Candidates are admitted to the examination room ten minutes before the start of the examination. On admission to the examination room, you are permitted to acquaint yourself with the instructions below and to read the question paper.

-------------------------------------------------
Do not write anything until the invigilator informs you that you may start the examination. You will be given five minutes at the end of the examination to complete the front of any answer books used.
-------------------------------------------------

-------------------------------------------------
DO NOT REMOVE THIS QUESTION PAPER FROM THE EXAM ROOM. May/June 2013 IC101 2012/3 A 001 IC101 2011/2 A 201

1 Answer Book

UNIVERSITY OF READING

INTRODUCTORY SECURITIES AND MARKETS (IC101)

Three Hours
-------------------------------------------------

Answer ALL questions

Question 1 (a) Explain the use of both historical cost (amortised cost) and mark-to-market accounting principles in financial asset valuation on the balance sheet of a financial intermediary. Consider also how directors of a company may choose which principle(s) to apply to different situations. (b) Consider and explain the following: (i) what the terms insolvency and illiquidity mean in relation to the survival of a financial institution (ii) the impact of leverage on both liquidity and solvency. (iii) why is it difficult to know if a financial institution is suffering from cash flow insolvency or balance sheet insolvency (iv) the extent to which the intention of accounting rules on valuation may be subverted by directors to enable them to declare higher or lower profit and hide possible insolvency of the company

(c) Banks are often analysed in terms of their return on assets, return on equity, leverage, the proportion of profit paid out as dividend and expected dividend growth. Explain why today banks seem unable to generate a return on equity capital (ROE) which equals or exceeds their cost of equity capital. Also analyse the types of structural change that banks are making or could make in order to try to