BM2004

NAME: DATE: SCORE:

I. PURPOSE OF MONEY MARKET (5 points: 1 item x 5 points)

In an unregulated world, the money markets should not be needed because of the banking industry. The
latter exists primarily to provide short-term loans and to accept short-term deposits. They have an efficient
advantage in gathering information, which should eliminate the need for the money markets. Also,
because of their continuing relationships with customers, banks offer loans more cheaply than diversified
markets. Furthermore, deposits placed in banks and thrifts are more liquid and safe compare with the
short-term securities offered for sale in the money markets. Given the advantages that banks have, why
do money markets exist at all? Discuss your answer in no more than five (5) sentences.

Discussion:
Banks cannot eliminate the need for money markets because:

Money markets deal with big quantities and large denomination securities, bringing economies of
scale to the table.

Because money markets have a lower cost structure, they may provide greater interest rates.

Banks are regulated, and they must adhere to reserve standards. As a result, the cost of financing for
banks is greater than for money markets.

Money markets offer commercial banks with short-term liquidity. As a result, they contribute to a
country's economic stability and prosperity.

II. PARTICIPANTS IN THE MONEY MARKET (15 points: 3 items x 5 points)

A money market is an ideal place for a firm or financial institution to “warehouse” surplus funds until they
are needed. Given below are those firms or financial institution otherwise known as participants. Now,
discuss how the money market meets its liquidity requirements and cite an example demonstrating the
concept.

1. Investment Companies

Discussion:
 Investment companies' liquidity needs are managed by the money market through the
availability of funds through various investors who are consistently accumulating in their
money in the market and the investment companies are investing their money into the
markets at different rates, so these investor companies are making liquidity continuously
through general public investment and it can be seen through various commercial papers of
the investment companies are subscribing.

2. Commercial Banks

Discussion:
 Commercial banks are acquiring the desired liquidity from multiple market investors who
are continuously subscribing to various types of repurchase agreements and bank
guarantees, and it can also produce funds from the market through the issuance of
commercial papers and certificates of deposit, allowing it to gain the desired liquidity in a
short period of time.
 3. Bureau of Treasury

Discussion:

 Bureau of treasuries can also issue treasury bills and repurchase agreements in the
market, which can help these treasuries produce funds from the market for a longer
period of time, and since bureau of treasury has a huge number of risk free securities, it
will be better for investors to subscribe to risk free securities.

Rubric for grading:

CRITERIA PERFORMANCE INDICATORS POINTS
Content Provided the correct concept with pieces of evidence and 3
supporting details.
Organization Expressed the points in clear and logical arrangement of ideas in 2
of Ideas the paragraph.
Total 5

04 Activity 1 *Property of STI

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