FINA2002: FINANCIAL MARKETS AND INSTITUTIONS ASSIGNMENT HELP

Code: FINA2002

Subject: FINANCIAL MARKETS AND INSTITUTIONS

STUDENT GROUP PRESENTATION TOPICS (2015)

Students should refer to the Course Profile (Assessment) for specific information in relation to the format of the Group Presentation and the requirement to prepare a single page handout having a particular structure for distribution to class colleagues/learning facilitator at the commencement of the Presentation. As each topic will require the presenting group to undertake research into the topic area, early preparation for this assessment requirement is recommended.

PRESENTATION 1 TOPIC – THESE TOPICS ARE TO BE PRESENTED IN TRIMESTER WEEKS 8 AND 9

Student groups are required to undertake a Group Presentation from the following list of Group Presentation Topics. Each topic will require the presenting group to undertake research into the topic area so early preparation for this assessment requirement is recommended.

Question 1-A

a) Briefly explain the effects of relatively higher rates of inflation on the returns generated by each of the following investment classes:

i). fixed-interest securities, and

ii). shares. Note: In this part of the question students are expected to focus on how in times of higher inflation rates (than previously) the relevant cash flows generated by each of the investment classes (income/capital) are expected to be impacted. Students may (and are encouraged to) use practical examples to illustrate their discussion.

b)     i) Comment on the differences in the construction of the S&P/ASX200 index in Australia with the Dow Jones Index in the United States.

ii) Which of the indices are likely to be more useful in assessing the performance of the general share market for their relative country?

Question 1-B

Due to a lack of financial resources, individual investors often overlook the benefits attached to diversification on the basis that they believe that these benefits are not available to them.

Required:

a) Explain the concept of diversification to one of your family members who had never formally studied any business courses but was generally familiar with the term;

“don’t put all your eggs in one basket”,

however, they were not really sure how this statement was helpful to the concept of diversification.

b) It is often stated that the Capital Asset Pricing Model (CAPM) is a financial model/formulae that can be used to assist financial advisers in determining the risk-return trade-off and as a benchmark in the investment selection process for a diversified investor. Provide a brief explanation of how the terms;

i) risk-return trade-off,

ii) benchmark, and

iii) diversified investor, can be specifically applied to the CAPM in the context of this question.

Question 1 – C

a) Other than the financial ratios included on pages 232 to 233 of the textbook for this course, discuss in some detail 2 other financial ratios that are often used by analysts in assessing and reviewing the performance of a company. Note the emphasis of your discussion should be on the usefulness of the selected ratios for the financial planner not simply listing the formula for the ratios.

b) i) Discuss and provide practical 2 examples where it is more useful for the financial analyst in assessing alternative financial instruments for investment/borrowing purposes, to calculate effective interest rates rather than nominal interest rates.

ii) If you were making a presentation to a client and was asked a question as to the primary difference(s) between nominal and effective interest rates how would you respond in order to make your reply understandable to a person without a high finance level background like yourself?

Question 1-D

a) Price-earnings (PE) ratios are commonly used as a share valuation model in the investment analysis and decision-making process.

Required:

i) Briefly discuss why in particular personal investors commonly include PE ratios in their investment analysis.

ii) Outline the arguments used by those who suggest that PE ratios have many limitations which in fact outweigh the benefits of their use.

b) Using your high level of theoretical and practical financial skills, comment on the following statement that you heard when attending a recent investment seminar:

“…if the concept of efficient capital markets theory is accepted, the consequences of this is that there is no real benefit arising to the investor from undertaking in-depth investment analysis (using technical and/or fundamental analytical techniques) for individual investment selection because as long as the investor selects investments that are generally consistent with their risk profile they will obtain an appropriate risk-adjusted rate of return.”

PRESENTATION 2 TOPICS – THESE TOPICS ARE TO BE PRESENTED IN TRIMESTER WEEKS 10 AND 11

Student groups are required to undertake both a Group Presentation (from the following list of Group Presentation Topics) and a Group Peer Review. Each topic will require the presenting group to undertake research into the topic area so early preparation for this assessment requirement is recommended.

Question 2-A

a) In general, in many countries (including Australia) it is now generally accepted that the population (as compared to prior periods) is;

1. living longer (greater life expectancy),

2. preferring to retire at an earlier age (in order to enjoy their accumulated investment capital whilst they are in relatively good health), and

3. less reliant on receiving financial support from (extended) family members during their retirement years.

Required –

Accepting the general accuracy of the above information, what changes to people’s savings and investment patterns utilising the financial instruments discussed in Module 2 of the course (Equity and Debt Markets) during their working / accumulation years (as opposed to their retirement years) are likely to be recommended by a responsible financial adviser following from the above discussion?

Note: In this part of the question students are expected to compare (and accept) the current situation as discussed in the above statement with the advice provided in prior years where (comparatively); people’s life expectancy was shorter, they were less concerned about retiring at an earlier age, and they were more reliant on financial support from (extended) family members during their retirement years.

Hence it is the difference in advice now expected to be provided by the finance professional due to these changed conditions that are required to be the focus of student discussion in this question.

Further note: There is nothing in this question that requires a specific knowledge of Australian people’s savings and investment patterns as the question is designed to be more general in nature.

b) In your opinion, why has there been an increased popularity for investors to place their funds with fund managers adopting passive portfolio management strategies in more recent years? Note: Your discussion for this part of the question may be based on the Australian investment environment or more generally.

Question 2-B

The “Basel III reforms will require higher levels of capital, a greater holding of liquid assets and restrictions on overall leverage” (Andrew Cornell and Bianca Hartge-Hazelman, The Australian Financial Review, 07 September 2011, page 52).

Required:

a) Comment on the above statement by comparing the requirements of Basel III with that of the Basel II Accord.

b) Discuss the Australian regulators approach the timelines for implementation of Basel III with that of other developed nations and comment on the reasons adopted for this approach.

Question 2-C

Select 2 different companies in similar industries that first publicly listed on the ASX in 2012 (thus having 2 full years of trading), each of which has paid regular dividends to investors since listing.

Required:

a) Comment on the performance of each company since listing (in terms of reported profitability, stability and sharemarket returns and dividend distributions) by performing relevant calculations.

b) How has the relative performance of each company since listing compared to the expectations included in the relevant prospectus issued for each company?

c) Outline 2 significant internal and 2 significant external factors that have (positively / negatively) influenced the performance of each company.

d) Provide a brief investment recommendation if seeking to select only 1 of the companies for current investment.

Question 2-D

Following the recent global financial crisis (GFC) a significant portion of the blame was directed towards the credit ratings agencies on the basis that they issued overly ‘optimistic’ credit ratings to for financial products issued by firms. In particular, critics said the ratings agencies became ‘too close’ to its customers, banks, companies and investment funds, which paid for analysis of their financial products.

Required:

a) Provide 2 Australian examples of financial products that were issued in the last 5 years that ‘failed’ where there was a discussion (following the product failure) that investors were misled in relation to the credit ratings provided for the issued products.

b) i) Comment on the changes (if any) made by credit ratings agencies in their ratings processes since the GFC.

ii) In your opinion, have these changes gone far enough in preventing the likelihood of future product failures based on misleading credit ratings. Briefly justify your opinion.

Question 2-E

Following the global financial crisis (GFC), the securitisation market, including in Australia, basically collapsed. In the last couple of years however there has been comment that securitisation may be on its way back as a viable form of financing for financial organisations.

Required:

a) Comment on the relationship between the GFC and the securitisation market – that is, why was securitisation to a large extent ‘blamed’ as a cause of the GFC?

b) Comment on the following statement in relation to securitisation, particularly regarding ‘small’ lenders; “They were the lifeblood of smaller lenders before the financial crisis, allowing them to raise money at competitive rates and then lend to borrowers”.

c) Provide a brief example of a securitisation issue by an Australian organisation (other than one of the 4 main trading banks) in the last 2 years commenting on its size, investor group and purpose of capital raising.

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