SOLUTION MANUAL For Money, Banking, Financial
Markets and Institutions, 2nd Edition by Brandl
Michael
Fundamental characteristics of money market debt instruments and why they are
important to participants who are investing and financing - ANSWER: Money market
securities are attractive to investors because of 1. High quality (low default), 2.
marketable, 3. and short term. They protect the investors principal and offer liquidity
via a ready market or maturity in the near future. They also provide income, for the
borrowwer the money market is a constant source of relatively cheap funds,
available with very low financing costs
Economic function of money markets - ANSWER: Money markets are markets for
liquidity. Liquidity of many of the worlds investors is stored there. liquidity for high
quality borrowers is provided there.
Why most money market interest rates tend to move together over time - ANSWER:
To the extent that securities with various terms are substitutable, investors will rush
in and purchase the security that offers a high yield relative to other similar
securities. As a result, yields o substituable securities tend to be closely correlated.
Because all money market securities share some important characteristics, high
credit quality, high marketability, and low default risk - many investors may view
them as close substitutes to each other.
What is a banker's acceptance and ideally suited for foreign trade transactions? -
ANSWER: Bank accept is a trade bill of exchange that has been accepted by a third
party with an excellent credit rating, in this case a large commercial bank. With
limited knowledge of counter parties in transactions a third party "accepter" is
welcome. Banks and competitors that participate in acceptance are grease the
wheels of international trade
Stock market crashes of 1987 1989 and shortly after Sept 11 money market yields
dropped, what caused it? - ANSWER: First the Fed opened the discount window and
purchased large amount of treasuries expanding bank reserves expanding the supply
of loanable funds. However the major factor was the surge of funds from around the
world out of more risky security markets into money market instruments which led
to bidding up their prices and lowering yields.
What ways commercial banks participate in the money markets - ANSWER:
Commercial banks have to frequently adjust their liquidity positions. they buy and
sell money market securities from their investment portfolios. to raise funds a bank
can borrow in the fed funds market and other banks through repurchase agreements
as well as issue negotiable cds and commercial paper. to invest excess funds bank
, can lend in the fed fund market through reverse repos or by money market
securities of other issuers.
90 day T-Bill with a face value of $10,000 that is quoted at 3.25 bid and 3.05 ask.
What are the selling and purchasing prices? - ANSWER: bought at $10,000x[1-
(.0305x180/360)] = 9,923.75
Sold at 10000 x [1-(.032 x 180/360)] = 9,918.75
Compare and Contrast characteristics of securities of the money market with those
of capital market - ANSWER: Money market securities are short term while capital
are longer. The money market is largely a primary market with some secondary
activity. The cap market is a secondary market primarily with some secondary
additions. A;; mm sec are unsecured debt (except repos) while equities and debt,
and some collateralized make up cap market.
Risks faced by bond investors - ANSWER: default risk, price risk, ad reinvestment risk
(for coupon bonds), foreign exchange risks, and/or political risk for international
investments, and market risks.
Commercial banks and mortgage pools recently overlook thrift institutions as major
investors in mortgages. Discuss factors responsible. - ANSWER: More volatile capital
market rates, a troubled thrift industry, increased focused on the origination and
service function by thrifts, increased tech, subsidization of Frannie Mae, Ginne Mar,
and Freddie Mac and a thirst by pension funds for alternative investments has fueled
the growth of mortgage pools and mortgaged backed securities.
Why do mortgage backed securities guarranted by Federal gov agencies often have
yields about US Treasury bond rates - ANSWER: The demand for a prepayment risk
premium, in case interest rates decline significantly in the investment period, is the
primary reason for the higher yields on mortgage backed guaranteed securities.
Small investors are likely to invest in the money market through - ANSWER:
indirectly, money markets mutual funds
The money market is a dealer market linked by - ANSWER: efficient communications
systems
Fed Funds are typically - ANSWER: overnight interbank loans settled in immediately
available funds
Most common money market instrument utilized in Fed's open market operations -
ANSWER: T bills
Discount yield is always____than bond equivalent yield on same sec - ANSWER:
lower
Banks invest in gov sec for a variety of reasons except - ANSWER: high relative yield
Markets and Institutions, 2nd Edition by Brandl
Michael
Fundamental characteristics of money market debt instruments and why they are
important to participants who are investing and financing - ANSWER: Money market
securities are attractive to investors because of 1. High quality (low default), 2.
marketable, 3. and short term. They protect the investors principal and offer liquidity
via a ready market or maturity in the near future. They also provide income, for the
borrowwer the money market is a constant source of relatively cheap funds,
available with very low financing costs
Economic function of money markets - ANSWER: Money markets are markets for
liquidity. Liquidity of many of the worlds investors is stored there. liquidity for high
quality borrowers is provided there.
Why most money market interest rates tend to move together over time - ANSWER:
To the extent that securities with various terms are substitutable, investors will rush
in and purchase the security that offers a high yield relative to other similar
securities. As a result, yields o substituable securities tend to be closely correlated.
Because all money market securities share some important characteristics, high
credit quality, high marketability, and low default risk - many investors may view
them as close substitutes to each other.
What is a banker's acceptance and ideally suited for foreign trade transactions? -
ANSWER: Bank accept is a trade bill of exchange that has been accepted by a third
party with an excellent credit rating, in this case a large commercial bank. With
limited knowledge of counter parties in transactions a third party "accepter" is
welcome. Banks and competitors that participate in acceptance are grease the
wheels of international trade
Stock market crashes of 1987 1989 and shortly after Sept 11 money market yields
dropped, what caused it? - ANSWER: First the Fed opened the discount window and
purchased large amount of treasuries expanding bank reserves expanding the supply
of loanable funds. However the major factor was the surge of funds from around the
world out of more risky security markets into money market instruments which led
to bidding up their prices and lowering yields.
What ways commercial banks participate in the money markets - ANSWER:
Commercial banks have to frequently adjust their liquidity positions. they buy and
sell money market securities from their investment portfolios. to raise funds a bank
can borrow in the fed funds market and other banks through repurchase agreements
as well as issue negotiable cds and commercial paper. to invest excess funds bank
, can lend in the fed fund market through reverse repos or by money market
securities of other issuers.
90 day T-Bill with a face value of $10,000 that is quoted at 3.25 bid and 3.05 ask.
What are the selling and purchasing prices? - ANSWER: bought at $10,000x[1-
(.0305x180/360)] = 9,923.75
Sold at 10000 x [1-(.032 x 180/360)] = 9,918.75
Compare and Contrast characteristics of securities of the money market with those
of capital market - ANSWER: Money market securities are short term while capital
are longer. The money market is largely a primary market with some secondary
activity. The cap market is a secondary market primarily with some secondary
additions. A;; mm sec are unsecured debt (except repos) while equities and debt,
and some collateralized make up cap market.
Risks faced by bond investors - ANSWER: default risk, price risk, ad reinvestment risk
(for coupon bonds), foreign exchange risks, and/or political risk for international
investments, and market risks.
Commercial banks and mortgage pools recently overlook thrift institutions as major
investors in mortgages. Discuss factors responsible. - ANSWER: More volatile capital
market rates, a troubled thrift industry, increased focused on the origination and
service function by thrifts, increased tech, subsidization of Frannie Mae, Ginne Mar,
and Freddie Mac and a thirst by pension funds for alternative investments has fueled
the growth of mortgage pools and mortgaged backed securities.
Why do mortgage backed securities guarranted by Federal gov agencies often have
yields about US Treasury bond rates - ANSWER: The demand for a prepayment risk
premium, in case interest rates decline significantly in the investment period, is the
primary reason for the higher yields on mortgage backed guaranteed securities.
Small investors are likely to invest in the money market through - ANSWER:
indirectly, money markets mutual funds
The money market is a dealer market linked by - ANSWER: efficient communications
systems
Fed Funds are typically - ANSWER: overnight interbank loans settled in immediately
available funds
Most common money market instrument utilized in Fed's open market operations -
ANSWER: T bills
Discount yield is always____than bond equivalent yield on same sec - ANSWER:
lower
Banks invest in gov sec for a variety of reasons except - ANSWER: high relative yield
