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 commcerciacl 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 instrument because it has almost zero defaulft risk, they are
issued by the Treasury and 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?
- Nondepsitory institution
- Characteristic: owned by depositors (mutualy) , concentrate on residentual
mortgage loans and smalle compared to commercial banks
6. Explain how Repo works? In nature la 1 tool ntn?
Repo agreegemnt: 1 party sell securities with an agreement to repurchase at the
specified date and price
Reverse repo agree refers to a party purchase a securities with agreement to sell them
back at specified date and price
So in nature, repo is about borrowing and lending
7. Discuss how financial intermediation could prevent consequences of information
asymetry?

Financial intermediation is the best solution for asymetric information. It acts as a

“supermarket” that cut off between actual producer and customer. To prevent the
asymetric information, they have expert and complete system to exploit the information
then they will collect all the information about SSU and DSU then will help allocate fund
efficiently. Without financial intermadiation, maybe 1 side of transaction can get more
benefit than others.

8. Explain the differences btw primary and secondary market

Primary market Secondary market

- Facilitate the newly issued securities - Facilitate the trade of existing
- Financing the issuing firms securities
- DSU are issuers - Trade between investors
- No financing to issuers

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?

Finace companies is belongs to nondepositary institution.

They obtain fund from issuing securities: bonds, stock then lend to small business or
individuals (FE credit) >< banks

11. How do you identify T-bill’s annualized yeild and discount , explain economic
meaning of those?
T-bill annualized yield = (SP-PP)/PP*365/n
T-bill discount = (par-P)/par*360/n
365 is just use to compared with different securities

12. Why Fed Funds rate is being watched closely?

Fed fund rate are interbank offer rate in nature and it effect all units and activities.

Beacuse Fed hold the sererve of the banks and if banks themselves have any liquidity
problen can borrow with fed fund rate. It is very vital for all units to watch closely the fed
fund rate because if there any change in fed fund rate will affect all the economy. If fed
fund rate increase due to the need of liquidity of the banks=> borrowing rate of customer
will aslo higher.

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 effect 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 reflect all avaiable
information.

There are 3 form of efficient market:

- Weak-form efficient market: the price reflect all the 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 function: underwrite the newly issued securities
Dealer function: create the market for parties by adjusting the inventory
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 occur 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?

Commercial paper is very illiquid because high denomination (>100k) and no active
secondary market. If the lender need money, they turn into the bank to return CP before
maturity, can cause the liquidity problem to the banks. In theory the maruity is from 20
days to 270days but the discount policy of central bank is limminted only to CP of less
than 91days, meaning that if the bank have liquidity problem with the withdraw of lender
and that CP has more than 91 days left to maturity=> central bank dont buy => 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
- Nonprofit org.
- Very tiny compared to the banks
- Includes S&Ls, saving banks
- Mostly owned by depositor (mutual)
- 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
- Claim on ownership of company
- Gain devidend and capital gain
29. What types of institution do pension fund belong to? How does it raise fund and
use it?
- Non
- This is usually offed buy corp or gov agencies. They obtain fund prediodcally and
manage the fun until they are withdrawn from the retirement account, it use to
invest in stock and bond issued by cor or gov

30. Diffences btw centralized market & OTC

Centralized OTC
There is a visible marketplace the the There are 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. CP is low liquid because of high denomination : minimum 100k

33. Explain the most feature of mortgage?

- 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 individuals investors have less opp. to join money market securities? (tttt)
Bc its uaually large denomination of minium 1k-100k, so not many indi can afford
that
36. When commercial paper is discounted, its price will rise. T/F? Explain?

F. the CP is discounted when the holder want 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