MGT411 Midterm Subjective Paper Solved 2011

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Question No: 3 ( Marks: 3 )
“Financial intermediary reduce costs”. How?
Answer
Financial intermediary is naturally an foundations that make easy the control of funds
between lenders and borrowers not directly that acts as the middle man between investors
and firms raising fund is called financial intermediary.
Financial intermediary will reduce transaction cost because they are specializing in the
issuance of standardized securities.
Question No: 4 ( Marks: 5 )
Define financial intermediaries. What functions the financial intermediaries
performs regarding savings?
Answer:
Financial intermediary is naturally an foundations that make easy the control of funds
between lenders and borrowers not directly that acts as the middle man between investors
and firms raising fund is called financial intermediary.
Financial intermediary will reduce transaction cost because they are specializing in the
issuance of standardized securities
1. Maturity transformation
Converting short-term liabilities to long term assets just like banks deal with large
number of lenders and borrowers, and settle their conflicting needs
2. Risk transformation
Converting risky investments into relatively risk-free ones For example ending to
multiple borrowers to spread the risk
3. Convenience
Matching small deposits with large loans and large deposits with small loans
Question No: 5 ( Marks: 5 )
Suppose that over the past 20 years, the average annual return on investments has been
12%. For each dollar invested at the beginning of the period, How much money would
investors have at the end of 20 years?
Answer
FV= (1+i)^n -1/i
(1+.12)^20-1/.12 =72.052
72.052x (1.12) = 80.698
Question No: 6 ( Marks: 5 )
Briefly explain the factors which shift the bond demand.
Answer:
Factors that shift Bond Demand are
• Expected inflation