Chapter 8

3. Explain how banks, companies and inventors use financial instruments in the money market.

When the demand for loans and mortgages exceeds the deposits from savings accounts, banks employ financial
instruments in the money market to issue certificates of deposit with a fixed interest date and a duration of up to 5
years. Financial instruments are used by businesses to raise capital to meet immediate requirements while they
wait for a sizable payoff or to invest excess cash in debt-based financial instruments to produce prospective
revenue while keeping its value. Finally, investors employ financial instruments as a safe bet for their funds and
invest in them while making a profit. (Page 112, Par, 5)

4. Give and describe the types of money-market instruments.

Commercial paper – it is a short-term debt obligation of a private-sector firm and government-sponsored

corporation, however, only companies with good credit rating can issue such.

Banker’s Acceptances – are basically a promissory note from a non-financial firm in exchange for a loan, and
banks can resell it at the market at a discount.

Treasury Bills – are securities issued by national governments with a year or less of maturity.

Government Agency Notes – notes issued by national government agencies and government-sponsored
corporations to borrow in the money markets of different countries.

Local Government Notes – notes issued by local governments to borrow in banks and money markets.

Interbank Loans – loans issued from one bank to another to possibly lend to the borrowing bank’s own customer.

Time Deposits – bank deposits that bear interest but cannot be withdrawn before a specified date of maturity
without penalty.

Repos – is an agreement to sell securities to a third party or invertors and repurchase them at a specified time a
higher price. (Page 114-117, Par. 2-6; 1:6; 1;5; 1-2)

5. Explain what capital market is

A capital market is a financial marketplace where long-term debt and equity instruments, such bonds, and various
kinds of stocks, are traded. (Page 117, Par. 3)

14. Distinguish between ordinary or common stock and preferred stock.

Preferred stock has preference towards dividends and distribution of assets in liquidation over common stock.
(Page 132, Par.3) while the common stock has voting rights over preference stock and are also known as residual
owners of the corporation because all the residue will be distributed amongst them. (Page 129, Par. 6)

15. Compare the features of bond, ordinary equity shares and preferred share in terms of

a. Ownership & control of the firm

b. Obligation to provide return
c. Claims to assets in the event of bankruptcy
d. Cost of distributor
e. Risk-return trade off

FLORES, KRISTINE HANNA U.

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f. Tax obligation of the corporation
g. Tax obligation of the recipients of income

Bonds Ordinary Stock Preferred Stock

a. No ownership and no
control
b. Return is limited only to
the interest
c. Has claims to the assets
d. Low cost
e. Low-moderate return
f. Deductible of Tax
g. Interest of government
bond is exempted from
tax
(Page 136-137, Table 1)
Has voting-based ownership
and control
The return is restricted to the
remaining funds after all claims
have been compensated,
whether through dividends or
liquidated assets.
Does not have any claims if
there is no residue left
Medium cost
High moderate Return
Not deductible
Tax exemptions apply to
dividends given to other
corporations.
Has minimal power due to their
lack of voting rights and
ownership.
Dividend distribution is favored
for them above common
shareholders.
Has claims to the remaining
assets after creditors are paid
High cost
Moderate Return But certain (if
the corporation is profitable
enough)
Not deductible
Tax exemption applies to
dividends given to another
corporation.

Chapter 9

2. Explain how exports and imports tend to influence the value of currency.

Since the value of currency is determined by supply and demand, a country’s currency will like have a higher
market exchange rate if its dependent on imports and vice versa if its dependent on exports. (Page 145. Par 1)

3. Differentiate between the spot exchange and forward exchange rate.

Spot exchange rate is the rate at which one currency will be exchange for another immediately while in the
forward exchange rate are the rate which currency will be exchange for another currency in the future or it deals
with a future time. (Page 149-150, Par. 5-6) (Page 153, Par. 1-2)

4. What is meant by translation exposure in terms of foreign exchange risk?

Translation exposure is a type of foreign exchange risk that arises from the potential impact of currency
fluctuations on a company's financial statements when those financial statements are converted into another
currency for financial reporting purposes. (Page 155, Par. 1-2)

6. What is LIBOR? How does it compare to U.S prime rate?

LIBOR (London Interbank Offered Rate) is a benchmark interest rate that indicates the average rate at which
major banks can borrow money from each other. It is used globally to set interest rates on a wide range of
financial instruments. In comparison, the U.S. prime rate is the interest rate that banks offer to their most
creditworthy customers. While LIBOR is used internationally, the U.S. prime rate is only applicable within the
United States.

FLORES, KRISTINE HANNA U.

CBEA-01-401A
MGT7B