QUESTION 1
With reference to financial management in the global context, distinguish between the
following terms:
(i) A “Eurobond” and a “Euro note”.
(ii) An option being “in the money” and “out of the money”.
(i)Euro Bond and Euro-notes:
A Euro bond is an international bond that is denominated in a currency not native to
the country where it is issued. Euro bonds are named after the currency they are
denominated in for example, Euro-yen and the Euro-dollar bonds which are
denominated in Japanese yen and American dollars respectively.
The Euro bonds are issued in order to raise long-term debt finance.
The Euro notes are basically the Euro Commercial papers issued for purposes of raising
of short term finance.
(ii)An option is ‘in the money’ and ‘out of the money’
An option is said to be ‘in the money’ if it is exercised and gains are realized there from
by the party exercising the option that is.
An option is said to be ‘out of money’ if it is exercised and losses are incurred by the
holder of the option.
QUESTION 2
Discuss how corporate governance might impact the dividend policy of a firm.
How corporate governance impacts the dividend policy of a firm:
In the context of dividends policy, corporate governance is defined from the perspective
of investors as “both the promise to repay a fair return on capital invested and the
commitment to operate a firm efficiently given the investment. The implication therefore,
is that corporate governance has an impact on an investment and thus ultimately the
dividend policies.
Type 2 agency problems which involve a conflict between corporate insiders such as
managers and controlling shareholders (block holders) on one hand and outside
investors such as minority shareholders on the other hand affect the dividend policies.
Block holders may want to reduce dividends which they have to share with minority
shareholders as they have other ways of benefiting from the company through their
control.
Dividend payouts however, mitigate type 2 agency conflicts by reducing the amount of
free cash flow available that would otherwise result in unprofitable projects.
QUESTION 3
In relation to financial management in a global context, explain how the following
theories could be used to forecast exchange rates:
Interest rate parity
Interest rate parity is an equilibrium state where covered interest arbitrage is not
feasible. The theory relates exchange rates with interest rates. The relative change in
interest rates will influence the value of exchange rates.
(ii) Purchasing power parity.
This theory relates exchange rates with inflation rates. Notably, the relative change in
inflation rates influences the value of exchange rates.
ANSWER 4
Functions of the African Development Bank are;-
The Africa Development Bank is engaged in promoting the economic development and
social progress of its shareholder countries in Africa. The bank is owned by 53 African
countries and by 24 countries in America, Europe, and Asia.
The bank’s functions include the following:
– Making loans and equity investments for economic and social advancement of the
regional member countries.
– Providing technical assistance for preparation and execution of development projects
and programs.
– Promoting the investment of public and private capital for development purposes.
– Responding to requests for assistance in coordinating the development policies and
plans of regional member countries.
– To give special attention to national and multinational projects and programmes that
promotes regional integration.
QUESTION 5
a) Explain the functions of the World Bank.
b) Explain the functions of International Monetary Fund.
(a)Explain the functions of the World Bank.
⎯ It determines the quantities of loans, interest rate and terms and conditions are
determined by the Bank itself.
⎯ Assessing request of loans for a particular project duly submitted to the Bank by the
member country.
⎯ The bank also provides loan to private investors belonging to member countries on
its own guarantee, but for this loan private investors have to seek prior permission
from those counties where this amount will be collected.
⎯ World Bank provides various technical services to the member countries.
⎯ Grant loans to a member country up to 20% of its share in the paid-up capital.
(b)Explain the functions of International Monetary Fund.⎯ Facilitates the expansion and balanced growth of international trade and to
contribute to the promotion and maintenance of high levels of employment and real
income and to the development of the productive resources of all members as
primary objectives of economic policy.
⎯ Promotes exchange stability and to maintain orderly exchange arrangements among
members and to avoid competitive exchange depreciation.
⎯ Assists in the establishment of a multilateral system of payments in respect of
current transactions between members and in the elimination of foreign exchange
restrictions which hamper the growth of world trade.
Promotes international monetary cooperation through a permanent institution
which provides the machinery for consultation and collaboration on international
monetary problems.
⎯ Gives confidence to members by making the general resources of the Fund
temporarily available to them under adequate safeguards, thus providing them with
opportunity to correct maladjustments in their balance of payments without
resorting to measures destructive of national or international prosperity.
⎯ Helps in shortening the duration and lessen the degree of disequilibrium in the
international balances of payments of members.
