TUTORIAL 2

Topic 1 – An Overview of Financial Markets and Institutions

Multiple Choice Questions (Highlight your answer in YELLOW color).

1. Every financial market has the following characteristic:

A) It allows loans to be made.
B) It channels funds from lenders-savers to borrowers-spenders.
C) It allows common stock to be traded.
D) It determines the level of interest rates.

2. Which of the following can be described as a direct finance?

A) A corporation buys commercial paper issued by another corporation.
B) People buy shares in a mutual fund.
C) An insurance company buys shares of common stock in the over-the-counter
markets.
D) A corporation takes out a loan from a bank.

3. Which of the following is not being categorized under primary market?

A) Nestle stock in Bursa Malaysia
B) Cagamas bond issuance
C) Optimax Holdings Berhad IPO (Initial Public Offering)
D) Certificate of deposit

4. Discuss the role of financial institutions in socio economic development?

- Mobilization of savings
- SSU (Surplus spending units) to DSUs (Deficit spending units)
Outcome- capital formation – investment, more production, employment and income
- Social Responsible Investing (SRI)
- Increase in economic growth will lead to increased job opportunities.
- This will lead to a decrease in the unemployment rate, directly increasing the
economic growth of the country.

5. Explain how the typical household is always being the largest entity in surplus
spending unit (SSU) while the typical business firm is always the ultimate deficit
spending unit (DSU)?
Household is the largest entity in surplus spending unit(SSUs) = savers, lenders or
investors
~SSU means have income for the period thar exceeds spending, resulting in savings,
mostly are households
- They have capacity to generate savings and contribute to the pool of funds available
for investment
- Earn income through wages, investment, then could save a portion of their income
- Their savings can be used or saved into the FI such as banks, financial investments
like stock, bond, mutual funds.

Business firm is the deficit spending unit(DSU) = “borrowers”

1|Page
 ~DSU means have spending for the period that exceeds income, mostly are businesses
or government.
- Firms are deficit spenders as they spend more than they earn.
- Firms require funds to finance their operations and investments
- They have expenses related to production of goods n service such as wages, raw
materials equipment
- Therefore, the need external sources to raise funds such as from issuing shares or
getting loans

6. Name the FOUR (4) major market players in Malaysia, which play their significant
roles in the economy by being the Surplus Spending Units (“SSUs”) and the Deficit
Spending Units (“DSUs”). Justify how a financial intermediary connects the surplus
and deficit agents in an institution.
Households (SSU)
- Earn income through various sources and save a portion of their earnings
- They deposit their savings in Fis such as fixed deposit, unit trust and stocks

Corporation (DSU)
- Required funds to finance their operation, capital investment and expansions as
they spend more than they earn
- Obtain funs from external source such as bonds, share, loan from banks

Government (DSU)
- Incurs expenses exceed its immediate revenue
- Required funds to finance for public spending, infrastructure, development, social
welfare programs
- May borrow from FIs issue government bonds, or seek external source from funds

Financial institutions (Financial Intermediaries)

- Importing in connecting Surplus and Deficit agents in the economy
- FIs accept deposits from SSUs and offer various lending and investment services
to DSUs

7. Why are direct financing transactions more costly or inconvenient than intermediated
transactions?
Direct financing
- Time consuming and costly.
- Requires higher level of financial knowledge, expertise and resources on both
borrower and investor
- They need to know the regulatory requirements, financial reporting and legal
complexities.
- They need to evaluate the risk and returns associated with the securities offered

Financial Intermediaries provides access to expertise of financial intermediaries who

specialize in assessing n managing such complexities

Indirect financing
-w/ the help of FIs, it provides a more liquid secondary market, such as stock
exchange or bond market which investor can easily buy or sell securities, enhancing
2|Page
 convenience n reducing transaction cost.

8. How do financial intermediaries generate profits? Discuss why don't people loan their
money directly and earn all the interest instead of getting only a portion?
- Interest income: FIs borrow money at lower interest rate n lend it to borrow at a
higher interest rate
- free income
- Service after sales
- Protected by PDIM up to RM250,000
- Reason: lack of expertise, transaction cost, risk diversification, liquidity ,
regulatory and compliance burden.

3|Page
9. Financial intermediaries are generally classified into two broad categories, which are
depository institution and non-depository institution.

Required:

(i) Define the meaning of depository institution and provide the total numbers of
commercial banks (conventional and Islamic) in Malaysia financial system.
Depository institution is finance intermediaries that accept mainly deposits
and provide funds to DSUs through loan and purchases of securities

(ii) Kumpulan Wang Persaraan Diperbadankan (“KWAP”) and Kumpulan Wang

Simpanan Pekerja (“KWSP”) are the examples of non-depository institutions
that manage pension funds of resident employees in Malaysia. Identify the
difference between the two.
KWSP
- Malaysia Retirement Fund Incorporated
- managing and administering pension funds for public sector employees in
Malaysia
- focus on the pension saving and investment of employees working in government
agencies

KWSP
- Employees Provident Fund(EPF)
- Manages the retirement savings of private sector employees in Malaysia which
covers in various industries throughout the country
- Provides retirement savings n investment opportunities for private sector workers

(iii) KWSP/EPF offers 2 savings option accounts for the subscribers. Define the 2
savings accounts and discuss the subscription policies for each account?

10. Define the role of the Ministry of Finance Malaysia (“MoF”) in Malaysia financial
market. And who grants approval on the appointment of the Minister of Finance in
Malaysia?

11. Describe BNM’s initiatives to attain an effective financial market in the country.

12. Discuss the main function of the financial system and why it is important for the
country like Malaysia.

- Facilitate the efficient allocation of funds by connecting savers and investors via
financial market and financial institutions.
- Important as it facilitates the flow of funds from the areas of surplus to areas of
deficit in the most efficient manner
- The infrastructure n service that provided will mobilize the savings, allocate funds
efficiently, and support the country’s economic development n stability

4|Page