Question 01: A commercial bank has the following items in its balance sheet: bank capital, 36,000,000đ;

borrowings, 54,000,000đ; checkable deposits, 18,000,000đ; loans, 180,000,000đ; non-transaction deposits,

192,000,000đ; other assets, 39,000,000đ; reserves, 21,000,000đ; and securities, 60,000,000đ.
Required:
(1) Compute the total assets of the bank.
(2) Compute the total liabilities of the bank.
Answer:
BALANCE SHEET OF ALL COMMERCIAL BANKS
ASSETS (USES OF FUNDS) LIABILITIES (SOURCES OF FUNDS)
Reserves and Cash Item $ 21,000,000.00 Checkable Deposits $ 18,000,000.00
Securities $ 60,000,000.00 Non-transaction Deposits $ 192,000,000.00
Government and Agency Savings Deposits
State and local government and other Securities Small Denomination Time Deposits
Large Denomination Time Deposits
Loans $180,000,000.00 Borrowings $ 54,000,000.00
Commercial and Industrial Bank Capital $ 36,000,000.00
Real Estate
Consumer
Interbank
Other
$ 39,000,000.00
Other Assets (for example, physical capital)
Total $300,000,000.00 Total $ 300,000,000.00

Question 02: The bond has 8% coupon bond with a face value of $1000 with 5 years to maturity.
a) Find the price of bond with a 9% yield to maturity.
b) Find the price of bond with a 6% yield to maturity.
c) Find the price of bond with a 10% yield to maturity.
Give a conclusion about the relation between price of coupon bond and yield to maturity.
Answer:

Coupon rate 8% 8% 8%
Face Value $ 1,000.00 $ 1,000.00 $ 1,000.00
Time to Maturity 5.00 5.00 5.00
YTM 6% 9% 10%

Coupon payment $ 80.00 $ 80.00 $ 80.00

Price of the bond ($1,084.25) ($961.10) ($924.18)
The price of a coupon bond and the yield to maturity are negatively related
The yield to maturity is greater than the coupon rate when the bond price is below its face value.
Question 03: Kea corp. has issued a four-year bond that pays a coupon of 8.20 percent. Coupon payments
are made semiannually. Given the market rate of interest of 6.80 percent, if the current market price is
$1,030, should investors buy or not?
Answer:

Current Price $ 1,030.00

Coupon rate per year 8.20%
Face Value $ 1,000.00
Time to Maturity 4.00
Payment per year 2.00
Market rate 6.80%

 Coupon rate = 8.2%/2 = 4.1%

 YTM = 6.8%/2 = 3.4%
 T = 4*2 = 8
 Coupon payment = 4.1%*1000 = 41
 Price of the bond = 1048.32
 We should BUY it because it CHEAPER
Question 04: Calculate the rate of return of a $1,000 face value coupon bond with a coupon rate of 10% that
is bought for $1,000, held for one year, and then sold for $ 1,150; duration of this coupon bond is 5 years.
Answer:

Coupon rate 10%

Face Value $ 1,000.00
Price of the Bond $ 1,000.00
Selling Price $ 1,150.00
Duration 5.00

Coupon Payment = Face Value * Coupon rate = 1000*10% = 100

Return rate = 25%

Question 05: Assume that you just hit the $30 million Jackpot in the New York Lottery, which promises you
a payment of $7.5 million for the next four years. You are clearly excited, but have you really won $30
million? (if interest rate is 8.5%)
Answer:
Jackpot Treasure $ 30,000,000.00
Payment $ 7,500,000.00
Payment Time 4.00
Interest Rate 8.50%
PV = 24,566,974
 We should NOT choose this option.

Question 06: Henry wants to invest his money in one year. After consideration, he requires stock A with rate
of return is 15%. The price currently is for $43 per share and pays $1.2 per year in dividends. The analyst
predicts that the stock will be selling for $52 in one year. Should she buy this stock?
Answer:

Current Price (P0) $ 43.00

Dividend $ 1.20
Next Year Price (P1) $ 52.00
Rate of Return 15%
Price of the Stock = 46.26
 We Should Buy because the current price (43) of the stock is currently cheaper than the initial price
(46.26)

Question 07: VNM firm’s last dividend was $1.3 and will growth 10% every year forever. If the required
rate of return is 15 percent, what is current price of this stock if the dividends grow at the same rate as the
firm? What will be the price of this stock in year 3?
Answer:

Last Dividend (D0) $ 1.30

Growth Rate 10%
Rate of Return 15%
Year (n) 3.00
 Current Price (P0) = 28.6
 Price at year 3 = P0*(1+g)^3 = 38.07
Question 08: CC corp. is expected to grow at a constant rate of 8 percent. If the company’s next dividend,
which will be paid in a year, is $1.3 and its current stock price is $27, what is the required rate of return on
this stock?
Answer:

Dividend (D1) $ 1.30

Growth Rate 8%
Current Price (P0) $ 27.00

 Rate of Return = 12.81%

Question 09: Fledgling Electronics is forecasted to pay a $5.00 dividend at the end of year one; a $5.50
dividend at the end of year two; a $6.5 dividend at the end of year three. At the end of the third year the
stock will be sold for $238. If the discount rate is 10%, what is the price of the stock?
Answer:

Dividend at year 01 $ 5.00

Dividend at year 02 $ 5.50
Dividend at year 03 $ 6.50
Selling Price $ 238.00
Number of Year 3.00
Rate of Return 10%

 Price of Stock = 192.787

Question 10: If the interest rate is 10%, what is the present value of a security that pay you $1,100 next
year, $ 1,210 the year after, and $ 1,331 the year after that? Should the investors buy these securities with the
price $3,100 on the market?
Answer:

Current Price of the Security $3,100.00

Dividend at year 01 $ 1,100.00
Dividend at year 02 $ 1,210.00
Dividend at year 03 $ 1,331.00
Rate of Return 10%
Price of stock = 3000 => Should NOT Buy

Question 11: A principal, $7000, is invested at 9% interest for 8 years. Determine the future value
if the interest is compounded:
(a) semi-annually
(b) quarterly
(c) monthly
(d) yearly
Answer:

Principal $ 7,000.00
Rate of Return (Year) 9.00%
Time (Years) 8.00
Time (Half-Years) 16.00
Time (Quaters) 32.00
Time (Months) 96.00
Rate of Return (Half-Year) 4.50%
Rate of Return (Quater) 2.25%
Rate of Return (Month) 0.75%
FV (Yearly) $13,947.94
FV (Semi-annually) $14,156.59
FV (Quarterly) $14,266.72
FV (Monthly) $14,342.45

Question 12: We would like to have $7000, and we will invested at 9% interest for 8 years. Determine the
present value if the interest is compounded:
(a) semi-annually
(b) quarterly
(c) monthly
(d) yearly
Answer:
Future Value $ 7,000.00
Rate of Return (Year) 9.00%
Time (Years) 8.00
Time (Half-Years) 16.00
Time (Quaters) 32.00
Time (Months) 96.00
Rate of Return (Half-Year) 4.50%
Rate of Return (Quater) 2.25%
Rate of Return (Month) 0.75%
PV (Yearly) $3,513.06
PV (Semi-annually) $3,461.29
PV (Quarterly) $3,434.57
PV (Monthly) $3,416.43

Question 13: Consider the following items: checkable deposits, 300 billion VND; currency, 120 billion
VND; excess reserves, 15 billion VND; non-transaction deposits, 300 billion VND; and required reserves,
70 billion VND.
Required:
(1) Compute the monetary base.
(2) Compute the M1 money supply.
Answer:

High-powered money
MB = C + R
C = currency in circulation
R = total reserves in the banking system
Checkable Deposits $ 300.00
Currency $ 120.00
Excess Reserves $ 15.00
Non-Transaction Deposits $ 300.00
Required Reserves $ 70.00
Total Reserves (R) = Excess Reserves + Required Reserves = 15 + 70 = 85
Monetary Base (MB) = Currency (C) + Total Reserves (R) = 120+85 = 205
M1 Money Supply = Currency (C) + Checkable Deposits = 120 + 300 = 420

Question 14:
1. List the major stock market indexes on Vietnamese Stock Exchange, and explain what they tell us.
Vietnam's stock market features several major indexes that serve as key indicators of the market's
performance. The primary stock exchanges in Vietnam are the Ho Chi Minh Stock Exchange (HOSE) and
the Hanoi Stock Exchange (HNX). Here are the major indexes on these exchanges:
1. VN-Index (Vietnam Index): This is the benchmark index for the Ho Chi Minh Stock Exchange. It
tracks the performance of all the stocks listed on HOSE. The VN-Index is a capitalization-weighted
index, meaning that the larger companies have a greater impact on the index's movement. This index
provides a broad indication of the market's performance and is often used as a barometer for the
Vietnamese economy.
2. HNX-Index: This index tracks the performance of stocks on the Hanoi Stock Exchange. Similar to
the VN-Index, it is also a capitalization-weighted index but is specific to the Hanoi market. The
HNX-Index includes a diverse range of companies and is reflective of the economic activities in the
northern region of Vietnam.
3. VN30-Index: This index is a subset of the VN-Index and includes the 30 largest and most actively
traded stocks on the Ho Chi Minh Stock Exchange. The VN30-Index provides a focused view of the
market, emphasizing the most influential companies in Vietnam.
4. HNX30-Index: Similar to the VN30, this index represents the 30 most significant stocks listed on
the Hanoi Stock Exchange. It gives investors insight into the performance of the leading companies
in the northern market.
These indexes are important as they provide investors and analysts with a quick snapshot of the market's
performance. By tracking these indexes, one can gauge the overall health and trends of the Vietnamese stock
market. They reflect a range of sectors and give insights into the economic conditions and investor sentiment
in Vietnam. Additionally, these indexes are used as benchmarks for fund managers and investors in
evaluating the performance of portfolios and for creating index-tracking funds.

2. Please list and explain three tools of monetary control. What is the most powerful tool?
Monetary control refers to the mechanisms used by central banks to manage the money supply, influence
interest rates, and achieve macroeconomic goals such as controlling inflation, maintaining employment
levels, and ensuring economic growth. Here are three primary tools of monetary control:
1. Open Market Operations (OMOs): This is the most frequently used tool. Open market operations
involve the buying and selling of government securities in the open market. When a central bank
buys securities, it injects money into the economy, thereby increasing the money supply and typically
lowering interest rates. Conversely, selling securities withdraws money from the economy,
decreasing the money supply and usually raising interest rates. OMOs are a flexible way to control
short-term interest rates and the money supply.
2. Reserve Requirements: This tool involves the regulation of the amount of funds that banks must
hold in reserve against deposits. By changing the reserve requirement, the central bank can directly
influence the amount of money available for banks to make loans. A lower reserve requirement frees
up more money for lending, increasing the money supply, while a higher reserve requirement does
the opposite. However, changes to reserve requirements are used infrequently due to their potentially
disruptive impact on the banking sector.
3. Discount Rate: The discount rate is the interest rate charged by central banks when they provide
loans to commercial banks. Altering the discount rate influences the cost of borrowing for banks.
Lowering the discount rate makes borrowing cheaper for banks, encouraging them to lend more,
which increases the money supply. Raising the discount rate makes borrowing more expensive,
which can reduce lending and decrease the money supply.
Among these tools, open market operations are generally considered the most powerful and flexible tool for
monetary control. OMOs can be adjusted frequently and precisely, allowing central banks to exert fine
control over short-term interest rates and the money supply. They are also quick to implement, making them
highly effective for responding to changing economic conditions. Reserve requirements and the discount
rate are more blunt tools and are used less frequently due to their broader impact and potential for causing
disruptions in the banking system and the wider economy.

3. Which of the two bonds in each example would you expect to generally pay the higher interest rate?
Explain why.
a U.S. government bond or a Brazilian government bond.
a U.S. government bond or a municipal bond with the same term and issued by a creditworthy municipality.

1. U.S. Government Bond vs. Brazilian Government Bond:

• Higher Interest Rate: Brazilian Government Bond.
• Reason: This is primarily due to the difference in credit risk. U.S. government bonds are
considered among the safest investments globally, as they are backed by the full faith and
credit of the U.S. government. This safety is reflected in lower yields. In contrast, Brazilian
government bonds typically carry higher risk, including political, economic, and currency
risks. To compensate investors for taking on these additional risks, Brazilian bonds generally
offer higher yields than U.S. government bonds.
2. U.S. Government Bond vs. Municipal Bond (same term, creditworthy municipality):
• Higher Interest Rate: Depends, but often the Municipal Bond.
• Reason: U.S. government bonds are considered very low risk, resulting in lower interest
rates. Municipal bonds, even those issued by creditworthy municipalities, usually carry a
slightly higher risk compared to U.S. government bonds, which can lead to higher yields.
However, the interest from many municipal bonds is exempt from federal (and in some cases,
state and local) taxes. This tax-exempt status can make the effective yield of a municipal
bond more attractive, even if the nominal interest rate is lower. Investors in higher tax
brackets might find municipal bonds more beneficial after accounting for tax advantages.
Therefore, the comparison can be complex and depends on the specific characteristics of the
bonds and the tax status of the investor.

4. Suppose the Fed sells government bonds. Use a graph of the money market to show what this does to the
value of money.

When the Federal Reserve sells government bonds, it conducts a contractionary monetary policy. This action
affects the money market and, consequently, the value of money. To illustrate this, let's use a standard supply
and demand graph for the money market.
In the money market graph:
1. The horizontal axis (x-axis) represents the quantity of money.
2. The vertical axis (y-axis) represents the interest rate, which can be interpreted as the "price" or value
of money.
There are two main curves:
• Money Supply (MS): Initially, we depict this as a vertical line because the money supply is typically
controlled by the central bank (in this case, the Federal Reserve) and is assumed to be independent of
the interest rate in the short run.
• Money Demand (MD): This curve is downward sloping, indicating that at lower interest rates, the
quantity of money demanded increases, and vice versa.
Now, let's depict the impact of the Fed selling government bonds:
• When the Fed sells government bonds, it effectively removes money from the economy, as
individuals and institutions buying these bonds pay money to the Fed, which then removes this
money from circulation.
• This action results in a leftward shift of the Money Supply (MS) curve from MS1 to MS2.
• As the money supply decreases, the equilibrium point on the graph moves up along the Money
Demand curve.
• This results in a higher interest rate (moving from i1 to i2) and a lower quantity of money in the
economy.
The higher interest rate reflects an increase in the value of money. When there is less money available, each
unit of money becomes more valuable, and thus, the cost of borrowing money (interest rate) goes up.
To create a graphical representation of this scenario, I will plot a simple money market graph illustrating
these changes.

The graph above illustrates the effect of the Federal Reserve selling government bonds on the money
market:
• The downward-sloping line represents the Money Demand (MD) curve.
 • The vertical lines represent the Money Supply (MS) curve at two different points in time:
• The red dashed line (MS1) is the initial money supply.
• The green dashed line (MS2) is the new money supply after the Fed has sold government
bonds, showing a decrease in the money supply.
• The black dots indicate the equilibrium points, where the Money Demand curve intersects with the
Money Supply curve.
• The first equilibrium point (at the red line) shows the initial interest rate (i1).
• The second equilibrium point (at the green line) shows the new, higher interest rate (i2) after
the money supply has decreased.
This graph demonstrates that when the Fed sells government bonds, the money supply in the economy
decreases, leading to an increase in the interest rate. The higher interest rate signifies an increase in the value
of money.

5. List some financial intermediations, and why are they important?

Financial intermediaries play a crucial role in the economy by facilitating the flow of funds between savers
and borrowers. They help in pooling savings, allocating capital, reducing risk through diversification,
providing liquidity, and reducing the costs of searching for and negotiating with other parties. Here are some
key financial intermediaries:
1. Banks: Banks are perhaps the most well-known financial intermediaries. They accept deposits from
individuals and businesses and use these funds to provide loans. By doing so, banks facilitate the
movement of funds from savers to borrowers and play a key role in the monetary policy transmission
mechanism.
2. Insurance Companies: These entities provide financial protection against various risks (like health,
life, property). They collect premiums from policyholders and invest these funds. In the event of a
claim, they provide financial compensation.
3. Pension Funds: These funds collect and invest contributions from employees and/or employers to
provide retirement benefits to participants. They are significant institutional investors in various
markets, including stocks and bonds.
4. Mutual Funds: Mutual funds pool money from many investors to purchase a diversified portfolio of
stocks, bonds, or other securities. This diversification reduces individual investment risk.
5. Investment Banks: They assist in the issuance of new securities, facilitate mergers and acquisitions,
and provide various financial services such as market making and trading of securities.
6. Venture Capital and Private Equity Firms: These firms provide capital to companies in early
stages of development or to companies looking for expansion, typically in exchange for equity
stakes. They play a vital role in fostering innovation and business growth.
7. Credit Unions: Similar to banks, credit unions accept deposits and provide loans. However, they are
cooperatively owned by their members and often cater to a specific demographic or community.
8. Finance Companies: These companies provide loans to individuals and businesses but do not accept
deposits. They are typically focused on certain types of loans, such as consumer finance, leasing, and
factoring.
Financial intermediaries are important for several reasons:
• Mobilization of Savings: They facilitate the transfer of funds from savers, who might otherwise find
it difficult to directly invest, to those who need capital.
• Risk Management: By pooling funds and investing in diversified assets, intermediaries help spread
and reduce risks.
• Cost Efficiency: They reduce transaction costs and provide economies of scale in investment,
making it more accessible and affordable for individual investors.
• Information Processing: Intermediaries assess and manage credit risks, perform due diligence, and
provide valuable financial advice and information to both savers and borrowers.
• Economic Stability: By effectively channeling funds and managing risks, financial intermediaries
contribute to the stability and efficiency of the financial system, which is crucial for economic
growth.

6. Which of the two bonds in each example would you expect to generally pay the higher interest rate?
Explain why.
a. a 6-month Treasury bill or a 20-year Treasury bond;
b. a Microsoft bond or a bond issued by a new recording company;

To determine which bond in each pair would generally pay a higher interest rate, we can apply fundamental
principles of bond valuation and risk assessment:
1. 6-month Treasury Bill vs. 20-year Treasury Bond:
• Higher Interest Rate: 20-year Treasury Bond.
• Reason: This difference is primarily due to the term to maturity (duration) of the bonds.
Longer-term bonds, like a 20-year Treasury bond, typically have higher interest rates than
shorter-term bonds, like a 6-month Treasury bill. This is because longer-term bonds carry
greater risk, such as interest rate risk (the risk that interest rates will rise, causing bond prices
to fall) and inflation risk (the risk that inflation will reduce the purchasing power of the
bond's future payments). To compensate investors for taking these additional risks over a
longer period, longer-term bonds usually offer higher yields.
2. Microsoft Bond vs. Bond Issued by a New Recording Company:
• Higher Interest Rate: Bond Issued by a New Recording Company.
• Reason: The key factor here is credit risk, which refers to the risk that the bond issuer will
default on its payment obligations. Microsoft, being a well-established and financially stable
company, would typically have a lower credit risk compared to a new recording company.
The new recording company, likely having a less established credit history and potentially
more uncertain financial prospects, would be perceived as having a higher credit risk. Bond
investors require higher yields as compensation for taking on higher credit risk, so the bond
issued by the new recording company would generally offer a higher interest rate than a bond
issued by Microsoft.
7. Using separate graphs, demonstrate what happens to the money supply, money demand, the value of
money, and the price level if:
a. the Fed increases the money supply.
b. people decide to demand less money at each value of money.

To demonstrate the effects of these scenarios on the money supply, money demand, the value of money, and
the price level, we need to consider two separate sets of graphs: one set for each scenario.
Scenario A: The Fed Increases the Money Supply
1. Money Market Graph:
• The Money Supply (MS) curve shifts to the right, indicating an increase in the money supply.
• The Money Demand (MD) curve remains unchanged.
• The intersection of the supply and demand curves shifts down, leading to a lower interest
rate.
• The value of money decreases as more money chases the same amount of goods and services.
2. Aggregate Demand and Aggregate Supply Graph (Price Level):
• The increase in money supply can shift the Aggregate Demand (AD) curve to the right.
• Assuming the Aggregate Supply (AS) curve remains constant, the equilibrium price level
rises.
• This represents inflation, where more money leads to higher prices for the same level of
goods and services.
Scenario B: People Decide to Demand Less Money at Each Value of Money
1. Money Market Graph:
• The Money Demand (MD) curve shifts to the left, indicating a decrease in the demand for
money at each interest rate.
• The Money Supply (MS) curve remains unchanged.
• The intersection of the supply and demand curves shifts down, leading to a lower interest
rate.
• The value of money increases since less money is being demanded.
2. Aggregate Demand and Aggregate Supply Graph (Price Level):
• The decrease in money demand can shift the Aggregate Demand (AD) curve to the left.
• Assuming the Aggregate Supply (AS) curve remains constant, the equilibrium price level
falls.
• This represents deflation, where less demand for money leads to lower prices.
I will create two sets of graphs, one for each scenario, to visually represent these effects.
The graphs above illustrate the effects of the two scenarios on the money market and the overall economy:
Scenario A: The Fed Increases the Money Supply
1. Money Market Graph (Top Left):
• The initial money supply is shown by the red dashed line (MS1), and the increased money
supply by the green dashed line (MS2).
• The money demand curve (MD) is unchanged.
• The increase in the money supply leads to a lower interest rate.
2. Aggregate Demand and Aggregate Supply Graph (Top Right):
• The initial aggregate demand curve (AD1) shifts to the right to AD2, representing an increase
in the money supply.
• The aggregate supply (AS) remains constant.
• The shift in AD leads to a higher price level, indicative of inflation.
Scenario B: People Decide to Demand Less Money at Each Value of Money
1. Money Market Graph (Bottom Left):
• The money supply (MS) remains constant.
• The new money demand curve (MD2) shifts to the left, indicating a decrease in money
demand.
• This shift leads to a lower interest rate.
2. Aggregate Demand and Aggregate Supply Graph (Bottom Right):
• The initial aggregate demand curve (AD1) shifts to the left to AD2, reflecting a decrease in
money demand.
• The aggregate supply (AS) remains constant.
• The shift in AD leads to a lower price level, indicative of deflation.
These graphs depict the relationships between money supply, money demand, interest rates, and the overall
price level in the economy under different monetary conditions.

8. What are the advantages of open market operations compared to other Tool of Monetary Policy?
Open Market Operations (OMOs) have several advantages compared to other tools of monetary policy, such
as the discount rate and reserve requirements. These advantages make OMOs a preferred choice for central
banks, like the Federal Reserve, in implementing monetary policy:
1. Flexibility and Precision: OMOs can be used to make very precise adjustments to the money
supply. The central bank can buy or sell varying amounts of securities to fine-tune the level of
reserves in the banking system. This flexibility allows for more precise control over short-term
interest rates.
2. Speed and Reversibility: Changes in open market operations can be implemented quickly and
reversed if needed. This makes it an effective tool for responding to unexpected changes in the
economy or financial markets.
3. Market-Based Mechanism: OMOs involve buying and selling government securities in the open
market, which is a market-based approach. This allows for efficient implementation without the need
for direct regulation or administrative control.
4. Minimal Disruption: Unlike changes in reserve requirements, which can be disruptive to banks'
operations and planning, OMOs are less intrusive and do not directly impact the banking sector's
fundamental structure or operational framework.
5. Indirect Impact on Banks: OMOs affect the banking system indirectly through changes in reserves
and interest rates, rather than directly altering banks' operational constraints (as is the case with
reserve requirements or the discount rate).
6. Signaling Effect: OMOs also serve an important signaling role. When a central bank engages in
OMOs, it sends a clear message to markets about the direction of its monetary policy, which can
influence expectations and behavior.
7. Liquidity Management: OMOs are particularly effective in managing the overall liquidity in the
financial system. By adjusting the level of reserves, central banks can ensure that there is neither too
much nor too little liquidity in the system.
8. Less Political Interference: Since OMOs are conducted in the open market and are part of regular
central bank operations, they are generally subject to less political scrutiny and interference
compared to tools like the discount rate or reserve requirements, which might require more overt
policy decisions.
These advantages make open market operations a versatile and effective tool for central banks in executing
monetary policy, especially for short-term objectives. However, it's important to note that OMOs are just one
tool in the central bank's toolkit, and they are often used in conjunction with other measures to achieve
broader economic goals.

9. What are capital markets and money market, and why are capital markets important to corporations?
Capital markets and money markets are two critical components of the financial system, each serving
distinct functions and catering to different financial needs and timeframes.
Capital Markets
Capital markets are markets for buying and selling equity and debt instruments. They channel savings and
investment between suppliers of capital (like retail investors and institutional investors) and users of capital
(like businesses, governments, and individuals). Capital markets are vital for the functioning of an economy
because they facilitate the efficient allocation of resources and the distribution of risk.
Components of Capital Markets:
1. Equity Markets (Stock Markets): Where shares of companies are issued and traded.
2. Debt Markets (Bond Markets): Where debt instruments (like corporate bonds and government
bonds) are issued and traded.
Timeframe:
• Capital markets deal with long-term securities, which have a maturity period of more than one year.
Money Markets
Money markets are part of the financial market where short-term financial instruments with high liquidity
are traded. This market is used by participants as a means for borrowing and lending in the short term, with
maturities that usually range from overnight to just under a year.
Components of Money Markets:
1. Treasury Bills: Short-term government securities.
2. Commercial Paper: Short-term corporate debt.
3. Certificates of Deposit: Time deposits at banks.
4. Repurchase Agreements: Short-term borrowing for dealers in government securities.
Timeframe:
• Money markets focus on short-term lending and borrowing, typically for periods of a year or less.
Importance of Capital Markets to Corporations
1. Raising Capital: Corporations primarily use capital markets to raise funds through the issuance of
stocks (equity) and bonds (debt). This is crucial for financing investments, expansion, and
operations.
2. Lower Cost of Capital: By accessing a broad pool of investors, corporations can secure financing at
a lower cost compared to other means like bank loans.
3. Diversification of Funding Sources: Capital markets provide an alternative to traditional bank
financing, allowing companies to diversify their funding sources and reduce reliance on any single
lender.
4. Liquidity for Investors: The tradability of stocks and bonds in capital markets provides liquidity for
investors, making investment in corporations more attractive.
5. Market Valuation: Capital markets offer a mechanism for valuing companies through the pricing of
their stocks and bonds, providing valuable information to stakeholders and the management.
6. Shareholder Base Expansion: Listing on stock exchanges enables companies to expand their
shareholder base, which can include retail and institutional investors.
 7. Corporate Governance and Discipline: Publicly traded companies in capital markets are subject to
regulatory standards and disclosure requirements, which can lead to better corporate governance and
accountability.
In summary, while money markets are essential for short-term liquidity and financing, capital markets play a
critical role in long-term financial planning and investment for corporations. They are essential for economic
growth, allowing companies to raise capital for investment, innovation, and expansion.

10. Advantages and disadvantages of Reserve Requirements as a tool of monetary policy?

Reserve requirements are a traditional tool of monetary policy used by central banks to influence the amount
of funds that commercial banks must hold in reserve against deposits. This tool directly affects the ability of
banks to create loans and, consequently, impacts the money supply in the economy. Like any policy tool,
reserve requirements have their own set of advantages and disadvantages:
Advantages of Reserve Requirements
1. Direct Control Over Money Supply: By adjusting reserve requirements, central banks can directly
influence the amount of money that banks can lend out, thus exerting a strong influence on the
money supply.
2. Signal Monetary Policy Intentions: Changes in reserve requirements can be a strong signal to the
market about the central bank's policy stance – whether it is aiming for tightening or loosening
monetary policy.
3. No Need for Market Participation: Adjusting reserve requirements does not require central bank
participation in financial markets, unlike open market operations.
4. Long-term Impact: Changes in reserve requirements can have a lasting impact on banking
operations and the money supply, making it a potent tool for long-term monetary policy adjustments.
Disadvantages of Reserve Requirements
1. Disruptive to Banking Operations: Frequent changes in reserve requirements can be disruptive to
banks, as they need to adjust their lending and asset management strategies accordingly.
2. Less Flexibility and Precision: Compared to open market operations, reserve requirements are a
less flexible and less precise tool for adjusting the money supply and influencing short-term interest
rates.
3. Impact on Profitability of Banks: Changes in reserve requirements can directly affect the
profitability of banks. Higher reserve requirements may lead to lower profits as banks are forced to
hold more non-interest-bearing reserves.
4. Indirect Impact on Borrowing and Lending: Adjustments to reserve requirements have an indirect
effect on borrowing and lending rates in the economy. The impact may not be as immediate or
predictable as with other tools like the discount rate.
5. Risk of Bank Runs: In extreme cases, very high reserve requirements could lead to liquidity issues
for banks, potentially increasing the risk of bank runs in times of financial stress.
6. Potential for Market Distortions: Significant changes in reserve requirements can lead to
distortions in the banking sector and the broader financial market, as banks adjust to new operational
constraints.
In summary, while reserve requirements are a powerful tool for controlling the money supply over the long
term, their use can be somewhat blunt and disruptive compared to more flexible and precise tools like open
market operations. Consequently, many central banks, including the Federal Reserve, tend to prefer and rely
more on open market operations for day-to-day monetary policy management. Reserve requirement
adjustments are generally used more sparingly and in response to broader monetary policy goals or financial
stability concerns.

11. Please list all goals of monetary policy. Which one is the most important goal and explain the reason?
Monetary policy, conducted by central banks, has several key goals. These goals can vary slightly depending
on the country and its specific economic circumstances, but generally, they include:
1. Price Stability: This involves controlling inflation and preventing deflation to ensure that prices
remain relatively stable over time. Price stability is crucial because it helps maintain the purchasing
power of the currency and creates a predictable environment for consumers and businesses to make
long-term financial decisions.
2. Full Employment: Often referred to as achieving maximum employment, this goal aims to ensure
that all who are willing and able to work can find employment. It's important for the overall health of
the economy, as high levels of employment typically lead to more robust economic growth.
3. Economic Growth: Central banks aim to foster a stable environment conducive to sustained and
stable economic growth. This involves managing the money supply and interest rates to encourage
investment and consumption, which in turn drives economic expansion.
4. Interest Rate Stability: This involves managing fluctuations in interest rates to maintain a balance
in the economy. Stable interest rates help in predictable planning for consumers and businesses.
5. Financial Market Stability: Ensuring the stability of the financial system is crucial to prevent
financial crises and to maintain the confidence of participants in the financial system.
6. Exchange Rate Stability: For some countries, particularly those with significant international trade
or those vulnerable to currency fluctuations, maintaining a stable exchange rate can be an important
goal to protect the economy from external shocks.
7. Balance of Payments Stability: This involves managing the money supply and influencing interest
rates to maintain a stable balance of payments, thereby avoiding large deficits or surpluses that could
destabilize the economy.
Among these goals, the most important is often considered to be price stability. The rationale for
prioritizing price stability is as follows:
• Foundation for Economic Growth: Price stability creates an environment conducive to sustainable
economic growth. When prices are stable, consumers and businesses can make long-term financial
plans and investments with greater confidence.
• Prevents Economic Distortions: High inflation or deflation can lead to economic distortions.
Inflation erodes purchasing power and can lead to a decrease in real incomes, especially for those
with fixed incomes. Deflation can lead to decreased consumer spending and investment, as people
anticipate lower prices in the future.
• Facilitates Other Goals: Achieving price stability often helps in achieving other monetary policy
goals. For instance, it can contribute to financial market stability and economic growth.
• Predictability and Confidence: Stable prices lead to greater predictability in the economy, which is
essential for consumer and business confidence. This confidence, in turn, encourages spending and
investment, which are key drivers of economic growth.
While price stability is often prioritized, it's important to note that the relative importance of these goals can
shift depending on the current economic conditions and challenges faced by a country. Central banks must
balance these goals, adapting their monetary policy tools and strategies to the prevailing economic
circumstances.

12. Analyze the difference between Money Market and Capital Market. (Meaning, financial instruments,
institutions, risk factor, liquidity, purpose)
The Money Market and Capital Market are two distinct segments of the financial market, each serving
different needs and purposes for investors and borrowers. Here's an analysis of their differences across
various dimensions:
Meaning
• Money Market: This is a segment of the financial market where short-term funds are borrowed and
lent, typically for periods up to one year. The money market is primarily used for liquidity
management and short-term financing.
• Capital Market: This refers to financial markets where long-term debt or equity-backed securities
are traded. Capital markets are used for raising capital for longer-term investments and funding.
Financial Instruments
• Money Market Instruments:
• Treasury Bills: Short-term government securities with maturities typically less than a year.
• Commercial Paper: Unsecured short-term corporate debt.
• Certificates of Deposit (CDs): Time deposits at banks.
• Repurchase Agreements (Repos): Short-term borrowing against securities.
• Banker’s Acceptances: Short-term credit investments created by non-financial companies and
guaranteed by a bank.
• Capital Market Instruments:
• Stocks: Equity shares in a company, representing ownership.
• Bonds: Long-term debt instruments issued by corporations or governments.
• Debentures: Long-term bonds not secured by collateral.
• Preferred Stocks: Equity with preferential rights over common stock in dividend payments.
• Convertible Securities: Bonds or preferred stock that can be converted into common stock.
Institutions
• Money Market:
• Central Banks: Play a key role in controlling and regulating the money market.
• Commercial Banks: Major participants as lenders and borrowers.
• Money Market Funds: Investment funds that invest in short-term money market instruments.
• Capital Market:
• Stock Exchanges: Facilitate the trading of stocks and bonds.
 • Investment Banks: Help companies issue new securities in the capital market.
• Institutional Investors: Such as pension funds and mutual funds, which invest in long-term
securities.
Risk Factor
• Money Market: Generally considered to be low risk due to the short-term nature of the instruments.
The risk is primarily in the form of credit risk and interest rate risk, but to a lesser extent compared to
capital market instruments.
• Capital Market: Involves higher risk, especially with equity instruments (stocks), due to market
volatility, economic cycles, and longer-term nature. Bonds also carry credit risk, interest rate risk,
and inflation risk.
Liquidity
• Money Market: Typically high liquidity due to the short maturity of instruments. Money market
securities are often considered cash equivalents.
• Capital Market: Liquidity can vary. Stocks are generally liquid, but some long-term debt
instruments may have lower liquidity. Liquidity is influenced by market conditions and the specific
security.
Purpose
• Money Market: Used for short-term borrowing and lending, often for working capital needs,
liquidity management, and short-term investment.
• Capital Market: Used for raising long-term funds to finance capital investment, business expansion,
and long-term projects. It also provides a platform for investors looking for long-term investment
opportunities.

13. Describe the primary and secondary markets, explain the link between them. And why are secondary
markets so important to businesses?
Primary Market
The primary market is where securities are created and sold for the first time. It is the market for new issues
of securities. In the primary market, companies, governments, or public sector institutions can raise funds by
selling securities like stocks and bonds to investors. The key features and processes of the primary market
include:
• Initial Public Offerings (IPOs): When a company issues shares to the public for the first time.
• Private Placements: Selling securities to a limited number of investors rather than the general
public.
• Rights Issues: Offering additional shares to existing shareholders.
• Debt Issuance: Governments or corporations issue bonds to raise capital.
In the primary market, the issuer of the securities receives the funds directly from investors. The pricing in
the primary market is typically set beforehand by the issuer or through a process involving underwriters.
Secondary Market
The secondary market is where existing securities are traded among investors after being issued in the
primary market. This market includes stock exchanges (like the New York Stock Exchange, NASDAQ), as
well as over-the-counter (OTC) markets. Characteristics of the secondary market include:
• Liquidity Provision: It provides liquidity to securities, enabling investors to buy and sell them post-
issuance.
• Price Discovery: Prices in the secondary market are determined by the forces of supply and demand.
• Market Participants: A wide range of investors, including individual retail investors, institutional
investors, traders, and speculators.
In the secondary market, the original issuer of the securities does not receive any funds from the
transactions. Instead, the securities are traded among investors.
Link Between Primary and Secondary Markets
The primary and secondary markets are intrinsically linked:
• Price Benchmarking: The performance and pricing of securities in the secondary market provide a
benchmark for pricing new issues in the primary market.
• Investor Confidence: A healthy and active secondary market increases investor confidence, as it
assures liquidity and fair pricing. This confidence, in turn, can make investors more willing to
participate in the primary market.
• Capital Formation: The secondary market supports the primary market by providing a mechanism
for investors to exit their investments, making investing in the primary market less risky and more
attractive.
Importance of Secondary Markets to Businesses
Secondary markets are crucial for businesses for several reasons:
• Capital Access: A robust secondary market creates a favorable environment for businesses to raise
capital in the primary market. Investors are more likely to invest in primary offerings when they
know there is a secondary market that provides liquidity.
• Valuation: The secondary market provides a continuous valuation of a company's securities, which
can be an important indicator of the market's perception of the company's performance and
prospects.
• Reputation and Visibility: Being traded in a secondary market, especially a recognized stock
exchange, enhances a company's visibility and reputation. This can be beneficial for business
dealings, partnerships, and overall corporate image.
• Employee Compensation: Many companies use their stock as part of employee compensation
packages. A liquid secondary market makes such compensation more attractive to employees.

14. What are the basic differences between bonds and stocks?
Bonds and stocks are two fundamental types of financial securities that companies and governments issue to
raise capital, but they have distinct characteristics, representing different forms of investment and offering
different rights and returns to investors. Here are the basic differences between them:
1. Type of Financial Security
 • Bonds: A bond is a fixed-income instrument that represents a loan made by an investor to a borrower
(typically corporate or governmental). Bonds are used by companies, municipalities, states, and
sovereign governments to finance projects and operations.
• Stocks: Stocks, also known as shares or equities, represent ownership in a company. When investors
buy stocks, they essentially buy a portion of the company.
2. Returns
• Bonds: Bondholders receive regular interest payments (coupons) and are repaid the principal amount
(face value) at maturity. The interest rate is usually fixed at issuance.
• Stocks: Stockholders might receive dividends, which are a portion of a company’s profits distributed
to shareholders. However, dividends are not guaranteed and depend on the company’s performance
and policies. The primary return on stocks comes from price appreciation if the stock’s value rises in
the market.
3. Risk
• Bonds: Generally considered lower risk compared to stocks. The risk for bondholders is that the
issuer defaults on the loan. However, in the event of bankruptcy, bondholders have a higher claim on
assets than stockholders.
• Stocks: Carry a higher risk as their returns depend on the company’s performance and market
conditions. In case of bankruptcy, stockholders are the last to be paid, if at all.
4. Ownership and Voting Rights
• Bonds: Do not confer ownership in the company. Bondholders do not have voting rights in the
company’s decisions.
• Stocks: Stockholders are partial owners of the company. Common stockholders typically have
voting rights, allowing them to vote on corporate matters.
5. Term
• Bonds: Have a fixed term (maturity) after which the loan is repaid. Maturities can range from a year
or less to 30 years or more.
• Stocks: Do not have a maturity date. Stocks remain valid as long as the company exists.
6. Income Stability
• Bonds: Provide a stable and predictable income stream through regular interest payments.
• Stocks: Offer potentially higher returns, but income (through dividends) is not guaranteed and can
fluctuate.
7. Market Price Fluctuation
• Bonds: Prices fluctuate based on interest rate changes, creditworthiness of the issuer, and other
factors, but typically less violently than stocks.
• Stocks: Prices can be highly volatile, fluctuating based on company performance, market conditions,
investor sentiment, and broader economic factors.
In summary, bonds are debt instruments that provide a fixed income and are generally lower in risk and
return, while stocks are equity instruments that offer potential for higher returns but come with higher risk
and volatility. The choice between investing in stocks and bonds depends on the investor's risk tolerance,
investment goals, and time horizon.
15. What is the difference between saver–lenders and borrower–spenders, and who are the major
representatives of each?
The terms "saver-lenders" and "borrower-spenders" refer to the two main categories of participants in the
financial market, each representing opposite sides of financial transactions.
Saver-Lenders
Definition: Saver-lenders are individuals, businesses, or entities that have excess funds which they wish to
invest or save. They are looking for a return on their surplus funds.
Major Representatives:
1. Individuals: People who save part of their income and look for safe investments, such as bank
deposits, bonds, or retirement accounts.
2. Businesses: Companies with excess cash that they wish to invest for short or long-term returns.
3. Financial Institutions: Banks, insurance companies, and pension funds that collect and invest funds
on behalf of their customers or beneficiaries.
4. Government Entities: Such as sovereign wealth funds or local governments with surplus funds.
5. Institutional Investors: Including mutual funds, hedge funds, and pension funds that aggregate and
invest large pools of capital.
Borrower-Spenders
Definition: Borrower-spenders are individuals, businesses, or entities that need funds to finance their
spending or investment activities. They are willing to pay interest for the use of borrowed funds.
Major Representatives:
1. Individuals: People who need loans for purposes like buying a home (mortgages), purchasing a car,
or funding education.
2. Businesses: Companies that borrow to finance their operations, expand their business, invest in new
projects, or manage cash flow.
3. Governments: Both local and national governments borrow to fund public projects, infrastructure,
and other government expenditures.
4. Non-Profit Organizations: May require loans for large projects or operational expenses.
5. Startups and Entrepreneurs: Often require external funding to kickstart or expand their business
ventures.
Key Differences
• Flow of Funds: Saver-lenders provide funds to the financial markets, while borrower-spenders
withdraw funds from these markets.
• Risk and Return Perspective: Saver-lenders are generally risk-averse, seeking to protect their
capital and earn a return. Borrower-spenders are typically risk-takers, willing to incur debt for
potential growth or consumption.
• Objective: The primary objective of saver-lenders is to earn interest or dividends from their surplus
funds. In contrast, borrower-spenders aim to use the borrowed funds for consumption, investment, or
growth, expecting that the return on the borrowed funds will exceed the cost of borrowing.
The interaction between saver-lenders and borrower-spenders is fundamental to the functioning of the
financial markets. Financial intermediaries, like banks and investment firms, play a crucial role in
connecting these two groups, channeling funds from those who want to save and invest to those who need to
borrow and spend.

16. When expected inflation rises, how will the price of bonds change? Please explain.
When expected inflation rises, the price of bonds typically decreases. This inverse relationship between
expected inflation and bond prices can be explained through several interconnected factors:
1. Interest Rates and Inflation: Central banks often respond to higher expected inflation by increasing
interest rates to control economic overheating and to maintain price stability. Higher interest rates in
the economy lead to higher yields on newly issued bonds.
2. Fixed Payments: Bonds typically pay fixed interest payments (coupons) and return the principal at
maturity. When inflation is expected to rise, the real value (purchasing power) of these fixed
payments is eroded. This makes bonds less attractive to investors, as the future cash flows from
bonds will buy less in terms of goods and services.
3. Yield Requirements: Investors demand higher yields to compensate for the decrease in the real
value of future payments due to inflation. Since bond prices and yields move inversely, this demand
for higher yields means lower prices for existing bonds, especially those with fixed interest rates.
4. Market Sentiment: The expectation of higher inflation can also lead to a shift in investor sentiment.
Investors might start favoring assets like stocks or inflation-indexed bonds, which have the potential
to offer returns that keep pace with or exceed inflation. This shift in preference can reduce the
demand for traditional fixed-rate bonds, contributing to a decline in their prices.
5. Comparison to New Bonds: New bonds issued in a higher inflation environment will offer higher
interest rates to remain attractive. This makes existing bonds with lower interest rates less
competitive, resulting in a price drop as sellers try to make these older bonds more attractive to
potential buyers.
6. Discounting Effect: The value of a bond is the present value of its future cash flows (interest
payments and principal repayment). When investors expect higher inflation, they use a higher
discount rate to calculate the present value of these cash flows. A higher discount rate reduces the
present value, and consequently, the price of the bond.
In summary, the expectation of higher inflation typically leads to a decrease in bond prices. This is because
inflation erodes the real value of the bond's fixed payments, leading investors to demand higher yields
(lower prices) to compensate for the loss in purchasing power. Additionally, higher inflation expectations
often prompt central banks to raise interest rates, further contributing to lower bond prices.