ASSIGNMENT

SUBJECT:
INTERNATIONAL
FINANCE

SECTION: 4C

SUBMITTED BY:

SAQIB ZUBAIR FAO9-MBA-

145

SYEDA ANUM ASIM FA09-MBA-

165

YUSRA TARIQ FAO9-MBA-

194

YASIR EHSAN TOOR FA09-MBA-

193

SUBMITTED TO:

MIRZA NASIR JAHAN

MEHDI
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SUBMISSION DATE: 27TH APRIL 2011

Short questions on Money- Market

1) What characteristics define the Money- market?

Ans: Money market has three characteristics in common:
 They have usually sold in large denominations.
 They have low default risk
 They mature in one year or less from their original issue date. Most money
markets instruments mature in less than 120 days.

2) Why do banks not eliminate the need for Money market?

Ans: The banking industry is subject to more regulations and governmental cost
than the money markets. In this situation where the asymmetric information
problem is not severe the money markets have a distinct cost advantage over
banks in providing short term funds so that’s why banks not eliminate the need
for money market.

3) Distinguish b/w a term security and a demand security.

Ans: Term security is managed and established by the Federal Reserve to provide
liquidity in Treasury and collateral markets. The goal of this facility is to keep
Treasury and collateral markets flowing as a method of empowering the larger
financial market. And the demand security is the security that is issued on the
demand deposits by the MNCs and commercial banks.

4) What were the purpose motivating regulators to impose interest ceilings on

bank saving Accounts? What impact did this eventually have on the money
markets?

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 Ans: Interest rate regulations were second competitive obstacles for banks. The
basic principle of the banking regulations was to reduce competitive advantage
among banks. With less competition the chance of failure of banks will be less.
The cost to consumer of the great profits to bank earned because of the lack of
free market competition was justified by the greater economic stability. It
eventually results that the investors pulled their money out of the banks and put it
into the money market security accounts offered by many brokerage firms.

5) Why do the US government and Pakistan government use the Money

market?
Ans: The primary reason of money market is that cash inflows and outflows are
rarely synchronized government tax revenues usually come only a certain time of
The year but expenses are incurred all year long. So that the US government and
Pakistani government use money market.

6) Why do businesses use Money market?

Ans: Following are the purposes of money markets:
 As a warehouse for investors to invest their surplus funds
 Investors use money market as an interim investment that provides higher
return.
 The money market provides a mean to invest idle funds and to reduce its
opportunity cost.
 Investment advisors by holding investment in their hands are able to get
advantage quickly they identify.
 Money market provides a low cost source of temporary funds.

7) What purpose initially motivated Merrill Lynch to offer Money market

Mutual funds to its customers?
Ans: The first purpose initially motivated Merrill Lynch to offer Money market
mutual funds to its customers is the small invertors having little amount of
investment. It allows small investors to participate in the money market by
aggregating their funds to invest in large denomination money market securities.

8) Which of the Money Market securities is the most liquid and considered the
most risk free? Why?
Ans: Investment companies are most liquid and considered the most risk free
security because they ensure that sellers can readily market their securities.

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9) Distinguish b/w the competitive - bidding and non- competitive bidding for
treasury securities.
Ans: The significant difference between the two methods is that competitive
bidders may or may not end up buying securities whereas the non competitive
bidders are guaranteed to do so.

10) Who issues federal funds and what is the usual purpose of these funds?
Ans: Federal funds are issued by Federal Reserve Bank.
The main Propose of the federal funds is to provide banks with an immediate
infusion of reserve should they be short

11) Who issues commercial papers and what is the usual purpose of these?
Ans: Commercial papers are unsecured promissory notes issued by the
corporations that mature in no more than 270 days. The usual purpose of
commercial paper is that the bank holding companies use commercial paper to
fund leasing and consumer finance.

12) Why are banker’s Acceptances (Letter of credit) so popular for international
transactions?
Ans: Letter of credit is so popular for international transitions because;
 The exporter is paid immediately.
 The exporter is shielded from foreign exchange risk because the local bank
pays in domestic funds.
 The exporter does not have to assess the creditworthiness of importer because
the importer’s bank guaranteed payment.

13) Does the Federal Reserve directly set the federal funds interest rate how does
the Fed influence this rate?
Ans: The Federal Reserve cannot directly control fed funds rate it can and does
indirectly Influence them by adjusting the level of reserves available to banks in
the system. The fed can increase the amount of money in the financial system by
buy the fed, the proceeds are deposited in their banks account sat the Federal
Reserve. These deposits increase the supply of reserve in the financial system and
lower interest rate.

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