Financial: Bond and Money Market

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Chapter 9
Question #1
What characteristics define the money market?
-Money market securities are short-term instruments with an original maturity of less than one year. These securities include Treasury Bills, commercial paper, federal funds, repurchase agreements, negotiable certificates of deposit, banker’s acceptances, and Eurodollars. Money market securities are used to “warehouse” funds until needed. The returns earned on these investments are low due to their low risk and high liquidity.

Question #7
Why do businesses use the money market?
-Money markets are useful from a business standpoint because they provide banks with readily disposable income to loan to businesses that need an inflow of cash over a short amount of time. Businesses borrow from the banks and then have to make interest payments on their loans. The banks that profit on these interest payments and the businesses use the loans to generate more income for themselves. Since money market accounts are frequently used in mutual funds, you can easily enter into buying stock shares or a bond fund.

Question #10
Which of the money market securities is the most liquid and considered the most risk free? Why?
-The U.S. Treasury Bill or T-bills are sold by the government to raise money. They are the most marketable securities in the money market, which denotes very low transaction cost. T-bills are issued with maturities of 28, 91, 182, or 365 days (1, 3, 6, or 12 months) and are sold in denominations from $1,000 to $5 million, which makes them easy for the small investor to buy. T-bills are sold at a discount from their face values. The income earned from T-bills is exempt from all state and local taxes. Since T-bills are backed by the U.S. government, they are considered completely safe and they are often quoted to show the risk-free rate.

Chapter 10
Question #3
Distinguish between the primary market and secondary market for securities.
-A primary market is the main market to...
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