Money and Banking

Money and Banking

  • Submitted By: umdhe
  • Date Submitted: 04/09/2015 1:45 PM
  • Category: Business
  • Words: 931
  • Page: 4

1) Financial Instruments
Using your own words, in no more than 10 short clear sentences; describe each of the following financial instruments, including the kind of claim (debt or equity), maturity (money market or capital market), risk, and liquidity characteristics, and any other distinguishing characteristics. Identify a type of financial institution or other participant in the financial market (individuals, government, business) that are most likely to borrow using these instruments (hold as liabilities on their balance sheet), and a type of institution or other participant that is most likely to lend using these instruments (i.e., buy and hold these instruments as assets on their balance sheet.) Use chapter 2 and resources in the internet, but more than Wikipedia.

(a) Negotiable Certificates of Deposit
Negotiable CDs: Money Market Instrument. Certificate of deposits (CDs) pay annual interest of a given amount and the principal at maturity. Negotiable CDs are CDs that are sold in the secondary markets. Liquid. Short maturity (less than a year in most cases). Low risk. Negotiable CDs are issued by major commercial banks. They are an important source of funds for commercial banks from corporations, money market mutual funds, charitable institutions, government agencies. Their denomination is
$100,000 or more

(b) Municipal Bonds
Municipal Bonds: Capital Market Instrument. Municipal bonds are long-term debt instruments that state and local governments issue to finance their expenditure. There is a secondary market, but its size is smaller than that of the US government securities market. Municipal bonds are riskier and less liquid than US government securities but not as risky as equity and more liquid than loans. Interest payments of municipal bonds are exempt from federal income tax and generally from state tax of the issuing state. Main buyers (hold as assets) of these bonds are: commercial banks, wealthy individuals in high income tax...

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