ADDIS ABABA UNIVERSITY

GRADUATE PROGRAM
MASTER IN ACCOUNTING AND FINANCE
CAPITAL MARKET FINAL EXAM
Maximum Marks: 40
Date of Exam: 13 August , 2020
Date of answer submission: Before 10 am August 14,2020
Name_________________________ID#:____________________
General information
➢ Answers have to be emailed to: alemhagos20032002@yahoo.com on or before 10 AM,
August 14, 2020. Any email sent to deliver answers, after 10AM, August 14 , 2020,will be
rejected.

➢ This is take home exam.

➢ Make your answer clear, short and precise

1) Explain the following concepts

a) asymmetric information,

b) adverse selection, and moral hazard.

2) Regardless of the size and the level of financial system development both adverse selection and moral
hazard may happen in lending-borrowing process.
a) How has the financial system developed to manage these problems?

b) Why does the government regulate the financial system

c) What regulations are or have been used to protect the public from adverse selection and
moral hazard?

3) If you buy a call option on a Birr 200,000 bond futures contract with an exercise price of 220 and the
price of the Treasury bond is 222 at expiration, is the contract in the money, out of the money, or at
the money? What is your profit or loss on the contract if the premium was Birr 3000?

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4) The financial system is the component of the economy that connects the deficit and surplus unit of
funds. The system works using financial intermediaries and financial markets.

a) Discuss what role do financial intermediaries and financial markets take part in this process?

b) Why might the deficit units wish to raise funds directly from the capital markets?

c) Explain whether financial intermediaries or financial market is a dominant in mobilizing

source of funds in Ethiopia and why ?

5) Suppose ABC issues a bond today with a $10,000 face value and a coupon rate of 10%. If the bond
has a life of 10 years, makes coupon payment semi-annually and has a yield to maturity of 12%, what
will the bond sell for today?

6) Answer the following

a) A well-developed secondary markets is very important to the operation of the Primary markets
within the financial system. Comment

b) Explain the difference between Primary and secondary market

7) The derivatives market is the financial market for derivatives for financial instruments such as
underlying assets and financial derivatives. What are the different types of derivative markets and How
do they work?

8) We all aware that the National Bank of Ethiopia (NBE) has announced that it will move forward with
plans to launch a Securities Markets over the course of 2020, which may be called the Addis Ababa
Stock Exchange. As a finance student you all agree that it will not be an easy task for developing
countries like Ethiopia to launch these markets. However, they will have significant benefits to the
Ethiopia Economy. Briefly explains

a) The benefits and possible challenges of establishing these market

b) What would you suggest to minimize factors that hamper the effective implementation of
Securities Markets in Ethiopia?
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