Economy and Finance: Lending and Borrowing
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Questions and Answers

What is the primary characteristic of securities traded in the money market?

  • Securities issued by the government only
  • Long-term securities with a maturity period of more than 1 year
  • Short-term securities with a maturity period of 1 year or less (correct)
  • Securities issued by private companies only

    • What is the purpose of a bank's guarantee in a Banker's Acceptance (BA)?

  • To provide a discount on the payment
  • To ensure the firm's payment is made on time
  • To facilitate international trade without a bank's involvement
  • To obligate the bank to make good on the draft if the firm fails (correct)

    • What is the primary function of a Banker's Acceptance (BA)?

  • To guarantee a firm's payment to a supplier
  • To provide a short-term loan to a firm
  • To act as a negotiable certificate of deposit
  • To facilitate international trade by providing a credit instrument (correct)

    • What type of securities is typically traded in the money market?

    <p>Credit instruments</p> Signup and view all the answers

    What is the main difference between a Banker's Acceptance (BA) and a check?

    <p>A BA is guaranteed by the bank, while a check is not</p> Signup and view all the answers

    What is the primary reason for a firm to use a Banker's Acceptance (BA)?

    <p>To ensure payment is made on time and to get a bank's guarantee</p> Signup and view all the answers

    What is the primary function of financial intermediaries in a two-sector economy?

    <p>To transfer funds from savers to investors through various financial instruments</p> Signup and view all the answers

    What is the outcome of financial disintermediation?

    <p>Savers invest directly in financial instruments, bypassing intermediaries</p> Signup and view all the answers

    What is the characteristic of securities or financial instruments?

    <p>They are liabilities for the borrower and assets for the lender</p> Signup and view all the answers

    What is the purpose of financial markets in a two-sector economy?

    <p>To transfer funds from savers to investors</p> Signup and view all the answers

    What is the difference between direct finance and indirect finance?

    <p>Indirect finance involves financial intermediaries, while direct finance does not</p> Signup and view all the answers

    What is an example of a financial asset created through financial intermediation?

    <p>All of the above</p> Signup and view all the answers

    What is the primary benefit of Negotiable Instruments of Deposit (NIDs) compared to Fixed Deposits?

    <p>Holder has opportunity to make profits or minimize losses in anticipation of interest movements</p> Signup and view all the answers

    What is the primary purpose of Commercial Paper (CP) issuance by corporations?

    <p>To raise short-term funds for immediate borrowing needs</p> Signup and view all the answers

    How are Malaysian Government Securities (MGS) issued?

    <p>On a tender basis from the Treasury via BNM</p> Signup and view all the answers

    What determines the price of Malaysian Government Securities (MGS) in the secondary market?

    <p>The forces of demand and supply</p> Signup and view all the answers

    How often are dividends paid to holders of Malaysian Government Securities (MGS)?

    <p>Half yearly</p> Signup and view all the answers

    What is the purpose of BNM's monthly published price listing of Malaysian Government Securities (MGS)?

    <p>To reflect the indicative price of MGS</p> Signup and view all the answers

    What is the time period for an intermediate-term debt instrument?

    <p>between one to ten years</p> Signup and view all the answers

    What type of securities make periodic payments to their holders?

    <p>Equities</p> Signup and view all the answers

    In a primary market, who buys new issues of a security?

    <p>Investors</p> Signup and view all the answers

    What is the main function of a dealer in a secondary market?

    <p>To buy and sell securities at stated prices</p> Signup and view all the answers

    What is the purpose of a secondary market?

    <p>To facilitate the resale of previously issued securities</p> Signup and view all the answers

    What type of market is organized through a central location where buyers and sellers meet to conduct trades?

    <p>Exchange</p> Signup and view all the answers

    What is the primary distinction between direct finance and indirect finance?

    <p>The involvement of financial intermediaries</p> Signup and view all the answers

    Which of the following is NOT a function of a central bank?

    <p>Provision of loans to individuals</p> Signup and view all the answers

    What is the primary difference between money markets and capital markets?

    <p>The maturity of the investments</p> Signup and view all the answers

    Which of the following is an example of a money market instrument?

    <p>Commercial paper</p> Signup and view all the answers

    What is the primary driver of adverse selection in lending?

    <p>Asymmetric information</p> Signup and view all the answers

    What is the primary purpose of a financial system?

    <p>To allocate resources efficiently</p> Signup and view all the answers

    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
    • 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

    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

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    Description

    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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