Exam (elaborations)
ECS2605 EXAM PACK 2023
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WELL-ELABORATED EXAM QUESTIONS & ANSWERS AND SUMMARIZED NOTES
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ECS2605EXAM
PACK
2023
WELL ELABORATED EXAM
QUESTIONS & ANSWERS AND
SUMMARIZED NOTES
,SUGGESTED SOLUTIONS FOR MAY/JUNE 2015
QUESTION 1
a)
i. Money market
A segment of the financial market in which financial instruments with high liquidity and
very short maturities are traded
The money market is used by participants as a means for borrowing and lending in the
short term, from several days to just under a year
Whilst Capital market
Capital market is a market where buyers and sellers engage in trade of financial
securities like bonds, stocks, etc.
Capital market consists of primary markets and secondary markets
It helps in channelizing surplus funds from savers to institutions which then invest them
into productive use.
ii. Primary Markets
Deals with the trading of newly issued securities.
The corporations, governments and companies issue securities like stocks and bonds
when they need to raise capital.
The investors can purchase the stocks or bonds directly from the company issuing them
Initial Public Offering (IPO) occurs when a private company sells stocks to the public for
the first time (happens in primary market).
iii. Secondary Markets
Deals with already traded securities
Investors’ trade securities among themselves and the company with the security being
traded do not participate in the transaction.
The resale value of the securities in the secondary market is dependent on the fluctuating
interest rates.
, b)
i. Intermediaries
Intermediaries such as bank, building society, insurance company, investment bank or pension
fund offers a service to help an individual/ firm to save or borrow money.
It also helps to facilitate the different needs of lenders and borrowers.
ii. Payment Service Providers
Payment Service Providers offer ecommerce merchants one single technical interface to one or
more online payment methods. They help ecommerce merchants and businesses to accept
credit cards, alternative payment methods (bank transfers, direct debits), digital wallets
(MasterPass, Visa Checkout) etc
c)
i. Collective investment scheme
A collective investment scheme (“CIS”) can be described as an investment product that allows
many different investors to pool their money into a portfolio.
Unit trusts were the first collective investment scheme to be offered to investors in South Africa.
ii. Micro finance institution
A microfinance institution is an organization that offers financial services to low income
populations.
Almost all give loans to their members, and many offer insurance, deposit and other services.
d)
i. Future
Is an auction market in which participants buy and sell commodity and futures contracts for
delivery on a specified future date
ii. Options
Are financial instruments that can provide you, the individual investor, with the flexibility you
need in almost any investment situation you might encounter
, Options give you options
SECTION B1
a) Credit rating agencies
Many countries (especially developing countries) rely on foreign investors to purchase
their debt, and these investors rely heavily on the credit ratings given by the credit rating
agencies.
The benefits for a country of a good credit rating include:
o Being able to access funds from outside their country; and
o The possession of a good rating can attract other forms of investment to a
country, such as foreign direct investment.
o By helping to reduce the informative asymmetry between lenders and investors
and enables governments and companies to raise capital in the international
financial market.
b)
Credit-default swaps would widen,
Corporate or banks profits decline
increase the cost of funding (financing costs)
c)
Since there will be less capital outflows leading to reduction in credit to the private sector and
consumers
Smaller credit limit is given to firms or households or simply rejected outright.
Household debt levels would increase
d)
Individual banks are not allowed to print their own money; however banks may create money by
creating checkable deposits, which are a part of the money supply.
The money creation process begins with the injection of reserves into the banking system, which
is usually accomplished by the Federal Reserve System (SARB).
The central bank ie SARB has the responsibility of deciding what is the minimum percentage of
their deposits the banks must keep on hand as cash
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