30 Questions
What is the primary characteristic of securities traded in the money market?
Short-term securities with a maturity period of 1 year or less
What is the purpose of a bank's guarantee in a Banker's Acceptance (BA)?
To obligate the bank to make good on the draft if the firm fails
What is the primary function of a Banker's Acceptance (BA)?
To facilitate international trade by providing a credit instrument
What type of securities is typically traded in the money market?
Credit instruments
What is the main difference between a Banker's Acceptance (BA) and a check?
A BA is guaranteed by the bank, while a check is not
What is the primary reason for a firm to use a Banker's Acceptance (BA)?
To ensure payment is made on time and to get a bank's guarantee
What is the primary function of financial intermediaries in a two-sector economy?
To transfer funds from savers to investors through various financial instruments
What is the outcome of financial disintermediation?
Savers invest directly in financial instruments, bypassing intermediaries
What is the characteristic of securities or financial instruments?
They are liabilities for the borrower and assets for the lender
What is the purpose of financial markets in a two-sector economy?
To transfer funds from savers to investors
What is the difference between direct finance and indirect finance?
Indirect finance involves financial intermediaries, while direct finance does not
What is an example of a financial asset created through financial intermediation?
All of the above
What is the primary benefit of Negotiable Instruments of Deposit (NIDs) compared to Fixed Deposits?
Holder has opportunity to make profits or minimize losses in anticipation of interest movements
What is the primary purpose of Commercial Paper (CP) issuance by corporations?
To raise short-term funds for immediate borrowing needs
How are Malaysian Government Securities (MGS) issued?
On a tender basis from the Treasury via BNM
What determines the price of Malaysian Government Securities (MGS) in the secondary market?
The forces of demand and supply
How often are dividends paid to holders of Malaysian Government Securities (MGS)?
Half yearly
What is the purpose of BNM's monthly published price listing of Malaysian Government Securities (MGS)?
To reflect the indicative price of MGS
What is the time period for an intermediate-term debt instrument?
between one to ten years
What type of securities make periodic payments to their holders?
Equities
In a primary market, who buys new issues of a security?
Investors
What is the main function of a dealer in a secondary market?
To buy and sell securities at stated prices
What is the purpose of a secondary market?
To facilitate the resale of previously issued securities
What type of market is organized through a central location where buyers and sellers meet to conduct trades?
Exchange
What is the primary distinction between direct finance and indirect finance?
The involvement of financial intermediaries
Which of the following is NOT a function of a central bank?
Provision of loans to individuals
What is the primary difference between money markets and capital markets?
The maturity of the investments
Which of the following is an example of a money market instrument?
Commercial paper
What is the primary driver of adverse selection in lending?
Asymmetric information
What is the primary purpose of a financial system?
To allocate resources efficiently
Study Notes
Malaysian Capital Market
- Divided into two parts: market in government securities and market in stock and shares, including other corporate securities
Money Market
- Consists of securities issued in principle for 1 year or less (short-term securities)
- Examples of securities traded: treasury bills, negotiable certificate of deposits (NCDs), commercial papers, banker’s acceptance, and repurchase agreements
Money Market Instruments
- Non-Government Papers
- Bankers Acceptance (BAs)
- A bank draft (promise of payment similar to a check) issued by a firm, payable at some future date, and guaranteed for a fee by the bank that stamps it “accepted”
- Advantages: negotiable compared to Fixed Deposits, holder has opportunity to make profits/minimize losses in anticipation of interest movements
- Commercial Paper (CP)
- Short-term debt instrument issued by large banks and well-known corporations
- Issued for use in short-term borrowing needs, with maturity usually less than 9 months
- Bankers Acceptance (BAs)
- Government Papers
- Malaysian Government Securities (MGS)
- Consist of government bonds and loan stock, which represent government borrowings from the private sector
- Issued on a tender basis from the Treasury via BNM
- Can be traded in the secondary market, with price determined by demand and supply
- Malaysian Government Securities (MGS)
Primary and Secondary Markets
- Primary Market
- A financial market in which new issues of a security are sold to initial buyers by the corporation or government agency borrowing the funds
- Secondary Market
- A financial market in which securities that have been previously issued can be resold
- Securities brokers and dealers are crucial to a well-functioning secondary market
Exchange and Over-the-Counter
- Secondary markets can be organized in two ways:
- Exchanges, where buyers and sellers of securities meet in one central location to conduct trades
- Over-the-Counter markets, where buyers and sellers do not meet in a central location
Functions of a Central Bank
- Regulates and supervises banking systems
- Manages foreign exchange reserves
- Acts as lender of last resort
- Implements monetary policy
- Manages government debt
Money Market Instruments
- Examples:
- Bankers Acceptance (BA)
- Commercial Paper (CP)
- Repurchase Agreements
Adverse Selection
- A problem that arises when one party in a transaction has more information than the other
- Can lead to a situation where it is more likely to make a loan to a family member than to a stranger
Test your understanding of lending and borrowing processes in a two-sector economy, including financial intermediation and disintermediation. Learn about the flow of income, savings, and investments between households and firms.
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