1. Discuss forms of commercial paper?

There are 2 types of commercial paper: bill of exchange and promisary note.

Bill of exchnage is commercial paper that lender make to claim money of borrower after
maturity. It is popular in trading activities

Promisory note is commcercial paper issued by the borrowers to raise short-term fund
and promise to pay that amount of money to the lenders after maturity. This is usually
issued by creditworthy firms, corporations.

In the market, promisary note is more dominaint.

2. Main features of T-bill?

- Are money market security
- Par value of $1000
- Issued by US Treasury to raise fund for government
- Very attractive because they are backed up the government and have free default
risk
- Sold weekly through auction
- Individual investors have less chance to buy, usually institutional investors
- Have secondary market

3. Why T-bills are called risk-free instrument?

T-Bills are called risk free instruments because they they are backed by the federal
government and are therefore virtually free of credit (default) risk. If any problem, the
gov can increase tax or print money to pay for that T-bills and also, they have very high
liquidty.

4. How do u use segmented market theory to explain 2 question abt time structure
of interest, explain how it succeeded and how it failed?

Assumption: investors just care about the maturity but not the interest rate, the securities
are not substitute at all

Investors prefer short trem securities than long term securities to obtain their future plan
withoout caring about interest rate=>demand on short term is high-> i short is lower than
long => upward sloping yield curve
Cant answer 2 other questions because this theoary assums thay the long and short
interest rate are determined by the D&S for each maturity without mentioning about
expected interest rate

5. What type of financial intermediary do the S&L belong to, what are their main
characteristic?

S&Ls standing for Savings and Loans Associations, is a type of savings institutions,
belonging to depository institutions group. They offer deposit accounts to surplus units
and then channel these deposits to deficit units. Savings institutions can be owned by
shareholders, but most are mutual (depositor owned). Like commercial banks, savings
institutions rely on the federal funds market to lend their excess funds or to borrow funds
on a short-term basis. Savings institutions concentrate on residential mortgage loans.

6. Explain how Repo works? In nature la 1 tool ntn?

With a repurchase agreement (or repo), one party sells securities to another with an
agreement to repurchase the securities at a specified date and price. In essence, the
repo transaction represents a loan backed by the securities. If the borrower defaults on
the loan, the lender has claim to the securities. Most repo transactions use government
securities, although some involve other securities such as commercial paper or NCDs.
7. Discuss how financial intermediation could prevent consequences of information
asymetry?

There are 2 consequences of assymetric information: adverse selection and moral

hazard.

Adverse selection refers to the fact that bad credit risks are the ones most likely to
seek loans. A financial intermediary, such as a bank, becomes an expert in
producing information about firms so that it can sort out good credit risks from bad
ones. Then it can acquire funds from depositors and lend them to the good firms.
Moreover, it avoids the free-rider problem by primarily making private loans rather
than by purchasing securities that are traded in the open market.

Moral hazard refers to the risk of the borrower’s engaging in activities that are
undesirable from the lender’s point of view. Again, they can reduce moral hazard
by monitoring what borrowers are doing with borrowed funds.
8. Explain the differences btw primary and secondary market
Primary markets facilitate the issuance of new securities. Secondary markets facilitate the
trading of existing securities, which allows for a change in the ownership of the
securities. Many types of debt securities have a secondary market, so that investors who
initially purchased them in the primary market do not have to hold them until maturity.
Primary market transactions provide funds to the initial issuer of securities; secondary
market transactions do not.

9. How do u use pure expectation theory to explain 2 question abt time structure of
interest, explain how it succeeded and how it failed?

Assumption: the invester only care about interest rate, all the securities are substitute

The interest rate in long term is equal the average short term interest rate

1. Because of that relation then short term interest rate increase=> long term increase
and vise versa => Short term and long term interest rate are tend to move together.
2. If the investor expect short term intersest rate is rise then the yeild curve upward
If the investor expect short tern is down then the yield curve downward
 Shape of current yeild curve depend on expectation of future interest
10. What are main characteristics of finance companies?

Finance companies belong to non-depository institutions.

Finance companies obtain funds by issuing securities and then lend the funds to
individual and small businesses.
11. How do you identify T-bill’s annualized yeild and discount, explain economic
meaning of those?

T-Bill’s annualized yield:

SP−PP 365
Y T= ×
PP n

Where:

SP is selling price

PP is purchase price

n = number of days of holding T-Bill

The T-bills are sold at a discount from par value; thus, the yield is influenced by
the difference between the selling price and purchase price.

365/n indicates the annualized process. We use 365 days equavilent to 1 year in
order to compare T-Bill annualized yield with other capital market securities
yields.

T-Bill’s discount:
Par−PP 360
T −bill discount= ×
Par n

T-Bill discount represents the percentage discount of the purchase price from par
value for newly issued T-Bills.

360 days is the number of days equivalent to 1 year in money market.

12. Why Fed Funds rate is being watched closely?

All types of firms closely monitor the federal funds rate because the Federal Reserve
manipulates it to affect general economic conditions. For this reason, many market
participants view changes in the federal funds rate as an indicator of potential changes in
other money market rates.

13. Discuss how dealer and broker assit investors?

Broker act as the bridge to connect SSU and DSU. They dont keep securities by their
own, just buy and sell securities on behalf of clients and gain commission.

Dealer keep the securities on behalf of their own, they buy and sell securities on their
account and gain benefit, just create a market for parties

14. Why for any financial system liquidity is at extreme importance?

- Good price: equal market for all, competitive price
- Mkt stability
- Faster transaction
- More precise technical analysis

15. What types of institution do insurance comapnies belong to? Main

characteristics?

Insurance companies belongs to nondepositary institution

The customers are atually selling the financial consequences to the insurnace company

The insurance company provide insurance policy to individuals and firm for death,
health, damage for properties then charge the insurance premium. They invest in bonds or
stock issued by the corporation

16. Explain why T-bill is important to the gov. And the central bank?

T-bill is very important for the gov and central bank because the gov raise fund by
issueing T-bill and T-bill act as strong tool for central bank to regulate the money market.

By buying or selling T-bill, the central bank can affect the money supply because it effect
on the monetary base (reserve targeted)

17. Discuss different forms of efficient market?

Efficient market is the market in which the securities price reflects all avaiable
information.

There are 3 form of efficient market:

- Weak-form efficient market: the price reflect all the current market information.
Because in this form, all the past information are public to all investor,everyone
can guess the trend of the price, technical analysis is no use.
- Semi-strong efficient market: the price reflect all publicly avaiable information.
All the past and current information are shown to all the customer therfore
fundemental analysis is no use in this efficient market
- Strong-form efficient market: the price reflect all the public and private
information then noone can gain superior advantages compared to other investors.

18. What types of institution do securities comapnies belong to? Main

characteristics?
- Nondepositary institution
- 3 main function:
Broker function: execute the transaction btw parties and charge fee as bid-ask
spread
Investment banking function: underwrite the newly issued securities; Some
securities firms offer advisory services on mergers and other forms of corporate
restructuring.
Dealer function: making a market for specific securities by maintaining an
inventory of securities.
19. dicuss asymetry information? Effect on the participant of finacial market?

Asymetric information is the difference in the understanding of 2 parties, for example the
manager of the firm has more information than investor and can gain more benefit than
others. It can cause many consequences to the market. There are 2 effect of AI : moral
harzard and adverse selection. Adverse selection occurs when there is ai before the deal.
Bc of having less information than the firm manager then the investors will have to face
the difficulties in getting value and risks while the firm can get benefit from that. Moral
harzard occur when there is ai after the deal. After the deal the investors might not know
whether the firm use thieir money as they told you or not, they might engage in some
risky project since they think they wont get any negatve concequences, as the results,
they put the less knowdegable party (usually the investor) in disadvantage position.

20. What is the characteristic of money market securities?

- Maturity is less than 1 year
- High liquidity, low risk, low return
- Issued by banks, firm, gov, corp to raise short-term fund
- All of them are debt securities
21. Diffirentiate btw speculator and hedger?

Speculator hedger
- Increase their value by accepting - Reduce risk of loss by accepting
risk reduce money (neutralize the risk)
- 1 rule: buy low sell high
- Benefit from the increase or
decrease of P

22. What types of institution do mutual fund belong to? How does it raise fund and
use it?
- Nondepositary ins.
- Obtain funds by sell fund shares for SSU
- Use fund to purchase porfolio of securities
- Some focus on capital mkt sec but mmmf concentrate on money market sec
23. How do u use liqidity premium theory to explain 2 question abt time structure of
interest, explain how it succeeded and how it failed?

Ass: sec are not perfect sunstitute, customer prefer short tern but somtimes will hold long
if there is compensation. LPT is the combination of the 2

Average effect is modified: long term rate = average shortterm rate+LP

 1. Short term increase=> long term incrase bc of accumulative i
2. Short term is expected to high=> upward
3. Perfer shot but stil hold long if compen. Relationship btw LP: rise as the maturity
()<LP1<LP2..), LP is always >0
The i short<i long=> upward

24. Why commercial paper usually has maturity of less than 91 days?

In theory the maruity is from 20 days to 270days but the discount policy of central bank
is limmited only to CP of less than 91days, meaning that commercial bank has liquidity
problem with the withdraw of lender if CP has more than 91 days left to maturity => can
cause crises for the bank. So, to cover illiquidity risk, the CP usually has maturity of less
than 91 days.

25. Financial assets are all high liqidity. T/F? Why?

F. there are many financial asset with high demnomination and long term to maturity ,
theirs liquidity is low: CP, CDs...

26. Diffirentate btw credit union and saving institution?

Credit union Saving institution

- Restrict to member of union - Includes S&Ls, saving banks
- Nonprofit org. - Mostly owned by depositor (mutual)
- Very tiny compared to the banks - Concentrate on residential mortgage
loans
- Small compared to banks

27. In the economy is about to increase in money supply, what about interest rate
interpolation? Explain?
The i decrease
28. Characteristic of bond and stock?

Bonds Stocks
- Debt instrument - Equity instrument
- Lower risk- lower return - Long term
- Claim on interest - High risk high return
- Bondholders have higher priority - Claim on ownership of company
than stockholders - Income from devidend and capital
gain
29. What types of institution do pension fund belong to? How does it raise fund and
use it?
- Nondepository
- Pension funds provide an efficient way for individuals to save for their retirement.
The pension funds manage the money until the individuals withdraw the funds
from their retirement accounts. The money that is contributed to individual
retirement accounts is commonly invested by the pension funds in stocks or bonds
issued by corporations or in bonds issued by the government.
30. Diffences btw centralized market & OTC

Centralized OTC
There is a visible marketplace the the There is no visible marketplace, they
invetors come and trade trade over the ounter telecommunication
network)

31. Why are there auction of tin phieu khong canh tranh? Pricing/valuation regime?
1. Indentify all CF
2. Discount CF
3. Sum them up
32. Liquidity of commercial paper is still high without sencondary market? T/F?
Explain?

F. it is a typical unsecured instrument.

33. Explain the most feature of mortgage?

Mortgages - long-term debt obligations created to finance the purchase of real estate.
- Bank is the originators of the mortgage
- Holder is house-buyyer
- Holder is Deficit unit
34. The bonds with higher liquidity will have higher interest? T/F? Eplain?
F. higher liquid-> lower interst because of the risk structure

35. Why individual investors have less opp. to join money market securities? (tttt)
Because of high denomination of money market instruments, investors have little
direct access to them. One of the easiest ways for retail investors to buy them is to
engage in money market mutual funds, which are contributed by thousands of
investors to buy securities on money market.
36. When commercial paper is discounted, its price will rise. T/F? Explain?
F. the CP is discounted when the holder wants to withdraw money before the maturity so
they need to pay kind of fee, the money they get basck is less than the amount they get to
the bank (P<par)

37. I01=7.9% io2=8.3% i03=8.4% i04=8.5% i05=8.9% i24=8%

I45=10.51% i46=9.8%
a. Find arbitrage opp.
b. Find current i to prevent arbitrage