RMIT Classification: Trusted

COURSE TITLE: FINANCIAL MARKETS

MODULE CODE: BAFI3182(SGN) / BAFI3230(HN)

SEMESTER 2/2023, ASSESSMENT 1, WEEK 4 DURATION: 2 HOURS

INSTRUCTIONS TO STUDENTS

There is ONE Section and 4 Questions on this test.

Students are to answer all 4 questions.

 You must use word processing software (Microsoft Word). You will have to type your answers out
and, upon completion, save your file. Please ensure you continually save your document as you
progress through the assessment questions. Add your name and student ID to the document’ and
clearly indicate the questions you have attempted.
 Please note that this is two‐time submission.
 The questions for Assessment 1 will be made available during your scheduled sessions in Week 4.
You will have a total of 2 hours to complete the tasks, and an additional 10 minutes will be provided
for submission. If a student mistakenly submits incorrect files and subsequently attempts to resubmit
(for the third time), there will be a 50% deduction from the overall mark. If a student submits it late,
a penalty of 20% will be applied.
 Submission of your answer file is via Canvas. The Canvas link will close at the time indicated. No
uploads will be allowed after the stipulated time. Failure to upload your file within the stated time
will constitute a non‐attempt submission.
 This is an opened‐book test. Answers must demonstrate your knowledge and understanding of the
questions, and explanations must be in your own words. As you submit your files via Canvas
(Turnitin), your answers will be checked for plagiarism. Plagiarism is defined as representing any
other person’s work from any source whatsoever as your own.

The content of this assessment is confidential. Sharing any part of this assignment with anybody else is
strictly prohibited.

Note: Here is an example of how the test will work (If, for instance, your face‐to‐face timetable is from 8:00
a.m. to 10:00 a.m.)

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This test consists of 4 questions ‐ 3 pages.

Question 1

You are working as a Priority Relationship Manager at ABC Bank. Your client, Ms. Kim, is a surplus unit who
has decided to put her saving in ABC Bank.
Ms. Kim would like to receive an amount of 10,000 USD multiplied by the final digit number of your student
ID after some specific years equal to the last digit number of your student ID number (if your digit is 0, treat
it as a 9). (For example, your student number is S3409112, the last digit number is 2; multiply 2 with
$10,000 = $20,000, and the number of years is 2 years).

Note that the annual interest rate is equal to the second digit of your student ID from the left; for example,
if your student ID number is S3409112, the interest rate is 4% p.a. (if your digit is 0, treat it as a 9).

1a) How much should Ms. Rachel deposit now to receive that required amount after that period if the interest
is compounding:
(1) Annually?
(2) Quarterly?
(3) Monthly?
(4) How does the frequency of compounding impact the initial amount that Ms.Kim deposits? Explain?

1b) Now, your bank also provides 2 options to Ms. Kim:

Option 1: Compound semi‐annually at the interest rate equal to the second digit of your student ID
from the left + 0.25% (For example: if your student ID number is S3409112, the interest rate is 4.25% p.a. (if
your digit is 0, treat it as a 9).

Option 2: Deposit with the current quarterly compounding from part 1a) (2).

Which option brings more benefit to Ms. Kim? Why?

(1a: 2 marks, 1b: 2 marks)

Question 2

Data from the United States reports that the inflation rate cooled to its lowest since 2021; however, the Fed’s
signal is likely going to raise interest rates by a quarter percentage point. (The Economist news). Disregard
other factors:
a) Discuss the possible effects of the Fed’s signal on the behavior of surplus and deficit economic units?
b) If the Fed is likely to continue to increase the interest rate, what is the effect on the level of interest
rate? (Use theory and diagram to explain)

(2a: 1 mark, 2b: 1 Mark)

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Question 3

a) What is the shape of the yield curve given the term structure
in the United States Government bonds graph below?
b) Using relevant theories to explain the yield curve's shape in
the United States Government bonds graph?

(Source: http://www.worldgovernmentbonds.com)

(3a: 0.5 mark, 3b: 2.5 Marks)

Question 4:

The financial system consists of various types of financial institutions, with commercial banks being the
largest group among them.

In your opinion and drawing from the content on topic 3 (Financial institutions), what are the reasons behind
the emergence of commercial banks as the largest group in financial markets?

(1 Mark)

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