TUTORIAL 1

AN OVERVIEW OF THE FINANCIAL SYSTEM

Part 1. Questions for review

1. What is the main function of financial markets?

+ Performs (thuc hien) the essential function of channeling(chuyen) funds from economic
players that have saved surplus funds to those that have a shortage of funds
+ Direct finance: borrowers borrow funds directly from lenders in financial markets by
selling them securities (ck)
+ Promotes economic efficiency by producing an efficient allocation of capital, which
increases production
+ Directly improve the well-being of consumers by allowing them to time purchases better

The basic function of financial markets is to channel funds from savers who have an
excess of funds to spenders who have a shortage of funds. Financial markets can do this
either through direct finance, in which borrowers borrow funds directly from lenders by
selling them securities, or through indirect finance, which involves a financial
intermediary that stands between the lender-savers and the borrower-spenders and helps
transfer funds from one to the other. This channeling of funds improves the economic
welfare of everyone in society. Because they allow funds to move from people
who have no productive investment opportunities to those who have such opportunities,
financial markets contribute to economic efficiency. In addition, channeling of funds
directly benefits consumers by allowing them to make purchases when they need them
most.
2. Classify financial markets
Financial markets can be classified as debt and equity markets, primary and secondary
markets, exchanges and over-the-counter markets, and money and capital markets.
3. List and distinguish the differences among financial instruments
The principal money market instruments (debt instruments with maturities of less than
one year) are U.S. Treasury bills, negotiable bank certificates of deposit, commercial
paper, repurchase agreements, and federal funds. The principal capital market
instruments (debt and equity instruments with maturities greater than one
year) are stocks, mortgages, corporate bonds, U.S. government securities, U.S.
government agency securities, state and local government bonds, and consumer and
bank commercial loans.
4. Identify the differences among types of financial intermediaries (in terms of primary
liabilities and assets) using Table 3, page 40

Part 1. Multiple-choice questions

1. Economists group commercial banks, saving and loans associations, credit unions, mutual
funds, mutual savings banks, insurance companies, pension funds and finance companies under
the heading financial intermediaries. Financial intermediaries:
A. produce nothing of value and therefore a drain on society’s resources
B. provide a channel for linking between those who want to save and those who want
to spend
C. can hurt the performance of the economy
 D. have been a source of slow and resistant financial innovation

act as middlemen, borrowing funds from those who have saved and lending these funds to
others.
play an important role in determining the quantity of money in the economy.
help promote a more efficient and dynamic economy.
2. What is the basic activity of banks?
A. To sell shares of corporations to the general public
B. To facilitate the transfer of money from savers to borrowers
C. To represent the interest of insurance companies
D. To ensure everyone who wants a loan gets one
E. To equate future consumption with current consumption

3. Banks, savings and loans associations, mutual savings banks and credit unions
A. are no longer important players in financial intermediation
B. have been adept at innovating in response to changes in regulatory
environment(mt phap ly)
C. produce nothing of value and therefore a drain on society’s resources
D. since deregulation now provide services only to small depositors

4. Why are financial markets important to the health of the economy?

A. They channel funds from investors to savers
B. They identify and shut down inefficient firms
C. They eliminate the needs for financial intermediaries
D. They allow consumers to time their purchase better

5. These financial institutions are very small cooperative lending institutions organized around a
particular group: union members, employees of a firm and so forth. They acquire funds from
deposits called shares and primarily make consumer loans. They are
A. Credit unions
B. Commercial banks
C. Savings and loan associations
D. Mutual fund

6. These financial intermediaries raise funds primarily by issuing checkable deposits, savings
deposits and time deposits. They then use these funds to make commercial, consumer and
mortgage loans, and to buy US government securities and municipal bonds. They are
A. Credit union
B. Commercial bank
C. Savings and loan
D. Mutual fund

7. These instruments are typically overnight loans between banks of their deposits at Federal
Reserve.
A. Commercial paper
B. Treasury bills
C. Repurchase agreement
D. Federal Funds
E. Banker’s acceptances
8. Short-term debt instruments issued by large banks and well-known corporations
A. Commercial paper
B. Treasury billsGOVER
C. Repurchase agreement
D. Federal Funds
E. Banker’s acceptances

9. These instruments are effectively short-term loans (usually with maturity of less than two
weeks) for which Treasury bills serve as collateral, which the lender receives if the borrower
does not pay back the loan.
A. Commercial paper
B. Treasury bills
C. Repurchase agreement
D. Federal Funds
E. Banker’s acceptances

Các công cụ này có hiệu quả là các khoản cho vay ngắn hạn (thường có thời gian đáo hạn
dưới hai tuần) mà tín phiếu Kho bạc dùng làm tài sản thế chấp mà người cho vay sẽ nhận
được nếu người đi vay không trả lại khoản vay.
C. Thỏa thuận mua lại

10. A share of Microsoft common stock is:

A. a liability to the shareholder because it must be sold to realize a capital gain
B. an asset of Microsoft because it allows Microsoft to invest in capital equipment or other
companies
C. identical to a bond issued by Microsoft
D. an asset for its owner and a liability for Microsoft.

11. A share of common stock is a claim on a corporationʹs
A) debt.
B) liabilities.
C) expenses.
D) earnings and assets.

12. The price paid for the rental of borrowed funds (usually expressed as a percentage of the ren
tal of $100 per year) is commonly referred to as the
A) inflation rate.
B) exchange rate.
C) interest rate.
D) aggregate price level.

An interest rate is the cost of borrowing or the price paid for the rental of funds (usually
expressed as a percentage of the rental of $100 per year). There are many interest rates in the
economy—mortgage interest rates, car loan rates, and interest rates on many different types of
bonds.

13. ___________ occurs when the potential borrowers who are the most likely to produce an
undesirable (adverse) outcome – the bad credit risks – are the ones who most actively seek out a
loan and are thus most likely to be selected.
A. Adverse selection
 B. Asymmetric information
C. Moral hazard
D. Credit ratings
occurs when the potential borrowers who are the most likely to produce an undesirable
(adverse) outcome – the bad credit risks – are the ones who most actively seek out a loan and
are thus most likely to be selected.
14. A situation where one party often does not know enough about the other party to make
accurate decisions
A. Adverse selection
B. Asymmetric information( tt k tuong xung)
C. Moral hazard
D. Credit ratings

15. A situation where the borrower might engage in activities that are undesirable from the
lender’s point of view because they make it less likely that the loan will be paid back.
A. Adverse selection
B. Asymmetric information
C. Moral hazard
D. Credit ratings

16. Equity holders are a corporationʹs ________.  That means the corporation must pay

all of its debt holders before it pays its equity holders.
A) debtors
B) brokers
C) residual claimants
D) underwriters

17. A corporation acquires new funds only when its securities are sold in the
A) secondary market by an investment bank.
B) primary market by an investment bank.
C) secondary market by a stock exchange broker.
D) secondary market by a commercial bank.

18. Which of the following statements about financial markets and securities is true?
A) Many common stocks are traded over-the-counter, although the largest corporations usually
have their shares traded at organized stock exchanges such as such as the New York Stock
Exchange.
B)As a corporation gets a share of the brokerʹs commission, a corporation acquires new
funds whenever its securities are sold.
C) Capital market securities are usually more widely traded than shorter-term securities and
so tend to be more liquid.
D) Because of their short term to maturity, the prices of money market instruments tend to
fluctuate widely.

Part 2: Questions and applications

Chapter 2: Questions 3, 4, 6, 10

Question 3: Give at least three examples of a situation in which financial markets allow
consumers to better time their purchases.
Question 4: If you suspect that a company will go bankrupt next year, which would you rather
hold, bonds issued by the company or equities issued by the company? Why?

Question 6: Describe who issues each of the following money market instruments:
a. Treasury bills
b. Certificates of deposit
c. Commercial paper
d. Repurchase agreement
e. Fed funds

The money market is the financial market that provides short-term funds. Thus, the money
market instruments are those instruments that are used to raise funds for the short term. These
funds generally have a maturity of less than a year.

a. Treasury bills - These are the most actively traded instrument and thus is the most liquid
instrument. It involves very ow default and is a safe instrument. It is issued by the government.

b. Certificate of deposits - These are sold to depositors by commercial banks. An annual interest
rate is provided annually and the principal amount is returned on maturity.

c. Commercial paper - These are issued by large corporations and banks.

d. Repurchase agreements - Repos or repurchase agreements are short-term instruments issued

by banks.

e. Fed funds - These are loans that are provided by banks to other banks overnight.

Question 10: How does risk sharing benefit both financial intermediaries and private investors?

Part 3: Additional questions:

1. You have just purchased a 10-year, $1,000 par value bond. The coupon rate on this bond is
8 percent annually, with interest being paid each 6 months. If you expect to earn a 10
percent yield on this bond, how much did you pay for it?
2. Callaghan Motors ‘bonds have 10 years remaining to maturity. Interest is paid annually,
they have a $1,000 par value, the coupon interest rate is 8%, and the yield to maturity is 9%.
What is the bond’s current market price?
3. 3. A bond has a $1,000 par value, 10 years to maturity, and a 7% annual coupon and sells
for $985.
a. What is its yield to maturity (YTM)?
b. Assume that the yield to maturity remains constant for the next 3 years. What will the
price be 3 years from today?