Economy and Finance: Lending and Borrowing

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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
  • 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

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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