VERBAL QUESTIONS must be answered concisely and in no less than 300 but no more than 500 words. QUANTITATIVE QUESTIONS require that all work be shown so in case of errors partial credit can be...

Answer 1
The great recession of 2008 was caused by some wrong policies being adopted by certain
developed economies predominantly by Europe and United State of America. These countries
engaged into reckless lending and spending which was the major reason for the crisis.
Further, complex financial products were being developed over which there was not much
clarity to the investors. Suddenly, the economic production of these countries reduced and
unemployment rose. This lead to various credit defaults and the fallacies of complex financial
products came to the forefront. These developed economies witnessed either negative growth
or positive growth of 1-2%.
In contrast, the developing economies such as BRIC weathered the economic crisis and grew
at an average rate of 6-7%. Brazil, Russia and India grew at the rate of approximately 7% and
China grew at the rate of 8-9%. These economies were able to weathered the storm due to
strong internal demand and progressive policies coupled with simple financial instruments.
Even though these economies has the potential to grow at double-digits, the recession
restricted their growth to single digits as due to globalisation, more and more economies are
dependent on each other.
Currently investing in a BRIC economies make sense due to the following reasons:
1) Higher interest rate – BRIC governments are promoting investments and so they
have increased the general interest rate of their respective countries. This has led to
increase in the overall return expectations of the country. Interest rate in BRIC
economies are around 6-7%, however, the interest rate in developed economies is
currently at around 2-3%.
2) Increase in per capita income – The general per – capita income of the developing
economies is increasing at a much faster rate as compared to the developed
economies. The work force of these countries is increasing, poor people are entering
the middle – class range and demand for all the products are increasing. This is
pushing the general production of the country further high. Further, the demand for
the developed economies has already saturated and it is becoming difficult to increase
production.
3) Skilled employment – It is known fact that students of India and China are more
intelligent and more hard working. Indians and Chinese are now fluent English
speakers. More and more jobs are being outsourced into India. This proves that the
future intellect will come from countries like India and China. More intellectuals
means more technology, more technology means better products, better products
means a much more advanced country.
4) Domestic demand – Investment in BRIC countries is also safe due to the fact that
these economies are somewhat insulated from global phenomenon such as 2008 crisis.
The internal demand of these countries is so strong that the country achieves a
respectable level of GDP growth rate.
In addition to the fact that BRIC are the favoured countries to invest into at this
particular moment of time, there are several pitfalls as well. Each of the BRIC
countries has its own share of problems. Russia faces internal conflict in the form of
Chechnya, India runs on coalition politics where the taking some progressive policy
decisions becomes difficult, China is a communist country and not a democracy.
Apart from these pitfalls, if an investor intelligently chooses a better sector and a
better country, his money will be safe and it can earn handsome returns as well.
Answer 2A
A bond has two sets of cash flows – one is interest and the other is the principal
repayment. When a purchaser buys a bond he has to look into the following aspects:
1) Credit worthiness of the company – The Company should have good reputation in
the market and should also follow sound corporate governance practices. Any
downgrading by any of the credit agencies may lead to reduction in the value of
the bond.
2) General interest rate in the economy versus the coupon rate – The coupon rate in
the bond must be higher than the general interest rate in the economy. If the
company if paying lower coupon rate that the general interest rate in the economy,
then such bond should not be purchased as the bond is over-valued and vice versa.
3) Future expected interest rate in the economy - The coupon rate in the bond must
be higher than the future expected interest rate in the economy. If the company if
paying lower coupon rate that the future expected interest rate in the economy,
and then such bond should not be purchased as the bond will lose its value in the
future and vice versa.
The buyer is exposed to the following risks:
1) Default by the company – The buyer is exposed to the fact that the company may
default in its interest pay-outs and the principal repayment. The company may go
into liquidation and the buyer can lose all its money.
2) Increase in general interest rate in the economy – If the general interest rate
increases, then the value of the bond will fall.
The seller is exposed to the risks that the company may not make profits. This may
lead to default in the interest payments. Default...