Section A

1) Describe the nature of the financial system in a modern economy giving the important types of constituent institutions, markets and instruments. Explain the concept of flow-of-funds in the financial markets

2) Discuss the Markowitz theory of efficient portfolio selection. How does the Capital Asset Pricing Theory

(CAPM) theory build on it?

Section B

3) Critically examine the major theories that have been put forward to explain the term structure of interest rates.

4) Discuss the Black-Scholes formula on derivative pricing.

5) Discuss the concept of leverage for a firm. Discuss the important financial and leverage ratios used. Explain the Merton-Miller theorem.

6) Explain the need for, and role of depository systems in secondary markets. Explain the concept of custodial services.

7) Compare the impact of monetary policy under fixed exchange rates with those under flexible exchange rates.