Financial markets homework help. BCO224 FINANCIAL MARKETS MIDTERM Task brief & rubrics
Task
 The assignment consists of 5 questions and 3 exercises
 Concepts included are in UNIT 1 to 3
 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 to be explained and the calculation steps explained
This task is worth 40% of your overall grade for this subject.
It 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
LAUNCH: May 11th / DELIVERY: MAY 24^{th}, 2020, 23:59HRS ON MOODLE
Questions
 Explain the main three theories explaining the term structure of interest rates
 An important way in which the Federal Reserve decreases the money supply is by selling bonds to the public. Using a supplyanddemand analysis for bonds, show what effect this action has on interest rates.
 Using the supplyanddemand for bonds framework, show why interest rates are procyclical (rising when the economy is expanding and falling during recessions).
 Suppose that people in France decide to permanently increase their savings rate. Predict what will happen to the French bond market in the future. Can France expect higher or lower domestic interest rates? Explain why
 Go to http://www.moneychimp.com/articles/econ/ inflation_calculator.htm and review how changes in inflation alter your real return. What happens to the adjusted value of an investment compared with its inflationadjusted value as
 inflation increases?
 the investment horizon lengthens?
 expected returns increase?
 Regarding the Bank balance sheet:
 What are the main uses of funds for a Bank? And the main sources of funds?
 What is equity multiplier? When are bank shareholders better off in terms of this coefficient?
 What is the importance of a bank’s net interest margin?
 How can banks benefit from offbalance operations? Is this activity associated with bank risk profile?
 What is the logic behind provision for loan losses? Is this the same as a loan writeoff? Can the provision of bad loans be the source of large expenses for banks?
 How is Net Interest Margin (NIM) a good measure for bank performance? Bank management performance?
 ROA and ROE are considered as the performance evaluation tools for banks. Do they always move in the same direction? How does an increase in capital affect them?
Exercises
 You are considering buying a bond that matures in 10 years from today. The par value of the bond is $10,000 and the coupon rate is 7%. If the current market interest rates are 5%, what is the bond price today if the coupon is paid annually?
 Suppose there are 2 bonds you are considering to buy:
Bond A  Bond B  
Maturity  20  30 
Coupon % (paid semiannually)  5  3 
Par value  100%  100% 
 If both bonds had a required rate of return of 5% what would the bond´s prices be?
 Explain what it means when a bond is selling at a discount, a premium, or at its face amount (par value). Based on results in part (a), would you consider both bonds to be selling at a discount premium, or at par?
 Recalculate the prices of the bonds if the required return falls to 4%. Explain why and how the price moves versus the 5% required rate of return
 Recalculate the prices of the bonds if the required return falls to 6%. Explain why and how the price moves versus the 5% required rate of return
 An investor has the following options:
 To buy a twoyear 100% zerocoupon bond at a market price of 86%
 To buy a twoyear 100% bond with an annual interest of 3% for 90%
Assuming annual payments, which option do you think the investor should choose?
Rubrics
Exceptional 90100 
Good 8089 
Fair 7079 
Fail <70 

Understanding (30%) 
Student selects all key concepts, demonstrating an excellent understanding of the reading material and task. 
Student selects some key concepts, demonstrating a good understanding of the reading material and task. 
Student selects a few key concepts, demonstrating a fair understanding of the reading material and task although some concepts might be missing.  Student fails to select key concepts, demonstrating insufficient understanding of the reading material or task. 
Calculation (30%) 
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 (30X%) 
Student demonstrates an excellent ability to interpret statistics and the calculation results, as well as a highly critic approach 
Student demonstrates an good ability to interpret statistics and the calculation results, as well as a good critic approach 
Student demonstrates an 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 a insufficient critic approach 
Communication (10%) 
Student communicates their ideas extremely clearly and concisely, in writing and orally.  Student communicates their ideas clearly and concisely, in writing and in public.  Student communicates their ideas with some clarity and concision, in writing and to some extent, in public.  Student fails to communicate their ideas clearly and concisely, in writing and/ or in public. 