Financial Market

BCO224 FINANCIAL MARKETS – Task brief & rubrics

FINAL ASSIGNMENT

Description:

• The assignment consists of 3 questions and 4 exercises • Concepts included are in UNIT 1 to 6 • The final assignment will be accepted in WORD format ONLY. It is mandatory to submit an EXCEL file where you explain the different

calculations you made. So, both files have to be submitted. • Calculation results HAVE TO be explained and the calculation steps explained

Assignment Launch: Week 10

Submission: Week 13 – Via Moodle (Turnitin). Submission will be accepted all Week 13: From the 4th to the 10th of May at 23:59hrs (Barcelona’s time).

Weight: This task is a 40% of your total grade for this subject.

Outcomes: This task assesses the following learning outcomes: • Demonstrate a deep understanding of the role of financial markets and financial institutions • Examine the financial instruments • Critically evaluate what interest rates mean and why interest rates change • Demonstrate understanding of bond prices and bond yields • Analyze stock price changes and demonstrate understanding of foreign exchange rates and its effect on businesses

QUESTIONS

1. Assume that the following banks have the same net amount of 2 million, but they are different due to the capital structure:

BANK A Reserves 120 Deposits 850 Loans 900 Bank Capital 170 Total assets 1020 Total Liabilities and Equity 1020 BANK B Reserves 120 Deposits 1000 Loans 900 Bank Capital 20 Total assets 1020 Total Liabilities and Equity 1020

a. Which Bank is more attractive for shareholders? b. Which bank is riskier in case of loan depreciation at 20 million? Show your calculations to support your suggestions.

2. Could you define what is the yield curve? a. What are the three main theories that attempt to explain the yield curve? b. What does it mean an inverted yield curve? How does it compare to a normal yield curve?

3. Briefly explain what would happen and why:

a. Suppose that price levels in Indonesia rise by 20% relative to price levels in the Eurozone countries and that the purchasing power parity theory holds. How would this affect the value of the Indonesian rupiah relative to the euro?

b. If the British central bank prints money to reduce unemployment, what will happen to the value of the pound in the short run and the long run?

c. Due to increasing wealth, what would happen to the value of the Singapore dollar if Singaporeans significantly increased their consumption of foreign goods and services as compared to locally produced goods and services?

EXERCISES

1. Suppose there are two bonds you are considering:

Bond A Bond B Maturity (years) 20 30 Annual Coupon rate (%) 12 8 Par Value 100 100

a. If both bonds had a required rate of return of 10%, what would the bonds’ prices be? b. Re-calculate the prices of the bonds if the required return falls to 9%. Could you explain why the price increases or decreases given this

change in required return?

2. Calculate the NAV of the following fund, assuming 3,500 shares are outstanding. Calculate the percentage change in the NAV of the fund if stock C climbs to $33.41. Stock Shares owned price A 500 $5.74 B 6,000 $65.10 C 3,000 $12.04 Cash n.a. $4,368.40

a. Will the NAV increase or decrease? Why? b. Calculated your return on your investment given the change in NAV

3. Suppose the Swiss Franc is currently traded at SFR 1.40/$. The British Pound is traded at GBP 1.39/$. Ignoring transaction costs:

a. Determine the SFR/GBP exchange rate consistent with these direct quotations. b. Suppose the SFR/GBP cross rate in the market was at SFR 1.05/GBP. Is there any arbitrage opportunity?

4. Consider the following three stocks:

• Stock A is expected to provide a dividend of $10 a share forever • Stock B is expected to pay a dividend of $5 next year. Thereafter, dividend growth is expected to be 4% a year forever. • Stock C is expected to pay a dividend of $5 next year. Thereafter, dividend growth is expected to be 20% a year for 5 years (until year 6) and

zero thereafter. a. If the market capitalization rate for each stock is 10%, which stock is the most valuable? b. What happens if the capitalization rate drops to 7%? Explain c. Assume EPS for stock A is 5, Stock B 7, and Stock C 20. Calculate the P/E ratio for each. Briefly explain what the different values mean to

you.

Rubrics

Exceptional 90-100 Good 80-89 Fair 70-79 Marginal fail 60-69

Knowledge & Understanding

(20%)

Student demonstrates excellent understanding of key concepts and uses vocabulary in an entirely appropriate manner.

Student demonstrates good understanding of the task and mentions some relevant concepts and demonstrates use of the relevant vocabulary.

Student understands the task and provides minimum theory and/or some use of vocabulary.

Student understands the task and attempts to answer the question but does not mention key concepts or uses minimum amount of relevant vocabulary.

Calculation (40%)

Student demonstrates excellent ability to calculate and understand all key formulas & exercises.

Student demonstrates good ability to calculate and understand all key formulas & exercises.

Student demonstrates fair ability to calculate and understand all key formulas & exercises.

Student demonstrates insufficient ability to calculate and understand all key formulas & exercises.

Analysis (30%)

Student demonstrates an excellent ability to interpret statistics and the calculation results, as well as a highly critic approach

Student demonstrates a good ability to interpret statistics and the calculation results, as well as a good critic approach

Student demonstrates a fair ability to interpret statistics and the calculation results, as well as a fair critic approach

Student demonstrates an insufficient ability to interpret statistics and the calculation results, as well as an insufficient critic approach

Communication (10%)

Student communicates their ideas extremely clearly and concisely, respecting word count, grammar and spellcheck.

Student communicates their ideas clearly and concisely, respecting word count, grammar and spellcheck.

Student communicates their ideas with some clarity and concision. It may be slightly over or under the wordcount limit. Some misspelling errors may be evident.

Student communicates their ideas in a somewhat unclear and unconcise way. Does not reach or does exceed wordcount excessively and misspelling errors are evident.