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QUESTION TWO a. Assume you are a potential investor in Ghana and based on your analysis of the Ghanaian financial market, you are expecting interest rate to rise in the long term. How will this expectation affect: i. Investor's behaviour with respect to their choice for short or long-term assets. (3 marks) ii. The shape of the yield curve in Ghana today. (3 marks) iii. Borrowers who plan to issue securities in the financial market. (4 marks) b. Financial institutions are exposed to various types of risk. With practical examples, discuss any four types of investment risk that commercial banks are exposed to. (Your answer should not exceed 800 words) (10 marks) QUESTION THREE i Calculate the value of Macaulay's duration for a 10-year, $1000 par value bond purchased today at a yield to maturity of 14% and a coupon rate of 10%. (6 marks) ii. From the answer in (i) calculate the modified duration of the bond assuming the prevailing interest rate is still 14% (2 marks) iii. Now suppose the market interest rate on comparable bonds falls to 13 percent. What will be the approximate percentage change in the bond price.? (Hint: use the modified duration for your computation in (1) (2 marks) iv. Given the information in (0), did the bond sell at a discount or premium? (1 marks) One of the most important structural changes affecting the banking community in Ghana is the drive towards consolidation. Discuss three benefits of this move to the Ghanaian economy. (You answer should not exceed 600 words) (9 marks) V

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