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Sample Exam Paper Module name Module code Economic Fundamentals in the Investment Environment BECO01-5 (NQF LEVEL 5) Please note: This sample exam paper does not necessarily have the identical format to the examination (summative assessment) that you will write at the end of the semester. However, the type of questions that you will find are similar in nature to those found in the exam. Please see the Assessment Guidelines pertaining to this module for more guidance relating to the exact structure of your exam. Milpark Business School (Pty) Ltd. Economic Fundamentals in the Investment Environment BECO01-5 Sample Exam Paper 2013 Page 1 of 15 SECTION A (40 MARKS) – MULTIPLE CHOICE QUESTIONS Question 1 (40 marks) Select the correct answer and write it into your examination book next to the question number (for example, 11-C): 1. 1 Asset classes are divided into how many main groups? a) b) c) d) Two Three Four Five Answer: (Topic 3; page 112) c 1. 2 A bank fulfills the function of being an intermediary between: a) b) c) d) Consumers and producers.

Consumers and suppliers. Savers and borrowers. Capitalists and entrepreneurs. Answer: (Topic 2; page 60) c 1. 3 Capital is the concept which economists use to describe and to quantify: a) b) c) d) The amount of cash which shareholders invest a newly formed company. Factories, office blocks and equipment used in the manufacturing processes. The investments made in training personnel. The cash available to fund the daily running of the enterprise. Answer: (Topic 1; page 3) b 1. When a crop failure hits the tomato farmers and we anticipate the effect on the supply curve of tomatoes with the green grocers we shall: a) b) c) d) Illustrate it with a rightward shift of the supply curve Illustrate it with a leftward shift of the supply curve Describe it as a change in quantity supplied. Expect a corresponding drop in the demand for tomatoes. Page 2 of 15 © Milpark Business School (Pty) Ltd. Economic Fundamentals in the Investment Environment BECO01-5 Sample Exam Paper 2013

Answer: (Topic 1; page 21-22) b 1. 5 Commercial banking is a unique type of banking service because: a) b) c) d) The institutions rendering this kind of service are focused on that only and do not undertake mortgage financing. Commercial banking services are rendered for high net-worth clients only. Bank overdrafts can be arranged as a form of credit. Commercial banking services are focused on the best investment opportunities for its clients. Answer: (Topic 2; page 63) c 1. The Rand appreciates markedly and this can result in: a) b) c) d) Higher wage demands from groups of workers who are mainly consuming imported goods. Lower expectations of cost-push inflation, seeing that South Africa is a net importer of capital equipment. Higher state revenue from income taxes on South African exporters. a and c. Answer: (Topic 1; page 45) b 1. 7 You are the lawful owner of a property described as XYZ and are registered as such by your local authority for the purposes of property taxes.

The tax assessment which you receive based on the value of your property is known as a/an: a) b) c) d) Indirect tax Value added tax Capital gains tax Direct tax. Answer: (Topic 1; page 32) d 1. 8 A time series on the Real Gross Domestic Product: a) b) c) d) Does not reveal any signs of the presence of the business cycle. Can serve the purpose of an economic indicator. Is not very useful in economic analyses because of the distorting effect of inflation. Counts only the contribution of labour to the output of the economy. © Milpark Business School (Pty) Ltd.

Economic Fundamentals in the Investment Environment BECO01-5 Sample Exam Paper 2013 Page 3 of 15 Answer: (Topic 1; page 8) b 1. 9 Economics, by definition: a) b) c) d) Studies cases where voluntary organisations render support services to vulnerable groups of people in the economy. Ignores the decisions made by politicians in government. Ignores those decisions by entrepreneurs that are of a high risk type. Due to the need for accurate calculations, is nearer to the Natural Sciences than to the Social Sciences. Answer: (Topic 1; page 2) a 1. 0 A South African investor buys government bonds issued by the government of the United States of America on the Securities Exchange in New York with R converted to $ by the South African Reserve Bank. By comparing only the creditworthiness of the US government with the creditworthiness of the Spanish government of whom bonds could have been bought in Madrid, and not considering any other relevant factors, the South African investor: a) b) c) d) Hedges against inflation Ignores a currency risk Should have converted the R to $ at a bank in New York Should have considered the exchange rate between the $ and the €.

Answer: (Topic 1; page 45) b 1. 11 Fiscal policy is the collective name which captures the government’s actions with regard to: a) b) c) d) Government spending. Government revenue. Government borrowing. a, b and c. Answer: (Topic 1; page 30) d 1. 12 In interest calculations the amount of money which you will need in three years from now as a deposit on a house can be calculated and the amount which you now have available to invest with a view to the purchase of the house may also be useful information in the

Page 4 of 15 © Milpark Business School (Pty) Ltd. Economic Fundamentals in the Investment Environment BECO01-5 Sample Exam Paper 2013 calculations. The order in which these amounts are mentioned in this statement is: a) b) c) d) The discounted value and the present value The future value and the present value The real value and the future value The future value and the real value. Answer: (Topic 3; page 104) b 1. 3 Foreign labourers working in South African mines: a) b) c) d) Contribute to the Gross Domestic Product of South Africa Contribute only to the Gross National Product of South Africa Cannot be counted as adding value to the South African economy because their wages are sent to their countries of origin Can only be considered for a calculation of the Gross Domestic Product in South Africa when this variable is calculated according to the Expenditure Method. Answer: (Topic 1; page 8) a 1. 4 For the purposes of economic analyses a household is: a) b) c) d) Simultaneously a consumption and a production unit Two partners who live in wedlock The smallest unit of people who make consumption decisions and decisions regarding what work to do where The same as an enterprise because both use scarce resources. Answer: (Topic 1; page 15) c 1. 15 The retailer adds Value Added Tax (VAT) to the selling and therefore collects VAT on behalf of the tax authority in the country. VAT is in this case an example of: a) b) c) d) A tax meant to discourage consumption levels A Capital Gains Tax An excise duty An indirect tax.

Answer: (Topic 1; page 32) d 1. 16 When one household shows its willingness to pay or not to pay a certain price for sausages: a) We have a case illustrating the market demand for sausages © Milpark Business School (Pty) Ltd. Economic Fundamentals in the Investment Environment BECO01-5 Sample Exam Paper 2013 Page 5 of 15 b) We have a case that could lead to a movement along the individual demand curve, depending on what happens to the price of sausages c) d) We have a case illustrating the demand for an inferior good Both a and b. Answer: (Topic 1; page 17) b 1. 7 To be able to measure the inflation rate in an economy: a) b) c) d) Prices must be observed at the point of manufacture or entry into the country. Knowledge of the arithmetic of price indices is required. Consumer prices must be observed in a base year and then the same prices must be observed for subsequent years. b and c. Answer: (Topic 1; page 44) d 1. 18 In the world of finance, interest rates a) b) c) d) Are set by central banks Are the price to be paid for money borrowed or received for money lent Contain an element of reward for the lender in respect of the possibility that the borrower may default on the loan. and c Answer: (Topic 1; page 37) d 1. 19 On grounds of the definition of labour: a) b) c) d) The professional golfer is not a member of the labour market. Mine workers on strike do not fit the definition of labour. The professional film star is a member of the labour market. a and b. Answer: (Topic 1; page 4) c 1. 20 An asset with a high degree of liquidity: a) b) c) Is labelled liquid because there is very little risk of damage to or loss of this asset. Is one which has a history of many previous owners.

Can be turned into cash easily and with little risk of loss of capital. Page 6 of 15 © Milpark Business School (Pty) Ltd. Economic Fundamentals in the Investment Environment BECO01-5 Sample Exam Paper 2013 d) Belongs to the hard assets class. Answer: (Topic 3; page 102) c 1. 21 When you study Macroeconomics you will: a) b) Consider the pros and the cons of a policy of inflation targeting. Study the way in which a change in the repurchase rate by the central bank makes its way through the economy to eventually affect the inflation rate. ) d) Make a thorough analysis of the factors determining the supply of ice creams during the winter season. a and b. Answer: (Topic 1; page 6) d 1. 22 A market is said to be in disequilibrium when: a) b) c) d) Demand balances supply on that market Supply outstrips demand on that market Demand outstrips supply on that market b and c Answer: (Topic 1; page 23) d 1. 23 A microeconomist is likely to have a preference for researching: a) b) c) d) The factors determining the price at which equilibrium will be reached in the market for large delivery trucks.

Why the market for frozen fish is more stable than the market for fresh fish. The effect of a change in the price of electricity on the cost of mining platinum at Mine X. a, b and c. Answer: (Topic 1; page 7) d 1. 24 When the central bank follows an inflation targeting policy in order to arrest inflation and applies interest changes in this regard: a) b) c) d) The central bank is applying monetary policy. The central bank is applying fiscal policy. The central bank is applying regulatory policy. None of the above. Answer: (Topic 1; page 34) a Milpark Business School (Pty) Ltd. Economic Fundamentals in the Investment Environment BECO01-5 Sample Exam Paper 2013 Page 7 of 15 1. 25 The members of the XYZ Household living at Number 10 Paradise Street are ordinary shareholders in struggling company ABC. As ordinary shareholders they: a) b) c) Can be held liable for the company’s debts to an amount of twice their investment in the company’s shares. Can expect to receive dividends from the company ahead of the KLM family who bought the company’s preference shares.

Will not have any voting rights at the company’s Annual General meeting until such time that the company has recovered from its poor performance. d) Statements a, b and c are all wrong. Answer: (Topic 3; page 113) d 1. 26 The members of the DEF Household are holders of preference shares in company JKL. a) They would be the preferred targets of the liquidators of the company who are trying to pay creditors the best possible portion of the amounts owed to them by the company. b) c) Their dividend pay-out in good years is made before the dividend for ordinary shareholders is determined. is right but in exchange for this preferential treatment they are not allowed to vote at the Annual General Meeting of the company. d) Their preference shares may not be traded on the Johannesburg Securities Exchange. Answer: (Topic 3; page 113) b 1. 27 The so-called private client of a bank: a) b) Will not have access to the bank’s transactional banking products. Is selected by the bank to be regarded a private client on grounds of the magnitude of the difference between the person’s assets and liabilities. c) d) Is selected on grounds of the person’s shareholding in that bank.

Can only be labelled a private client by an investment bank. Answer: (Topic 2; page 64) b 1. 28 In order to predict the extent to which the households among your clients’ needs for credit during a recession compared with a prosperous period differs, it could be useful to know in which category of final Page 8 of 15 © Milpark Business School (Pty) Ltd. Economic Fundamentals in the Investment Environment BECO01-5 Sample Exam Paper 2013 consumption expenditure the majority of your clients spend the biggest share of their budgets.

By using the categories of final consumption expenditure as used in the national accounts of South Africa you will find their expenditure spread over all but ONE of the categories listed below, namely: a) b) c) d) Durable goods. Semi-durable goods Luxury goods Services. Answer: (Topic 1; page 9) c 1. 29 When the business cycle swings from a peak towards a recessionary phase you would expect your household banking clients to: a) b) c) d) Take precautions by curtailing expenditure, calling for less credit facilities and saving more.

Leave their savings habits undisturbed by the swing of the business cycle. Attempt to spend less and thus accelerate the recession. Not take much notice of the business cycle except if they are retrenched. Answer: (Topic 1; page 12) c 1. 30 Your banking client arranges an interview to discuss investments in the money market. The investment products which you will recommend to your client will all: a) b) c) d) Mature within 15 months but with different degrees of investment risks. Mature, at the most, after twelve months. Be in Treasury Bills. Be mostly off-shore investments.

Answer: (Topic 3; page 118) b 1. 31 You are an investment consultant at an investment bank and the economist in your bank convinced you that the economy is on the brink of a prosperity phase. You are thus expecting to be interviewed by clients with proposals or enquiries regarding: a) b) Mergers and acquisitions. Your bank’s policy on funding expansion plans in the manufacturing sector. © Milpark Business School (Pty) Ltd. Economic Fundamentals in the Investment Environment BECO01-5 Sample Exam Paper 2013 Page 9 of 15 c) d) Liquidations and sequestrations. a and b. Answer: (Topic 1; page 11) d 1. 2 Upon retirement in Greenland, Client X came to settle in South Africa and requested an interview with you about investing the lump-sum which the pension scheme in Greenland paid out. You will consult the economist in your bank about an eloquent way of informing the client about … and consult the legal adviser in the bank to sit in on the interview when discussing… a) b) c) d) Money market instruments / capital gains tax Investments in government bonds / immigration rules Inflation / income tax and capital gains tax None of the above will be of importance to an immigrant who has obtained permanent residence in SA.

Answer: (Topic 3; page 112) c 1. 33 The most reliable sources of information about the latest tax legislation and tax regulations are: a) b) c) d) Directives issued by South African Revenue Services and similar government agencies in other countries The daily press. Tax case judgments in the courts a and c. Answer: (Topic 1; page 33) d 1. 34 A new client of your investment bank requested an interview on offshore investments, amongst others, in government bonds of Eurozone countries. You will prepare yourself with information on: a) b) c) d) The phase of the business cycle in your country.

The phase of the business cycle in South Africa compared with Eurozone countries. The exchange rate between the Rand and the Euro. b and c Answer: (Topic 3; page 122-123) d 1. 35 In banking and financial circles the term investment refers to cases where deposits are made by clients in interest bearing financial Page 10 of 15 © Milpark Business School (Pty) Ltd. Economic Fundamentals in the Investment Environment BECO01-5 Sample Exam Paper 2013 instruments or in the shares of companies, as well as where such funds are used for the purchase of a fixed asset like machinery in a factory.

Economists prefer to distinguish between these two applications of savings by referring to the case where factories are developed and equipped as cases of: a) b) c) d) Durable expenditure. Capital formation Gross domestic fixed investments Gross domestic fixed expenditure. Answer: (Topic 3; page 100) b 1. 36 You wish to put together an efficient portfolio for the client of your private bank. You will apply your knowledge of portfolio theory by: a) b) c) d) Selecting investment instruments which will maximise returns and minimise tax obligations.

Selecting investment instruments that will maximise returns for a given amount of risk. Selecting investment instruments of which the returns are rather certain and which hold minimum risk. b and c Answer: (Topic 3; page 100) d 1. 37 An investment in an instrument labelled as volatile will be one: a) b) c) d) With a high degree of exchange rate risk With wide fluctuations in returns from the average returns. With a high degree of political risk In respect of which dealings on the Securities Exchange run the risk of being suspended. Answer: (Topic 2; page 82) b 1. 8 You interviewed a new client about the investment products your bank has on offer. In the interview you explained the different risks investing clients are exposed to. Your client is prepared to expose 30% of the contemplated investment to risks the investor is less concerned about. You will classify this category of risk factors as: a) b) c) d) Investment risks. Time horizon risk Interest risk Investor’s risk. © Milpark Business School (Pty) Ltd. Economic Fundamentals in the Investment Environment BECO01-5 Sample Exam Paper 2013 Page 11 of 15

Answer: (Topic 3; page 102) d 1. 39 An investment advisor who is fully acquainted with the Income Tax Act in South Africa will: a) b) c) d) Be able to advise his client on the tax implications of interest earned, dividends earned and Capital Gains Tax. Be able to advise his client that dividends tax is administered as a with-holding tax by the company paying the dividends. Will be able to advise along the lines of a and b but will have to study the separate Capital Gains Tax Act. a and b. Answer: (Chapter/Topic and page reference) d 1. 0 Unit trusts: a) b) c) d) Afford investors the opportunity to invest in shares on the Securities Exchange without compiling their own portfolios. Are classified as collective investment schemes. Are regulated under legislation specially drafted for such schemes. All of the above. Answer: (Topic 3; page 114-115) d Page 12 of 15 © Milpark Business School (Pty) Ltd. Economic Fundamentals in the Investment Environment BECO01-5 Sample Exam Paper 2013 SECTION B (30 MARKS) – PARAGRAPH QUESTIONS Answer the following questions: Question 1 (10 marks) 1. 1 1. Explain the distinguishing feature of commercial banking, and name associated services usually rendered by commercial banking. List five services rendered by investment banks. (5) (5) Answer: (Topic 2; page 63-64) 1. 1 Commercial banking receives cash deposits which are withdrawable by cheques in favour of the holder of the account’s creditors. Such deposits can also be withdrawn by electronic transfers. The cheque accounts have the unique feature that the account holders can, on grounds of their creditworthiness arrange with the bank to draw more money from the account than is credited on the account.

This is known as a bank overdraft. Cheque account holders normally also have access to the banks services by means of credit cards and all the electronic banking facilities available. 1. 2 Investment banks specialise in services such as: o Corporate finance, which entails advice on the structuring or restructuring of corporates; mergers and acquisitions; management buy-outs and the privatization of state assets. o o o o Corporate lending, which a credit product range offered by investment banks. Managing the investments of pension funds.

Stockbroking on Securities Exchanges. Property developments; project funding for. Question 2 (10 marks) Classify final consumption expenditure as is done in the national accounts of South Africa, and give three examples of expenditure in each category. © Milpark Business School (Pty) Ltd. Economic Fundamentals in the Investment Environment BECO01-5 Sample Exam Paper 2013 Page 13 of 15 Answer: (Topic 2; page 65) Final consumption expenditure by households Type of Consumer Goods Sub-categories Furniture, household appliances etc.

Durable Goods Personal transport equipment Computers and related equipment Recreational and entertainment goods Semi-durable goods Clothing and footwear Household textiles, furnishings, glassware etc. Motorcar tyres, parts and accessories Recreational and entertainment goods Food, beverages and tobacco Household fuel, power and water Household consumer goods Medical and pharmaceutical products Petroleum products Recreational and entertainment goods Rent Household services, including domestic servants Medical services Transport nd communication services Recreational, entertainment and educational services Non-durable goods Services Question 3 (10 marks) Describe each of the three specific phases in which your investment client may fall. Answer: (Topic 3; page 126) An individual’s life-cycle stages can be divided into three specific phases: 1. Accumulation phase: This corresponds with the single or married/cohabiting person who is building up long-term assets, e. g. a house. The individual has a long-term horizon and his investment portfolio will be geared towards high-risk investments.

Page 14 of 15 © Milpark Business School (Pty) Ltd. Economic Fundamentals in the Investment Environment BECO01-5 Sample Exam Paper 2013 2. Consolidation phase: Most of the individual’s debt has been repaid, and this individual is probably approaching retirement. This stage is characterised by accumulation of assets, e. g. active retirement planning. Capital preservation becomes important and the investment portfolio weighs more heavily towards fixed, income-generating instruments. 3. Spending phase: Usually the individual has reached retirement stage nd the re-investment of lump sums of retirement funds takes place. The emphasis is now on capital protection. The investment portfolio now consists of low-risk investments e. g. shares that yield dividends, treasury bills, and guaranteed annuities and money market funds products. The investor is now spending from the proceeds of investments but must still guard the safety of the investments. TOTAL MARKS: 70 © Milpark Business School (Pty) Ltd. Economic Fundamentals in the Investment Environment BECO01-5 Sample Exam Paper 2013 Page 15 of 15