Faculty of Foreign Languages – Department of Business English Banking & Finance

Full Name: ..................................... Class: .................................. Student Code: .............................

Mark:

TEST 4

 TOPIC 4: FINANCIAL MARKETS 

SECTION 1: Match the terms with the explanations

Terms Explanations
1 Appreciation A The immediate exchange of bank deposits denominated
in different currencies.
2 Asset-backed B The interest rate charged on short-term funds bought or
commercial paper sold between large international banks.
3 Bearer instrument C Increase in a currency’s value
4 Book entry D The principle that if two or more countries produce an
identical good, the price of this good should be the same
no matter which country produces it.
5 Capital mobility E Competing in an auction against other potential buyers
of Treasury securities.
6 Competitive bidding F Restrictions on the quantity of foreign goods that can be
imported
7 Depreciation G A market in which securities can be bought and sold
quickly and with low transaction costs.
8 Discounting H The theory that exchange rates between any two
currencies will adjust to reflect changes in the price
levels of the two countries.
9 Deep market I The price of one currency in terms of another.
10 Liquid market K A situation in which foreigners can easily purchase a
country’s assets and the country’s residents can easily
purchase foreign assets.
11 LIBOR - London L Taxes on imported goods.
interbank offer rate
12 Exchange rate M Decrease in a currency’s value.
14 Forward transactions N Short-term commercial paper secured by a bundle of
assets, usually mortgages
15 Foreign exchange O System of tracking securities ownership where no
market certificate is issued. Instead, the security issuer keeps
records, usually electronically, of who holds outstanding
securities.
16 Law of one price P Reduction in the value of a security at purchase such
that when it matures at full value, the investor receives a
fair return.
17 Tariffs Q An exchange rate transaction that involves the exchange
of bank deposits denominated in different currencies at
some specified future date.
18 Theory of purchasing R Markets where there are many participants and a great
 Faculty of Foreign Languages – Department of Business English Banking & Finance
power parity deal of activity, thus ensuring that securities can be
(PPP) rapidly sold at fair prices.
19 Quotas S The market in which exchange rates are determined.
20 Spot transactions T A security payable to the holder when presented. No
proof of ownership is required.

SECTION 2: Fill in the gaps

Task 1: Fill in the gaps in the text below using the correct terms from the given table.

denominated currencies forecasts productivity traders

Eurodollars money market price levels low decisions
managers price needed maturity cost
high banker’s treasury bill negotiable commercial
acceptances returns certificates of paper
deposit

- (1) ____________ securities are short-term instruments with an original (2) ____________ of less
than one year. These securities include Treasury bills, (3) ____________, federal funds, repurchase
agreements, negotiable certificates of deposit, banker’s acceptances, and (4) ____________.
- Money market securities are used to “warehouse” funds until (5) ____________. The returns earned
on these investments are low due to their (6) ____________ risk and (7) ____________ liquidity.
- (8) ____________ are the lowest because they are virtually devoid of default risk. (9)
____________ and (10) ____________ are next lowest because they are backed by the
creditworthiness of large money center banks.
- Foreign exchange rates are important because they affect the (11) ____________ of domestically
produced goods sold abroad and the (12) ____________ of foreign goods bought domestically.
- The theory of purchasing power parity suggests that long-run changes in the exchange rate between
two countries’ (13) ____________ are determined by changes in the relative (14) ____________ in
the two countries. Other factors that affect exchange rates in the long run are tariffs and quotas,
import demand, export demand, and (15) ____________.
- (16) ____________ of foreign exchange rates are very valuable to (17) ____________ of financial
institutions because these rates influence (18) ____________ about which assets (19) ____________
in foreign currencies the institutions should hold and what kinds of trades should be made by their
(20) ____________ in the foreign exchange market.
 Faculty of Foreign Languages – Department of Business English Banking & Finance
Task 2: Fill in the gaps in the text below using the correct terms from the given table. Each
term can only be used once, and five terms will not be used.
acceptance date creditworthiness goods liquidity
discounted default investments interest negotiable
international exchange warehouse maturity money
certificates trade bill short-term paper
commercial finance purchase securities rates

Money market (1) __securities_ are financial instruments with an original maturity of less than one
year. These securities include treasury bills, (2) __commercial__ paper, federal funds, repurchase
agreements, (3) _certificates___ of deposit, banker’s acceptances, and Eurodollars. Money market
securities are used to (4) _warehouse___ funds until needed. The returns earned on these (5)
_investments__ are low due to their low risk and high (6) _liquidity___. Many participants in the
money markets both buy and sell money market securities. The U.S. (7) ____, banks, businesses, and
individuals all benefit by having access to low-risk (8) __short-term__ investments.
Interest rates on all money market securities tend to follow one another closely over time. Treasury
(9) _bill___ returns are the lowest because they are virtually devoid of (10) __default__ risk.
Banker’s acceptances and (11) __negotiable__ certificates of deposit are next lowest because they are
backed by the (12) __creditworthiness__ of large money center banks. Banker’s acceptances are
payable to the (13) ____ and can be bought and sold until they mature. They are sold on a (14) ____
basis like commercial (15) ____ and T-bills.
A banker’s acceptance is an order to pay a specific amount of money to the bearer on a given (16)
____. Banker’s acceptances have been in use since the 12th century but only became major money
market securities when international (17) ____ expanded in the 1960s. They are used to (18) ____
goods that have not yet been transferred from the seller to the buyer. For example, if a construction
company in the U.S. wants to (19) ____ equipment from Japan, the Japanese company might require
a banker’s acceptance to guarantee payment before shipping the goods. This acceptance substitutes
the bank's (20) ____ for that of the purchaser, ensuring the seller that the payment will be made.

Task 3: Fill in the gaps in the text below using the correct terms from the given table. Each
term can only be used once, and five terms will not be used.
liquidity low risk creditworthiness commercial paper banker’s acceptance
maturity default investments interest rates negotiable certificates
payment participants warehouse discounted basis Money market securities
U.S. treasury returns bill international trade repurchase agreement
T-bills securities Purchase commercial banks short-term instruments

A (1) ____ is an order to pay a specified amount of money to the bearer on a given date. They have
been used since the 12th century but became significant money market securities when (2) ____
expanded in the 1960s. They finance goods not yet transferred from seller to buyer. For instance, if
Builtwell Construction Company wants to buy a bulldozer from Komatsu in Japan, Komatsu may
hesitate to ship without (3) ____ due to unfamiliarity with Builtwell. Likewise, Builtwell may not
want to send money before receiving the equipment. A bank can resolve this by issuing a banker’s
acceptance, substituting its (4) ____ for that of the purchaser.
Since banker’s acceptances are payable to the bearer, they can be bought and sold until they mature,
similar to (5) ____ and (6) ____. They are sold on a (7) ____ where dealers match firms wanting to
discount a banker’s acceptance with those wishing to invest in them. The (8) ____ on banker’s
 Faculty of Foreign Languages – Department of Business English Banking & Finance
acceptances are low due to their low (9) ____ risk. Money market securities are (10) ____ with an
original maturity of less than one year. These (11) ____ include treasury bills, commercial paper,
federal funds, (12) ____, negotiable certificates of deposit, banker’s acceptances, and Eurodollars.
Money market securities are used to (13) ____ funds until needed. The (14) ____ on these
investments are low because of their low risk and high (15) ____. Many (16) ____ in the money
markets buy and sell these securities. The (17) ____, (18) ____, businesses, and individuals all benefit
from access to low-risk short-term investments.
Interest rates on all money market securities tend to follow each other closely over time. Treasury
(19) ____ returns are the lowest because they are almost devoid of default risk. Banker’s acceptances
and (20) ____ of deposit follow because they are backed by the creditworthiness of large money
center banks.

SECTION 3: Multiple Choice Questions

Task 1: Choose the best answers.

1) A financial market in which only short-term debt instruments are traded is called the ________
market.
A) bond
B) money
C) capital
D) stock

2) Because these securities are more liquid and generally have smaller price fluctuations, corporations
and banks use the ________ securities to earn interest on temporary surplus funds.
A) money market
B) capital market
C) bond market
D) stock market

3) Prices of money market instruments undergo the least price fluctuations because of
A) the short terms to maturity for the securities.
B) the heavy regulations in the industry.
C) the price ceiling imposed by government regulators.
D) the lack of competition in the market.

4) U.S. Treasury bills pay no interest but are sold at a ________. That is, you will pay a lower
purchase price than the amount you receive at maturity.
A) premium
B) collateral
C) default
D) discount

5) A debt instrument sold by a bank to its depositors that pays annual interest of a given amount and
at maturity pays back the original purchase price is called
A) commercial paper.
B) a negotiable certificate of deposit.
C) a municipal bond.
 Faculty of Foreign Languages – Department of Business English Banking & Finance
D) federal funds.

6) A short-term debt instrument issued by well-known corporations is called

A) commercial paper.
B) corporate bonds.
C) municipal bonds.
D) commercial mortgages.

7) Federal funds are

A) funds raised by the federal government in the bond market.
B) loans made by the Federal Reserve System to banks.
C) loans made by banks to the Federal Reserve System.
D) loans made by banks to each other.

8) The British Banker's Association average of interbank rates for dollar deposits in the London
market is called the
A) Libor rate.
B) federal funds rate.
C) prime rate.
D) Treasury Bill rate.

9) Which of the following instruments are traded in a money market?

A) State and local government bonds
B) U.S. Treasury bills
C) Corporate bonds
D) U.S. government agency securities

10) Which of the following instruments is not traded in a money market?

A) Residential mortgages
B) U.S. Treasury Bills
C) Negotiable bank certificates of deposit
D) Commercial paper

Task 2: Read Unit 4 and circle the best option A, B, C or D:

1. What is the main purpose of the money market?
A. To facilitate long-term borrowing and lending
B. To facilitate short-term borrowing and lending
C. To facilitate trading of stocks and bonds
D. To facilitate investment in real estate
2. Which of the following is a characteristic of the money market?
A. It deals with long-term financial instruments
B. It deals with high-risk financial instruments
C. It deals with low-risk, short-term financial instruments
D. It deals with derivatives and options
3. What type of financial instrument is traded in the money market?
A. Stocks
B. Bonds
C. Treasury bills
D. All of the above
 Faculty of Foreign Languages – Department of Business English Banking & Finance
4. Which of the following is a participant in the money market?
A. Individuals
B. Corporations
C. Financial institutions
D. All of the above
5. What is the main function of the Federal Reserve in the money market?
A. To regulate the stock market
B. To control inflation
C. To provide loans to individuals
D. To facilitate short-term lending and borrowing
6. What is the primary reason for the high liquidity of money market instruments?
A. They have long maturity periods
B. They have low risk of default
C. They are easily traded
D. They offer high returns
7. Which of the following is not a characteristic of commercial paper?
A. Short-term unsecured debt
B. Issued by large, highly-rated corporations
C. Typically has a maturity of 30 to 270 days
D. Traded on the primary market
8. What is the purpose of repurchase agreements (repos) in the money market?
A. To facilitate long-term borrowing
B. To facilitate short-term borrowing
C. To facilitate trading of stocks
D. To facilitate trading of bonds
9. How do negotiable certificates of deposit (CDs) differ from regular savings accounts?
A. They have lower interest rates
B. They have higher minimum deposit requirements
C. They are not insured by the FDIC
D. They have a fixed maturity date
10. What is the main role of the Federal Reserve in the money market?
A. To set interest rates
B. To regulate the stock market
C. To provide loans to individuals
D. To facilitate the trading of money market instruments
11. How do federal funds transactions differ from other money market instruments?
A. They involve the lending of excess reserves between banks
B. They involve the lending of long-term funds between banks
C. They involve the lending of government securities between banks
D. They involve the lending of corporate bonds between banks
12. What is the main purpose of the federal funds market?
A. To facilitate the trading of government securities
B. To facilitate the lending and borrowing of excess bank reserves
C. To facilitate the trading of corporate bonds
D. To facilitate the lending and borrowing of personal loans
13. What is the key difference between the federal funds rate and the discount rate?
A. The federal funds rate is the rate at which banks lend to each other, while the discount rate is
the rate at which the Fed lends to banks
B. The federal funds rate is the rate at which the Fed lends to banks, while the discount rate is the
rate at which banks lend to each other
 Faculty of Foreign Languages – Department of Business English Banking & Finance
C. The federal funds rate is the rate for long-term loans, while the discount rate is the rate for
short-term loans
D. The federal funds rate is the rate for consumer loans, while the discount rate is the rate for
business loans
14. How do eurodollars differ from dollar-denominated deposits held in the United States?
A. Eurodollars are deposits held outside the United States, while dollar-denominated deposits are
held within the United States
B. Eurodollars are deposits held by non-U.S. citizens, while dollar-denominated deposits are held
by U.S. citizens
C. Eurodollars are deposits held by financial institutions, while dollar-denominated deposits are
held by individuals
D. Eurodollars are deposits held in U.S. dollars, while dollar-denominated deposits are held in
foreign currencies
15. How do the money market and the capital market differ in terms of the maturity of the financial
instruments traded?
A. The money market deals with short-term instruments, while the capital market deals with long-
term instruments
B. The money market deals with high-risk instruments, while the capital market deals with low-
risk instruments
C. The money market deals with government securities, while the capital market deals with
corporate securities
D. The money market deals with derivatives, while the capital market deals with stocks and bonds
16. What is the role of the yield curve in the money market?
A. It reflects the relationship between interest rates and maturity dates of money market
instruments
B. It reflects the risk-return tradeoff of money market investments
C. It reflects the supply and demand dynamics in the money market
D. It reflects the inflation expectations in the economy
17. How do changes in the federal funds rate affect other money market interest rates?
A. Changes in the federal funds rate have no effect on other money market rates
B. Changes in the federal funds rate have a direct and immediate effect on other money market
rates
C. Changes in the federal funds rate have an indirect and delayed effect on other money market
rates
D. Changes in the federal funds rate have a greater effect on long-term money market rates than
short-term rates
18. What is the significance of the 'inverted yield curve' in the money market?
A. It signals an upcoming economic recession
B. It signals an increase in inflation
C. It signals a shortage of liquidity in the financial system
D. It signals a decrease in the demand for money market instruments
19. How can money market mutual funds help investors manage their cash holdings?
A. They offer higher returns than traditional savings accounts
B. They provide greater liquidity than individual money market instruments
C. They allow investors to diversify their money market investments
D. All of the above
20. What is the role of the commercial paper market in the money market?
A. It facilitates short-term borrowing by large, highly-rated corporations
B. It facilitates long-term borrowing by small and medium-sized businesses
C. It facilitates the trading of government securities
 Faculty of Foreign Languages – Department of Business English Banking & Finance
D. It facilitates the lending and borrowing of personal loans

SECTION 4: True/False

1. Money markets deal in short-term debt instruments.

2. Treasury bills are a key instrument in the money market.
3. Commercial paper is an unsecured short-term promissory note issued by corporations.
4. Money market instruments are typically issued by individual investors.
5. Negotiable Certificates of deposit (CDs) are not part of the money market.
6. Money market instruments are generally high-risk investments.
7. Repurchase agreements (repos) are a form of short-term borrowing for dealers in government
securities.
8. Federal funds are short-term funds transferred between financial institutions, usually for a period of
one day.
9. The primary purpose of money markets is to provide liquidity.
10. Money markets are less liquid than capital markets.
11. Bankers’ acceptances are not used in international trade.
12. Treasury bills have coupon payments.
13. Eurodollars are U.S. dollar-denominated deposits held in foreign banks.
14. Money market instruments typically have high credit ratings.
15. Money market instruments help manage cash flow for businesses and governments.
16. Commercial paper is backed by collateral.
17. The money market is a good place to invest for long-term growth.
18. Certificates of deposit (CDs) issued by banks cannot be traded before maturity.
19. Bankers’ acceptances (Chấp phiếu ngân hàng) can be traded in the secondary market.
20. Money market instruments generally offer lower returns compared to long-term securities.
21. The primary issuers of commercial paper are large, creditworthy corporations.
22. Federal funds transactions are conducted with the general public.
23. Commercial paper can have maturities longer than one year.
24. The Eurodollar market is regulated by U.S. banking authorities.
25. A banker’s acceptance is an order to pay a specified amount of money to the bearer on a given
date.
26. The liquidity of money market instruments makes them suitable for emergency cash needs.
27. Money market instruments can be used to park funds temporarily while seeking longer-term
investment opportunities.
28. Treasury bills are issued at their face value.
29. Federal funds have fixed interest rates set by the government.
30. Eurodollar deposits are subject to the same U.S. reserve requirements as domestic deposits.
31. Money market instruments are considered safe due to their short maturities and high credit
quality.
32. Commercial paper securities are unsecured promissory notes, issued by corporations, that mature
in no more than 270 days.
33. Money market securities usually have an active secondary market.
34. Treasury bills pay interest periodically.
35. Repurchase agreements are a long-term funding solution for financial institutions.
36. The money market only operates within the United States.
37. In situations where the asymmetric information problem is not severe, the money markets have a
distinct cost advantage over banks in providing short-term funds.
38. Most investment funds and financial intermediaries also hold money market securities to meet
investment or deposit outflows.
 Faculty of Foreign Languages – Department of Business English Banking & Finance
39. The main purpose for fed funds is to provide banks with an immediate infusion of reserves should
they be short.
40. Whoever holds a negotiable certificate of deposit at maturity receives the principal and interest.
41. A banker’s acceptance is an order to pay a specified amount of money to the bearer on a given
date.
42. Investment advisers often hold some funds in the money market so that they will be able to act
quickly to take advanage of investment opportunities they identify.
43. The sellers of money market securities find that the money market provides a lowcost source of
temporary funds.
SECTION 5: Answer the questions
Task 1:
Question 1: Who issues commercial paper and for what purpose?
Question 2: How can a corporation use commercial paper as a source of short-term financing?
Question 3: Why do banks not eliminate the need for money markets?

Task 2:
Question 1: Is a Treasury bond issued 29 years ago with six months remaining before it matures a
money market instrument?
Question 2: Which of the money market securities is the most liquid and considered the most risk-
free in the U.S.? Why?
Question 3: Why are banker’s acceptances so popular for international transactions?

Task 3:
Question 1: Thang Long is one of the biggest names operating in the field of tobaccos. It has surplus
cash that it wants to invest in a safe, interest-bearing instrument for six months. It is considering
purchasing negotiable certificates of deposit (CDs). What are negotiable CDs, and what should the
corporation consider when investing in them?
Question 2: FLC corporation is facing a temporary cash flow shortage and decides to issue
commercial paper to raise funds. What factors should the corporation consider when issuing
commercial paper?
 Faculty of Foreign Languages – Department of Business English Banking & Finance

ANSWER KEY

SECTION 1: Match the terms with the explanations

Terms Explanations
1 Appreciation C Increase in a currency’s value
2 Asset-backed N Short-term commercial paper secured by a bundle of
commercial paper assets, usually mortgages
3 Bearer instrument T A security payable to the holder when presented. No proof
of ownership is required.
4 Book entry O System of tracking securities ownership where no certificate
is issued. Instead, the security issuer keeps records, usually
electronically, of who holds outstanding securities.
5 Capital mobility K A situation in which foreigners can easily purchase a
country’s assets and the country’s residents can easily
purchase foreign assets.
6 Competitive bidding E Competing in an auction against other potential buyers of
Treasury securities.
7 Depreciation M Decrease in a currency’s value.
8 Discounting P Reduction in the value of a security at purchase such that
when it matures at full value, the investor receives a fair
return.
9 Deep market R Markets where there are many participants and a great deal
of activity, thus ensuring that securities can be rapidly sold
at fair prices.
10 Liquid market G A market in which securities can be bought and sold quickly
and with low transaction costs.
11 LIBOR - London B The interest rate charged on short-term funds bought or sold
interbank offer rate between large international banks.
12 Exchange rate I The price of one currency in terms of another.
14 Forward transactions Q An exchange rate transaction that involves the exchange of
bank deposits denominated in different currencies at some
specified future date.
15 Foreign exchange S The market in which exchange rates are determined.
market
16 Law of one price D The principle that if two or more countries produce an
identical good, the price of this good should be the same no
matter which country produces it.
 Faculty of Foreign Languages – Department of Business English Banking & Finance
17 Tariffs L Taxes on imported goods.
18 Theory of purchasing H The theory that exchange rates between any two currencies
power parity will adjust to reflect changes in the price levels of the two
(PPP) countries.
19 Quotas F Restrictions on the quantity of foreign goods that can be
imported
20 Spot transactions A The immediate exchange of bank deposits denominated in
different currencies.

SECTION 2: Fill in the gaps

Task 1:

- (1) Money market securities are short-term instruments with an original (2) maturity of less than
one year. These securities include Treasury bills, (3) commercial paper, federal funds, repurchase
agreements, negotiable certificates of deposit, banker’s acceptances, and (4) Eurodollars.
- Money market securities are used to “warehouse” funds until (5) needed. The returns earned on
these investments are low due to their (6) low risk and (7) high liquidity.
- (8) Treasury bill returns are the lowest because they are virtually devoid of default risk. (9)
Banker’s acceptances and (10) negotiable certificates of deposit are next lowest because they are
backed by the creditworthiness of large money center banks.
- Foreign exchange rates are important because they affect the (11) price of domestically produced
goods sold abroad and the (12) cost of foreign goods bought domestically.
- The theory of purchasing power parity suggests that long-run changes in the exchange rate between
two countries’ (13) currencies are determined by changes in the relative (14) price levels in the two
countries. Other factors that affect exchange rates in the long run are tariffs and quotas, import
demand, export demand, and (15) productivity.
- (16) Forecasts of foreign exchange rates are very valuable to (17) managers of financial
institutions because these rates influence (18) decisions about which assets (19) denominated in
foreign currencies the institutions should hold and what kinds of trades should be made by their (20)
traders in the foreign exchange market.
Task 2:
1. Securities
2. Commercial
3. Certificates
4. Warehouse
5. Investments
6. Liquidity
7. Treasury
8. Short-term
9. bill
10. Default
11. Negotiable
12. Creditworthiness
13. Bearer
14. Discounted
 Faculty of Foreign Languages – Department of Business English Banking & Finance
15. Paper
16. Date
17. Trade
18. Finance
19. Purchase
20. Creditworthiness
Task 3:
1. banker’s acceptance
2. international trade
3. payment
4. creditworthiness
5. commercial paper
6. T-bills
7. discounted basis
8. interest rates
9. default
10. short-term instruments
11. securities
12. repurchase agreements
13. warehouse
14. returns
15. liquidity
16. participants
17. U.S. Treasury
18. commercial banks
19. bill
20. negotiable certificates

SECTION 3: Multiple Choice Questions

Task 1:

1) A financial market in which only short-term debt instruments are traded is called the ________
market.
A) bond
B) money
C) capital
D) stock
2) Because these securities are more liquid and generally have smaller price fluctuations, corporations
and banks use the ________ securities to earn interest on temporary surplus funds.
A) money market
B) capital market
C) bond market
D) stock market
3) Prices of money market instruments undergo the least price fluctuations because of
A) the short terms to maturity for the securities.
B) the heavy regulations in the industry.
 Faculty of Foreign Languages – Department of Business English Banking & Finance
C) the price ceiling imposed by government regulators.
D) the lack of competition in the market.
4) U.S. Treasury bills pay no interest but are sold at a ________. That is, you will pay a lower
purchase price than the amount you receive at maturity.
A) premium
B) collateral
C) default
D) discount
5) A debt instrument sold by a bank to its depositors that pays annual interest of a given amount and
at maturity pays back the original purchase price is called
A) commercial paper.
B) a negotiable certificate of deposit.
C) a municipal bond.
D) federal funds.
6) A short-term debt instrument issued by well-known corporations is called
A) commercial paper.
B) corporate bonds.
C) municipal bonds.
D) commercial mortgages.
7) Federal funds are
A) funds raised by the federal government in the bond market.
B) loans made by the Federal Reserve System to banks.
C) loans made by banks to the Federal Reserve System.
D) loans made by banks to each other.
8) The British Banker's Association average of interbank rates for dollar deposits in the London
market is called the
A) Libor rate.
B) federal funds rate.
C) prime rate.
D) Treasury Bill rate.
9) Which of the following instruments are traded in a money market?
A) State and local government bonds
B) U.S. Treasury bills
C) Corporate bonds
D) U.S. government agency securities
10) Which of the following instruments is not traded in a money market?
A) Residential mortgages
B) U.S. Treasury Bills
C) Negotiable bank certificates of deposit
D) Commercial paper

Task 2:
1. B 6. C 11. A 16. A
2. C 7. D 12. B 17. C
3. C 8. B 13. A 18. A
4. D 9. D 14. A 19. D
5. B 10. A 15. A 20. A

SECTION 4: True/False
 Faculty of Foreign Languages – Department of Business English Banking & Finance
1. Money markets deal in short-term debt instruments.
• Money markets involve instruments with maturities of one year or less, providing liquidity and
safety to investors.
2. Treasury bills are a key instrument in the money market.
• Treasury bills (T-bills) are short-term government securities with maturities of up to one year,
commonly traded in the money market.
3. Commercial paper is an unsecured short-term promissory note issued by corporations.
• Commercial paper is used by companies to meet short-term funding needs, with maturities usually
ranging from a few days to 270 days.
4. Money market instruments are typically issued by individual investors.
Correcting: Money market instruments are usually issued by governments, financial institutions, and
corporations.
5. Negotiable Certificates of deposit (CDs) are not part of the money market.
Correcting: Negotiable certificates of deposit (CDs) are widely traded in the money market.
• Negotiable certificates of deposit (CDs) are widely traded in the money market, typically issued by
commercial banks.
6. Money market instruments are generally high-risk investments.
Correcting: Money market instruments are generally low-risk investments.
• Money market instruments are low-risk investments due to their short maturities and high credit
quality.
7. Repurchase agreements (repos) are a form of short-term borrowing for dealers in government
securities.
• Repos involve selling securities with an agreement to repurchase them at a higher price on a
specified date, providing short-term liquidity.
P266
8. Federal funds are short-term funds transferred between financial institutions, usually for a period of
one day.
• The federal funds market allows banks to borrow and lend reserves to each other, typically
overnight.
9. The primary purpose of money markets is to provide liquidity.
• Money markets offer a platform for borrowing and lending short-term funds, ensuring liquidity for
participants.
10. Money markets are less liquid than capital markets.
Correcting: Money markets are more liquid than capital markets.
• Money markets are highly liquid due to the short-term nature of the instruments traded and the
active secondary market.
11. Bankers’ acceptances are not used in international trade.
Correcting: Bankers’ acceptances are widely used in international trade.
• Bankers’ acceptances are widely used in international trade to finance the import and export of
goods, providing a guarantee of payment.
12. Treasury bills have coupon payments.
Correcting: Treasury bills don’t involve coupon payments.
• Treasury bills are issued at a discount to their face value and do not pay periodic interest; the return
comes from the difference between the purchase price and the face value at maturity.
13. Eurodollars are U.S. dollar-denominated deposits held in foreign banks.
• Eurodollars facilitate international trade and finance by providing U.S. dollar funding outside the
United States.
14. Money market instruments typically have high credit ratings.
• Due to their short maturities and issuers’ creditworthiness, money market instruments generally
receive high credit ratings, reflecting low default risk.
 Faculty of Foreign Languages – Department of Business English Banking & Finance
15. Money market instruments help manage cash flow for businesses and governments.
P257
• Businesses and governments use money market instruments to manage short-term cash needs and
surpluses efficiently.
16. Commercial paper is backed by collateral.
Correcting: Commercial paper is unsecured, relying on the issuer’s creditworthiness rather than
collateral.
P268
17. The money market is a good place to invest for long-term growth.
Correcting: The money market is a good place to invest for short-term growth.
• The money market is intended for short-term financing and investment, not long-term growth, due
to the short maturities and lower returns.
18. Certificates of deposit (CDs) issued by banks cannot be traded before maturity.
Correcting: Certificates of deposit (CDs) issued by banks can be traded before maturity.
• Negotiable CDs can be traded in the secondary market, providing liquidity to investors before
maturity.
P267
19. Bankers’ acceptances (Chấp phiếu ngân hàng) can be traded in the secondary market.
• Once accepted by a bank, bankers’ acceptances become negotiable instruments that can be sold in
the secondary market.
20. Money market instruments generally offer lower returns compared to long-term securities.
• Due to their lower risk and shorter maturities, money market instruments typically provide lower
yields than long-term securities.
21. The primary issuers of commercial paper are large, creditworthy corporations.
• Corporations with high credit ratings issue commercial paper to meet short-term funding needs due
to lower costs compared to bank loans.
22. Federal funds transactions are conducted with the general public.
Correcting: Federal funds transactions are interbank loans, typically conducted between financial
institutions.
P264
23. Commercial paper can have maturities longer than one year.
Correcting: Commercial paper typically has maturities of up to 270 days, aligning with the short-term
focus of the money market.
24. The Eurodollar market is regulated by U.S. banking authorities.
Correcting: The Eurodollar market is not regulated by U.S. banking authorities.
• The Eurodollar market operates outside the jurisdiction of U.S. banking regulators, even though it
involves U.S. dollar-denominated deposits.
25. A banker’s acceptance is an order to pay a specified amount of money to the bearer
on a given date.
P271
26. The liquidity of money market instruments makes them suitable for emergency cash needs.
• The high liquidity and short maturities of money market instruments make them ideal for managing
short-term liquidity needs.
27. Money market instruments can be used to park funds temporarily while seeking longer-term
investment opportunities.
P257: Investment advisers often hold some funds in the money market so that they will
be able to act quickly to take advantage of investment opportunities they identify.
• Investors often use money market instruments to hold funds temporarily due to their safety and
liquidity.
28. Treasury bills are issued at their face value.
 Faculty of Foreign Languages – Department of Business English Banking & Finance
Correcting: Treasury bills are issued at a discount to their face value.
• Treasury bills are issued at a discount to their face value, with investors receiving the full face value
at maturity.
P261
29. Federal funds have fixed interest rates set by the government.
Correcting: Federal funds rates can fluctuate based on market conditions.
• Federal funds rates are determined by the supply and demand for reserves among banks and can
fluctuate based on market conditions.
P265
30. Eurodollar deposits are subject to the same U.S. reserve requirements as domestic deposits.
Correcting: Eurodollar deposits are not subject to U.S. reserve requirements.
• Eurodollar deposits are not subject to U.S. reserve requirements, making them an attractive funding
option for international transactions.
P271
31. Money market instruments are considered safe due to their short maturities and high credit
quality.
• The short duration and typically high credit quality of issuers make money market instruments a
low-risk investment.
32. Commercial paper securities are unsecured promissory notes, issued by corporations, that mature
in no more than 270 days
33. Money market securities usually have an active secondary market.
P255
34. Treasury bills pay interest periodically.
Correcting: Treasury bills do not pay periodic interest.
• Treasury bills do not pay periodic interest; they are issued at a discount and mature at face value,
with the interest being the difference between the purchase price and the maturity value.
35. Repurchase agreements are a long-term funding solution for financial institutions.
Correcting: Repurchase agreements are a short-term funding solution for financial institutions.
• Repurchase agreements are short-term funding instruments, often used overnight or for a few days
to manage liquidity.
36. The money market only operates within the United States.
Correcting: The money market is a global market.
• The money market is a global market, with instruments like Eurodollars and international
commercial paper traded worldwide.
37. In situations where the asymmetric information problem is not severe, the money markets have a
distinct cost advantage over banks in providing short-term funds.
P255
38. Most investment funds and financial intermediaries also hold money market securities to meet
investment or deposit outflows.
P257
39. The main purpose for fed funds is to provide banks with an immediate infusion of reserves should
they be short.
P264
40. Whoever holds a negotiable certificate of deposit at maturity receives the principal and interest.
P267
41. A banker’s acceptance is an order to pay a specified amount of money to the bearer on a given
date.
P271
42. Investment advisers often hold some funds in the money market so that they will
be able to act quickly to take advanage of investment opportunities they identify.
 Faculty of Foreign Languages – Department of Business English Banking & Finance
P257
43. The sellers of money market securities find that the money market provides a lowcost source of
temporary funds.
P257
TTTFFFTTTFFFTTTFFFTTTFFFTTTFFFTTTFFFTTTTTTT

SECTION 5: Answer the questions

Task 1:
Question 1: Who issues commercial paper and for what purpose?
Answer:
Large, creditworthy corporations issue commercial paper to raise short-term funds, typically to cover
operating expenses, manage cash flow, or finance inventory and accounts receivable. It is an
unsecured, short-term debt instrument that provides a cost-effective alternative to bank loans for
meeting immediate financing needs.

Question 2: How can a corporation use commercial paper as a source of short-term financing?
Answer:
A corporation can use commercial paper as a source of short-term financing by:
• Issuing Commercial Paper: Selling unsecured, short-term promissory notes directly to investors or
through dealers. The maturity of commercial paper typically ranges from a few days to 270 days.
• Cost Efficiency: Taking advantage of lower interest rates compared to traditional bank loans due to
the short-term nature and the typically higher credit rating of commercial paper issuers.
• Liquidity Management: Using the proceeds from commercial paper to meet working capital needs,
finance inventory, or cover short-term obligations. This provides flexibility and helps manage
liquidity efficiently.
• Revolving Programs: Establishing a commercial paper program to continuously roll over maturing
notes by issuing new ones, ensuring ongoing access to short-term funding.

Question 3: Why do banks not eliminate the need for money markets?
Answer: Banks do not eliminate the need for money markets because money markets offer unique
advantages that banks cannot fully provide. Money markets facilitate efficient short-term borrowing
and lending, offering instruments like Treasury bills, commercial paper, and repurchase agreements
specifically designed for managing short-term liquidity needs. These instruments often provide higher
yields and greater flexibility compared to bank deposits. Additionally, money markets help diversify
funding sources for corporations and financial institutions, reducing reliance on bank credit and
spreading credit risk. Banks face regulatory constraints, such as reserve requirements, that limit their
ability to engage in short-term lending as flexibly as money markets. Moreover, money markets offer
highly liquid and low-risk investment options that cater to specific investor preferences, providing
efficient and specialized financial solutions that banks alone cannot match.

Task 2:
Question 1: Is a Treasury bond issued 29 years ago with six months remaining before it matures a
money market instrument?
Answer: No, a Treasury bond issued 29 years ago with six months remaining before it matures is not
considered a money market instrument. Money market instruments are typically short-term debt
securities with maturities of one year or less. Despite having only six months left until maturity, the
original term of the Treasury bond makes it a capital market instrument.

Question 2: Which of the money market securities is the most liquid and considered the most risk-
free in the U.S.? Why?
 Faculty of Foreign Languages – Department of Business English Banking & Finance
Answer: Treasury bills (T-bills) are the most liquid and considered the most risk-free money market
securities. Issued by the U.S. Department of the Treasury, T-bills are backed by the full faith and
credit of the U.S. government, virtually eliminating default risk. Their short maturities, ranging from
a few days to one year, minimize exposure to interest rate fluctuations, making them a safe
investment. The secondary market for T-bills is highly active, ensuring that investors can quickly buy
or sell them with minimal price impact, contributing to their high liquidity. Additionally, T-bills are
widely recognized and accepted by investors, financial institutions, and central banks, further
enhancing their liquidity and safety. These attributes make T-bills the preferred choice for those
seeking a combination of maximum liquidity and minimal risk in their investments.

Question 3: Why are banker’s acceptances so popular for international transactions?

Answer: Banker’s acceptances are popular for international transactions due to their security,
liquidity, and flexibility. These instruments are time drafts guaranteed by a bank, providing assurance
to exporters that they will receive payment, thereby reducing the risk of default by importers. They
can also be sold in the secondary market before maturity, offering liquidity to the holder.
Additionally, banker’s acceptances are typically short-term instruments, ranging from 30 to 180 days,
making them well-suited for the specific cash flow needs of trade transactions. Their global
recognition and acceptance standardize them across different countries and markets, further
enhancing their attractiveness. By shifting the credit risk from the importer to the issuing bank,
banker’s acceptances mitigate the risk for exporters, especially when dealing with unfamiliar or high-
risk markets.

Task 3:
Question 1: Thang Long is one of the biggest names operating in the field of tobaccos. It has surplus
cash that it wants to invest in a safe, interest-bearing instrument for six months. It is considering
purchasing negotiable certificates of deposit (CDs). What are negotiable CDs, and what should the
corporation consider when investing in them?
Answer: Negotiable certificates of deposit (CDs) are time deposits issued by banks with a fixed
maturity date and specified interest rate. They are “negotiable” because they can be sold in the
secondary market before maturity. Here are some considerations for Thang Long corporation:
- Interest Rates: Thang Long corporation should compare the interest rates offered on negotiable CDs
with other short-term investment options.
- Credit Risk: While negotiable CDs are generally considered safe, there is still a small risk associated
with the issuing bank’s creditworthiness. Thang Long corporation should assess the financial stability
of the bank issuing the CD.
- Liquidity: The ability to sell negotiable CDs in the secondary market provides liquidity, but Thang
Long corporation should be aware that the price received may be less than the face value if sold
before maturity, depending on interest rate changes.

Question 2: FLC corporation is facing a temporary cash flow shortage and decides to issue
commercial paper to raise funds. What factors should the corporation consider when issuing
commercial paper?
Answer: FLC corporation should consider the following factors when issuing commercial paper:
1. Credit Rating: A higher credit rating will allow the corporation to issue commercial paper at lower
interest rates. Investors are more likely to purchase commercial paper from companies with strong
credit ratings.
2. Interest Rates: The interest rate environment will affect the cost of issuing commercial paper. If
interest rates are high, the cost of borrowing through commercial paper will also be high.
 Faculty of Foreign Languages – Department of Business English Banking & Finance
3. Maturity: The corporation needs to decide on the maturity of the commercial paper, which
typically ranges from a few days to 270 days. Shorter maturities may have lower interest costs but
require more frequent refinancing.
4. Market Conditions: The demand for commercial paper in the money markets can fluctuate,
affecting the corporation’s ability to raise the desired amount of funds.