. People can not invest into a collapsing company. People consider market share before investing into companies. The population has developed a fear for T Bills and they hope for their shares in case of collapsing. In order to make more profit people opt to invest to first growing companies. Advancement in technology also attracts customers in investing in a particular company. T Bills does not offer online services and people need a system which supports online transaction. They need to transact in their remote areas rather than visiting offices physically.

Exercise 3

A car is not an investment and buying a car means that I will be forced to use savings for its maintenance. Buying a car is not a problem but many people claim that the big problem is its maintenance. In this situation, I will not buy the car this year but I will be forced to wait till the next year. Currently, the car is worth 17,000 dollars while I have only 10,000 dollars in my account. At the end of this year, I will receive another 10,000 dollars and from my saving, I would have earned a saving interest of 500 dollars. In my account, I will be having 20,500 dollars and the car's price will be lower by then. It will be sold at $ 16,000. The only option and decision to make is to wait for one year when I will have the possibility to buy the car at a lower price. After buying the car I will be left with $ 4,500 in my account. This amount will be used for its maintenance.

Exercise 4

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European Commission, European Government, and European Central Bank (ECB) responded by implementing emergency measures to cope with the situation and restore the economy. After the eruption of the financial crises in September 2008, European Commission implemented programs to help in solving the situation. The European Financial Stability Facility (EFSF) was founded to preserve financial stability through market expansion. The European Financial Stability Mechanism program was also founded with an aim of funding emergency programs. The ECB also took several measures to prevent volatility in the financial market. Such institutions as IMF, World Bank, EBRD, Bilateral, Bop, GLF, and EFSF provided funds for financing government operations and provision of infrastructures to ensure smooth running and continuous investments. Different countries acquired funds from the organizations for different period of time, for instance: Cyprus, Greece, Hungary, Ireland, Latvia, Portugal and Spain among others. Each country proposed the time period to recover and pay for the loan. Some proposed to return money for a period of three years while others established a ten years period, starting programs to go up to 2016.

Each country had an access and permission to get a loan from those programs. Through the use of those programs, each government department had enough funds to ensure the continuation of government projects. Other programs concentrated on ensuring market expansion and availability of the financial market. European Commission fought to ensure each country in Europe has financial markets. The availability of a financial market ensures cash flow and increase in government revenue.

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Exercise 5

In calculation of Net Asset Value (NAV) the number of assets in the portfolio is subtracted from depts. Then the value is divided by the outstanding units. The asset is the market values of the invested funds plus accrued income plus receivable while debts include liability plus the accrued expenses. In this case the liability is $ 30 million while the share capital is 5 million and shares sells at $ 36 per share. The outstanding amount is calculated by multiplying the number of shares with the cost, which is 5 multiplied by 36, which will amount to $ 180 million. In this case the debt is $ 30 million. The NAV of the funds is 200 minus 30 which is $ 170 million divided by 5. The NAV is $ 34. The discount will be calculated by multiplying the value by 1/100 in order to get the percentage. The discount, in this case, will be 3.4 %.

Exercise 6

NAV at the beginning of the year is computed by adding up the current value of all assets and income less the operating expenses and other debts then dividing the figure by the total number of outstanding shares.

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a) NAV=$ 200 M

=200 1% OF 200M


The Net Asset Value (NAV) at the beginning of the year is $19.8M

At the end of the year: the dividend income increase by 18% making it 2.36M

The total assets will be 200m-2m=198M

NAV=198million less 1% of 198=196020000m/10m=19.602m

After subtracting the management fees and dividing the figure by the total shares outstanding, the Net Asset Value at the end of the year is 19.602M

b) The investors rate of return is 2.36M less 2M divided by the original dividend income of two Million.0.36 divided by 2M then multiplied by 100 results to 18 percent. The rate of return of the investor will be 18%.

Exercise 7

Total funds used are 1000 shares multiplied by the $20 per share which results in 20000 plus the entry fee of 4% of 20000=20800.

12% of 20 +20=22.4 the share price of the shares increased by 12% to make it 22.4 per share. The value of the shares will be 22.4*1000=22400.

The rate of return= the new value of shares less the original value, hence 22400-20000/20000*100=12%.

12% is the rate at which the stock has gained in value. The actual gain is 22400 less 20000 which is 2400.

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