Chapter 3: Managing Credit Risk in Money Market

Question 1

Not that the actual money or cash is being traded but instead the financial instruments are the ones being used in the exchange.

Answer 1

Money Market

Question 2

These instruments are highly liquid and somewhat have the characteristics close to cash or money.

Answer 2

Money Market

Question 3

Fundamental characteristics of Money Market are:

Answer 3

1. Usually sold in large denominations;
2. Low default risk; and
   3.Mature in one year or less from original issue date.

Question 4

Most money market instruments mature in less than 4 months.

True or False?

Answer 4

True

Question 5

Transactions in the money market are not confined to one singular location.

True or False?

Answer 5

True

Question 6

Money market securities commonly have an active secondary market.

True or False?

Answer 6

True

Question 7

Enables the parties to trade money market instruments to cater to short-term financial needs.

Answer 7

An active secondary market

Question 8

Money markets are considered as wholesale markets.

True or False?

Answer 8

True

Question 9

Allows the money market to be the preferred place for firms to temporarily store excess funds up until such time they are needed again by the organization.

Answer 9

Mature secondary market

Question 10

Investors who place funds in the money market do not intend to earn high return for their money

True or False?

Answer 10

True

Question 11

Investors also plan their strategy to incur the lowest opportunity costs.

True or False?

Answer 11

True

Question 12

Financial intermediaries also use money market instruments to attain investment requirements or deposit outflows.

True or False?

Answer 12

True

Question 13

Money markets offer a least expensive alternative for fund demanders such as the government and financial intermediaries when they have short-term fund requirements.

True or False?

Answer 13

True

Question 14

Participants in the money market

Sells government securities to raise funds.

Answer 14

Bureau of Treasury

Question 15

Issues treasury securities; sells certificates of deposits and extends loans; offers individual investor accounts that can be used to invest in money markets.

Answer 15

Commercial banks

Question 16

These private individuals made their investment through money market mutual funds

Answer 16

Private Individual

Question 17

These entities buy and sells money market securities to manage their cash

Answer 17

Commercial Non-Financial Institutions

Question 18

Trade securities on behalf of their clients

Answer 18

Investment companies

Question 19

Raise money market instruments

Answer 19

Finance/commercial leasing companies

Question 20

Invest in the money market to maintain liquidity level in case of unexpected demands most especially for property and casualty insurance companies.

Answer 20

Insurance companies

Question 21

Maintain funds in the money market as preparation for long-term investing in stocks and bonds

Answer 21

Pension Funds

Question 22

These funds permit small investors (e.g. individuals) to invest in the money market by accumulating funds from numerous small investors to buy large-denomination money market securities.

Answer 22

Money market mutual funds

Question 23

A resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.

Answer 23

Asset

Question 24

Assets can be classified in terms of physicality:

Answer 24

(1) Tangible
(2) Intangible assets

Question 25

Assets that have physical properties and can be easily seen, touched or perceived by the five senses.

Answer 25

Tangible

Question 26

Are identifiable assets that do not have physical substance and usually represents a legal claim to some future economic benefit.

Answer 26

Intangible assets

Question 27

Also called as financial assets or securities, are basically intangible as future economic benefit takes the form of a claim to cash that will be received in the future.

Answer 27

Financial Instruments

Question 28

Main vehicle used for transactions in the financial market

Answer 28

Financial instruments

Question 29

Presented under cash equivalents or investments

Answer 29

Financial Instruments

Question 30

Securities that are maturing within 90 days or less are classified under cash equivalents. Otherwise, they are classified under investments.

Answer 30

Financial Instruments

Question 31

There is a minimum of two parties involved in financial instrument:

Answer 31

(1) The issuer (2) The investor

Question 32

The party that issues the financial instrument and agrees to make future cash payments to the investor. The issuing party usually needs additional funds for investment to further grow their business.

Answer 32

Issuer

Question 33

The party that receives and owns the financial instrument and bears the right to receive payments to be made by the issuer.

Answer 33

Investor

Question 34

Financial instruments have two main economic purposes

Answer 34

* Allows transfer of fund from entities with excess funds (investors) to entities who needs funds (issuer) for business purposes (e.g. to pay for tangible assets). * Permit transfer of fund that allows sharing of inherent risk associated with the cash flows coming from tangible asset investment between the issuer and investor.

Question 35

Types of Money Market Financial Instruments:

Answer 35

1. Treasury Bills 2. Repurchase Agreement 3. Negotiable Certificates of Deposit

Question 36

Government securities issued by the Bureau of Treasury which mature in less than a year.

Answer 36

Treasury Bills

Question 37

There are three tenors of Treasury Bills:

Answer 37

(1) 91 day (2) 182-day (3) 364-day Bills

Question 38

Quoted either by their yield rate, which is the discount, or by their price based on 100 points per unit. True or False?

Answer 38

True

Question 39

Mature in less than 91-days

Answer 39

Cash Management Bills

Question 40

> Have virtually zero default risk > Risk of inflationary changes is also lower since the maturity term is shorter.

Answer 40

Cash Management Bills

Question 41

Market for Treasury bills is both deep and liquid. True or False?

Answer 41

True

Question 42

Market has numerous different buyers and sellers

Answer 42

Deep Market

Question 43

Means that securities can be quickly traded at low transaction costs.

Answer 43

Liquid Market

Question 44

Safest investment instrument in the market (default risk-free)

Answer 44

Liquid Market

Question 45

Interest rate is not explicitly stated in the Treasury bill; hence, interest is not actually paid by the government when they sell this security. Instead, treasury bills are issued at a discount (meaning lower price than the par value at maturity)

Answer 45

Liquid Market

Question 46

Treasury bills can be sold via two methods:

Answer 46

a. Auctions b. Competitive bidding and noncompetitive bidding.

Question 47

Bureau of Treasury announces the quantity and type of securities that they will sell. Interested parties give a bid offering and the Treasury accepts the highest bids.

Answer 47

Auctions

Question 48

Bidders only give the amount of securities that they want to buy. The Treasury accepts all noncompetitive bids. The price for all the securities under noncompetitive bids is set at the highest yield paid to any accepted competitive bid.

Answer 48

Competitive bidding and noncompetitive bidding

Question 49

The main difference between the two methods is that competitive bidders may or may not receive allocation from the securities being sold while noncompetitive bidders are guaranteed to receive the securities. True or False?

Answer 49

True

Question 50

Most investors look at percentages to be able to compare returns better. From the point of view of investors, the discount rate indicates how much return, in %, they can get from a particular security. True or False?

Answer 50

True

Question 51

Treasury bills are also known to be very near to the definition of a risk-free asset True or False?

Answer 51

True They are among the lowest in the market

Question 52

is a contract where a party which is a seller/borrower of an instrument will agree to the buyer/lender that the instrument will be repurchased or bought back on a later date at a higher price.

Answer 52

Repurchase Agreement (repo)

Question 53

Enable short-term funds, ranging from one- day to 3 to 14 days. (some repos can also range from one to three months)

Answer 53

Repurchase Agreement

Question 54

Do not have an indicative date of repurchase

Answer 54

Open Repos

Question 55

Repos are a key component of the debt securities market that produces short-term cash or securities liquidity True or False?

Answer 55

True

Question 56

Repos are collateralized loans True or False?

Answer 56

True

Question 57

In the Philippines, the government (through BSP) also uses repo to enforce monetary policy. True or False?

Answer 57

True

Question 58

Since repos are collateralized by the accompanying securities, these usually are treated as low-risk investments with low interest rates. True or False?

Answer 58

True

Question 59

Are securities issued by banks which record a deposit made.

Answer 59

Negotiable Certificates of Deposit

Question 60

The certificate indicates the interest rate and the maturity date of the deposit. (negotiable certificates of deposit are treated as a term security with a specific maturity date) True or False?

Answer 60

True

Question 61

It cannot be easily withdrawn by the depositor A certificate of deposit essentially restricts holders from withdrawing funds on demand. True or False?

Answer 61

True

Question 62

Investors are willing to accept a higher return in exchange for having no access to liquidity. True or False?

Answer 62

True

Question 63

Whoever person or entity which possesses the instrument upon maturity will receive the principal and interest.

Answer 63

Bearer instrument

Question 64

Investors can buy or sell certificates of deposit up until the instrument's maturity. Negotiable CDs may have a maturity period between one to four months up to six months. However, there is less demand for CDs with longer maturity. Upon maturity, the bank shall pay the principal plus the interest to the investor who holds the CD. True or False?

Answer 64

True

Question 65

In the Philippines, the BSP allows and regulates the issuance of long-term negotiable certificates of deposits (LTNCD). LTNCD refers to interest bearing negotiable certificates of deposit with a minimum maturity of five years. True or False?

Answer 65

True

Question 66

Offers a higher return compared to regular time deposit accounts because of the long period that depositors will be unable to withdraw the money (non-current assets)

Answer 66

Long Term Non Current Deposit

Question 67

> are unsecured promissory notes > may be short-term or long-term

Answer 67

Commercial Paper

Question 68

Evidence of indebtedness of any person with a maturity of three hundred and sixty-five (365) days or less

Answer 68

Short term commercial paper

Question 69

Since commercial papers are unsecured, only large and creditworthy corporations can issue this security True or False?

Answer 69

True

Question 70

Short Term Commercial papers are: issued directly to the buyer and usually True or False?

Answer 70

True

Question 71

There is no secondary market for commercial papers True or False?

Answer 71

True