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Case Study

The Property Corporation needs funds for inventory, salaries, utilities, and other operating costs. It can approach the money market, where short-term instruments like repurchase agreements, certificates of deposit, commercial paper, and bankers' acceptances are traded. These low-risk instruments provide immediate cash for working capital needs. A commercial bank is running short on cash due to high withdrawal volumes. To maintain reserves, it will issue certificates of deposit to borrow from another bank. CDs are low-risk, insured deposits with maturity periods from 7 days to 1 year that can be exchanged for funds.

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Jazmine Anne Manila
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121 views2 pages

Case Study

The Property Corporation needs funds for inventory, salaries, utilities, and other operating costs. It can approach the money market, where short-term instruments like repurchase agreements, certificates of deposit, commercial paper, and bankers' acceptances are traded. These low-risk instruments provide immediate cash for working capital needs. A commercial bank is running short on cash due to high withdrawal volumes. To maintain reserves, it will issue certificates of deposit to borrow from another bank. CDs are low-risk, insured deposits with maturity periods from 7 days to 1 year that can be exchanged for funds.

Uploaded by

Jazmine Anne Manila
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Chapter 1

3. Property Corporation requires funds for its inventory, payment of salaries and wages, payment
of utilities and other monthly operating costs.

a. You are to suggest which financial market the company may approach and why?

Base on the given situation, the Property Corporation may approach Money Market to be able t
o get the required funds for its inventory, payment of salaries and wages, payment of utilities a
nd monthly operating costs. This type of financial market trades instruments for the short-term
needs of the fund demanders. In this financial market, it easily provide the immediate cash requ
irements for the operation of the company. Money Market helps the industries to meet the wor
king captial they need continue their operation.

b. Discuss the financial instruments to raise in this requirement.

The company may use the following financial instruments:

1. Repurchase agreement - or collaterized loans. it is a financial contract involving a sale


or purchase of debt security on a near date and a reversing transaction on a future da
te. It generates low interest rates.

2. Certificate of deposit - it is a term security with a specific maturity date. It can be used
in exchange to funds since it serves as a promise of restricted balance on the bank th
at cannot be withdrawn by Property Corporation.This kind of instrument is similar to sa
vings accounts in that they are insured "money in the bank" and thus virtually risk free.

3. Commercial papers - these are unsecured promissory notes. It is a money-market securi


ty issued by large corporations to obtain funds to meet short-term debt obligations (in
the situation, funds for its inventory, payment of salaries and wages, payment of utilities
and other monthly operating costs. ) and is backed only by an issuing bank or compa
ny promise to pay the face amount on the maturity date specified on the note.

4. Banker's acceptance - form by issuing a draft or a promise to pay and signed by the
bank, approving the use of the latter's name in purchasing goods. In an agreement wh
ereby goods will be sold at a future date, if the buyer does not have an established re
lationship with or otherwise cannot obtain credit from the seller, a banker's acceptance
enables it to substitute the bank's creditworthiness for its own.
Chapter 2

3. Raphael finalizes a deal to buy a new house. So, he visits a nearby branch of a commercial
bank and withdraw from his account in order to pay the token money to the seller. In the ban
k he observes that a large number of customers are present to make cash withdrawals, probabl
y because it is an auspicious time to make purchases. After some time, he overhears one of th
e bank staff members telling his colleague that, today the bank is likely to fall short of cash an
d to make up for the deficit and maintain its cash reserve ratio, it will have to approach anothe
r bank.

a. Identify the instrument that the bank will use to meet its short term requirements of fund.

In order for the bank to meet its short term requirements of fund, they can issue certificate of
deposit that records a deposit made.

b. State any feature of the instrument as per above.

 A Certificate of Deposit issued by the commercial banks can have maturity period rangi
ng from 7 days to 1 year.

 It can be used in exchange to funds.

 It is similar to savings accounts in that they are insured "money in the bank" and thus
virtually risk free.

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