Exam (elaborations)
ECS3701 EXAM PACK 2023
- Institution
- University Of South Africa
ECS3701 EXAM PACK 2023
[Show more]
Content preview
ECS3701 EXAMPACK 2023
QUESTIONS
AND ANSWERS
,ECS3701
EXAM PACK
Revision PACK
Questions. Answers
,ECS301 [New ECS3701]
SELECTED EXAMINATION QUESTIONS AND SUGGESTED
SOLUTIONS
MAY/JUNE 2011
Part 1: Definition and functions of money (15 Marks)
Answer all questions in part 1.
1.1 List and explain the three primary functions of money. (2)
Medium of Exchange: money serves as a medium of exchange allowing
it to be used as payment for goods and services. As such it promotes
economic efficiency by reducing the time taken for transactions to take
place.
Unit of Account: used to measure value of goods and services in an
economy and helps to reduce transaction costs.
Store of Value: serves as a store of purchasing power from the time
the income is earned to the time it is spent.
1.2 What is the difference between primary and secondary financial
markets: (2)
Primary and Secondary markets: Primary market is the market in which
financial instruments are issued, while the secondary market is the market
in which financial instruments are traded.
1.3 What is fiat money? (3)
Fiat Money: paper currency decreed by government as legal tender. It is
largely dependent upon trust of the value of the currency.
1.4 How is the M2 money stock measured in South Africa? List ALL the
components. (4)
M2 consists of M1 plus deposits which are almost money. Apart from
coins, banknotes and demand deposits it also includes short-term and
, medium-term deposits held by the private domestic sector at monetary
institutions, commercial banks and savings institutions.
Part 2: Financial markets (20 Marks)
Answer question 2.1.
2.1
(i) Explain the difference between the yield to maturity of a bond and the
return on a bond. Please provide the relevant formulas to substantiate
your answer. (5)
Yield to Maturity: of the several common ways to calculate interest rates,
the most important is the yield to maturity. The key to calculating the
yield to maturity for any credit market instrument, is to equate today’s
value of the credit instrument with the present value (PV) of all of its
future cash flow payments. The bond price and the yield to maturity are
negatively related.
The formula used to calculate the yield to maturity depends upon the
specific credit instrument being considered. In this case the yield to
maturity on a bond, refer to the formula in the textbook.
[P = C/(1 + i) + C/(1 + i)2 .......... C/(1 + i)n + F/(1 + i)n]
The return on a security shows how well you have done by holding this
security over a stated period of time and it can differ substantially from the
interest rate measured by the yield to maturity. The rate of return is
defined as the payments to the owner plus the change in its value expressed
as a fraction of its purchase price. Because of fluctuating interest rates,
the capital gains and losses on long-term bonds can be large.
(ii) Provide a definition for the yield curve and draw a normal yield curve.
Please clearly label your graph and axes. (5)
When the yields on bonds with differing terms to maturity but the same
risk, liquidity and tax considerations are plotted on a graph, this is called
a yield curve. Normal yield curves are upward-sloping and this means
that the long-term interest rates are above the short-term interest rates.
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through EFT, credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying this summary from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller reinah44. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy this summary for R46,52. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
67096 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy summaries for 14 years now