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FSY TUTORIAL 5 PCP I think both arguments are correct. Because: -

A money market investment has both pros and cons, it can’t be any absolute decision.

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With point no: Investors always want to maximize shareholder returns in the company, but when participating in the money market, it offers a lower rate of investment with a lower return than when not participating. they can choose short-term investment with high liquidity for higher return but it carries very high risk

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Counter point: yes because When they invest in the money market, they can avoid having to borrow at high interest rates, thus taking a big risk when investing with different costs that investors cannot anticipate. (mặ c dù short tẻm invest to liquidity. that frm can mânge the liquidity problem. short t ẻm is beter. btw have others ưay to mânge liquidity, but not the best)

Question 4: Commercial Paper Who issues commercial paper? What types of financial institutions issue commercial paper? Why do some firms create a department that can directly place commercial paper? What criteria affect the decision to create such a department? Answer: - Commercial paper is normally issued by well-known, creditworthy firms. - Bank holding companies and finance companies commonly issue commercial paper - Those firms that issue commercial paper may decide to establish a department that can directly place the paper. In this way, the firms can avoid the transactions costs incurred when commercial paper dealers issue commercial paper. Such a strategy is only worthwhile if the firms continuously issue commercial paper. Question 5: Commercial Paper Ratings Why do ratings agencies assign ratings to commercial paper?

Answer -

Ratings are assigned to designate the degree of default risk associated with commercial paper. Companies issuing commercial paper pay rating services in order to have their paper rated.

Question 6: Commercial Paper Rates Explain how investors’ preferences for commercial paper change during a recession. How should this reaction affect the difference between commercial paper rates and T-bill rates during recessionary periods? Answer: -

Investors are less interested in commercial paper during a recession because the probability of default increases.

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Consequently, issuers of commercial paper must offer a higher premium above the prevailing risk-free rate in order to make the paper attractive to investors

Question 8: Repurchase Agreements Based on what you know about repurchase agreements, would you expect them to have a lower or higher annualized yield than commercial paper? Why? Answer Repurchase agreements with a similar maturity as commercial paper would likely have a slightly lower yield, since they are typically backed by Treasury securities. Question 9: Banker’s Acceptances Explain how each of the following would use banker’s acceptances: (a) exporting firms, (b) importing firms, (c) commercial banks (d) investors

For all each of the following the bank is the third party involved in the transaction and by issuing banker's acceptance the bank would guarantee each of these four parties their payment in case of default by whomever they are trading with.

Answer A banker's acceptance can (a) protect an exporter from the risk of nonpayment by the importer. (b) protect importing firms from the risk of paying for goods without ever receiving them (c) enable banks to offer exporters and importers a service for which it charges a fee (d) offer investors an investment instrument (when exporters sell the acceptance in the secondary market) Question 11: Motive to Issue Commercial Paper The maximum maturity of commercial paper is 270 days. Why would a firm issue commercial paper instead of longerterm securities, even if it needs funds for a long period of time? Answer The firm may be unwilling to lock in the prevailing long-term yield on bonds, perhaps because it expects that long-term interest rates (and yields offered on new bonds) will decline in the near future. Problem 4. Repurchase Agreement Stanford Corporation arranged a repurchase agreement in which it purchased securities for $4.9 million and will sell the securities back for $5 million in 40 days. What is the yield (or reporate) to Stanford Corporation? PP = $ 4.9 SP = $5 N = 40

 Y=

SP− PP 360 X n PP

=

$ 5−$ 4.9 360 x 40 $ 4.9

= 18%

5. T-Bill Yield You paid $98,000 for a $100,000 T-bill maturing in 120 days. If you hold it until maturity, what is the T-bill yield? What is the T-bill discount? PP = $98.000 SP = $100.000 n= 120 days  Yt = (100.000-98.000/98.000) x 365/120=6.2%  YD = (100.000-98.000/98.000)X 360/120= 6% 6. T-Bill Yield The Treasury is selling 91-day T-bills with a face value of $10,000 for $9,900. If the investor holds them until maturity, calculate the yield n=91 days PP = $9.900 SP =$10.000  Yt = (10000-9900/9900)x365/91= 4% 10. Return on NCDs Phil purchased an NCD a year ago in the secondary market for $980,000. The NCD matures today at a price of $1million, and Phil received $45,000 in interest. What is Phil’s return on the NCD? SP = 1.000.000 PP=980.000 Receive interest = 45.000  Yncd =

1000000 −980000 + 45000 = 6.6% 980000...