John Lei D.

Cabilan BSBA FM 2

MIDTERM EXAM (ESSAY)

1. Differentiate money market from capital market and money market instruments from capital

market instruments.

A market for securities that have a maturity of less than one year is a money market. The

securities in the money market are short term in nature, highly liquid. A few of the money

market instruments are treasury bills, repos, certificates of deposits, and banker’s acceptances

while A market for long term investments is the capital market. In other words, when the players

in the industry need funds for a long term horizon, they approach the capital market. The capital

market instruments have a maturity of more than one year. The players in the capital market

industry deal in capital market instruments like shares, bonds, ETFs, debentures, derivatives like

futures, options, and swaps.

The capital market mobilizes savings to investments. They also assist in funding long term

projects of the companies. These markets use competitive price mechanisms and hence help

inefficient capital allocation. Moreover, they also enable the faster valuation of financial

securities listed on the stock exchange.

2. Discuss the different types of stocks.

COMMON STOCKS

Common stock is, well, common. When you own common stocks, you own a share in the

company’s profits as well as the right to vote. When investor talk about stocks they are most
likely referring to this type of stocks. The majority of stock issued is in this form on stock

exchange. Common stock has given higher returns than most other investments. In addition to

higher returns, common stock also carries risks.

PREFERRED STOCK

Preferred stocks promise investors that they will pay a set quantity each year as dividends.

Dividends are paid to preferred shareholders before common shareholders, including in the case

of bankruptcy or liquidation. Preferred stock represents ownership in a company but usually

doesn’t come with voting rights. As we understand preferred stock as falling somewhere in

between bonds and common stock.

3. Differentiate T-bills, T-bonds, and T-notes.

Treasury bonds, called T-bonds for short, are often referred to as long bonds because they take

the longest to mature of the government-issued securities. Treasury bonds are offered to

investors in terms of 20 and 30 years to maturity. Treasury notes are similar to Treasury bonds

but have shorter terms, including two, three, five, seven, and ten years. Like T-bonds, Treasury

notes are backed by the U.S. government. Treasury bills, or T-bills, have the shortest terms of all

and are issued with maturity dates of four, eight, 13, 26, and 52 weeks.

4. What are mortgaged-backed securities? Are they safe? Why?

A mortgage-backed security (MBS) is an investment similar to a bond that is made up of a

bundle of home loans bought from the banks that issued them. Investors in MBS receive periodic
payments similar to bond coupon payments. Essentially, the mortgage-backed security turns the

bank into an intermediary between the homebuyer and the investment industry. A bank can grant

mortgages to its customers and then sell them at a discount for inclusion in an MBS. The bank

records the sale as a plus on its balance sheet and loses nothing if the homebuyer defaults

sometime down the road.

This process works for all concerned as everyone does what they're supposed to do. That is, the

bank keeps to reasonable standards for granting mortgages; the homeowner keeps paying on

time, and the credit rating agencies that review MBS perform due diligence.

5. Discuss the different types of dividends?

 The cash dividend refers to the distribution of the cash to the shareholders a return on

their investment. The shareholders can also opt to re-invest the dividend and increase the

size of their investment. The cash dividend is paid regularly; it may be Stock dividend

 The stock dividend is when a company issues additional stock to the shareholders instead

of the cash. The company may not have cash resources to pay the dividend, or they may

have some other preference for cash to be invested. Hence, a stock dividend is paid when

a company wants to give a return/reward to its shareholders but does not have the funds

to do so.

 The property dividend refers to the distribution of the property to the shareholders a

return on their investment. For property dividends, the company has to assess market

value and record the dividend on the fair value.

 The liquidating dividend is when the company is winded up, and the company’s assets

are distributed among shareholders by paying in the form of a dividend. It may be a

partial or full liquidation which means the company may decide to sell only partial assets

of the business or all of the assets.