Questions and Answers
1. Manifestations of Globalization in the Capital Market of the Kingdom of Saudi Arabia (2 Marks)
Globalization has significantly influenced the capital market in the Kingdom of Saudi Arabia (KSA) in various ways:
1. Increased Foreign Investment: The KSA capital market has opened up to foreign investors, allowing them to participate in local equity and debt markets. Initiatives like the inclusion of Saudi stocks in global indices (e.g., MSCI Emerging Markets Index) have attracted substantial foreign capital, enhancing liquidity and market depth.
2. Development of Financial Instruments: Globalization has led to the introduction of diverse financial instruments in the Saudi capital market, such as Sukuk (Islamic bonds) and exchange-traded funds (ETFs). These innovations facilitate investment opportunities for both domestic and international investors, aligning with global investment trends.
2a. What is a Simple Loan? (1 Mark)
A simple loan is a type of loan where the borrower receives a specific amount of money and agrees to repay the principal amount along with a fixed interest rate over a defined period. The interest is typically calculated only on the principal amount, not on any accumulated interest.
2b. Yield to Maturity on Ahmed’s Loan (2 Marks)
To calculate the yield to maturity (YTM) on Ahmed’s loan, we can use the formula for YTM in a simple loan scenario, which is based on the return on investment:
1. Loan Amount (Principal): 100 SAR
2. Future Value (Amount to be Repaid): 110 SAR
3. Time Period: 1 year
The YTM can be calculated as follows:
[
YTM = \frac{(Future Value – Principal)}{Principal} \times 100
]
Substituting the values:
[
YTM = \frac{(110 SAR – 100 SAR)}{100 SAR} \times 100 = \frac{10 SAR}{100 SAR} \times 100 = 10%
]
Thus, the yield to maturity on Ahmed’s loan is 10%.
3. Risk Aversion and Diversification: True, False, or Uncertain? (2 Marks)
True. The statement is true; more risk-averse individuals are indeed more likely to diversify their investments.
Explanation:
Risk-averse investors prefer to minimize potential losses and are inclined to spread their investments across various asset classes or securities. Diversification reduces the overall risk of an investment portfolio by ensuring that poor performance in one asset can be offset by better performance in another. As such, risk-averse individuals seek to balance their desire for returns with their aversion to risk, making diversification a key strategy.
4. Personal Financial Innovation Impact (3 Marks)
One significant financial innovation that has affected me personally over the past ten years is the rise of mobile banking applications.
Impact:
– Better Off: Mobile banking apps have made managing finances more convenient and accessible. I can easily transfer funds, pay bills, and track my spending from my smartphone without needing to visit a bank branch.
– Budgeting Tools: Many apps offer budgeting features that help me understand my spending habits and set savings goals, leading to improved financial management.
– Increased Financial Literacy: The availability of financial education resources within these apps has helped me make more informed decisions regarding investments and savings.
Overall, mobile banking has enhanced my ability to manage finances efficiently, making me better off financially by promoting better financial habits and providing convenience.
