BM20

NAME: DATE: SCORE:

I. TRUE OR FALSE (10 points: 10 items x 1 point)

Identify whether the given item is TRUE or FALSE. SHADE the corresponding circle for the correct answer.
T F
1. Investors see the money market as a long-term investment that will provide a slightly
higher return than holding their money or depositing it in banks.
2. In a reverse repo, one party sells an asset, usually fixed-income securities, to another
party at one price.
3. One of the reasons for the need for the short-term fund is due to the unmatched timing
of cash inflows and outflows.
4. Commercial papers are short-term debt obligations by private companies for their long-
term capital requirements, such as purchase of machinery and equipment.
5. Money markets become a viable option to temporarily invest idle funds to reduce
opportunity costs.
6. When the BSP buys securities from a bank, it increases the bank’s level of reserves and
thus, increasing the level of liquidity/money supply in the economy.
7. When the BSP entered into a reverse repo, it is doing an expansionary monetary policy.

8. A negotiable certificates of deposit (NCD) have a slightly less credit risk than a banker’s
acceptance because it is backed up by the bank and the importing firm.
9. Individual investors rarely purchase commercial papers directly because of their high
minimum denomination.
10. At the point of issuance of the instrument, the issuer usually receives something of value,
such as cash, from the investor.

II. MULTIPLE CHOICE (10 points: 10 items x 1 point)

ENCIRCLE the letter of the correct answer among the given choices.
1. Which of the following is NOT a fundamental characteristic of money market securities?
a. Higher marketability c. Long-term investment
b. Mature in one (1) year or less d. Low default risk
2. It is the interest income forgone by holding on to the cash.
a. Interest cost c. Sunk cost
b. Opportunity cost d. Borrowing cost
3. It cannot be easily withdrawn by the depositor since it is different from a demand deposit
account wherein money can be withdrawn upon the demand of the depositor.
a. Commercial paper c. Repurchase agreement
b. Negotiable certificates of deposit d. Banker’s acceptances

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4. They are often used to finance the purchase of goods that have not yet been transferred from the
seller to the buyer.
a. Banker’s acceptances c. Negotiable certificates of deposit
b. Commercial papers d. Repurchase agreement
5. It refers to how quick, efficient, and cheap the security can be converted to cash
a. Deep c. Interest rate
b. Liquidity d. Maturity
6. In the Philippines, commercial papers are not required to be registered with the Securities and
Exchange Commission (SEC) if they meet the following criteria, EXCEPT when:
a. Issued to at most 19 non-institutional lenders
b. Payable to a specific person
c. In an amount not exceeding Php 50 million
d. Either negotiable or assignable and to be held to maturity
7. Which of the following is INCORRECT about negotiable certificates of deposit?
a. The certificate indicates the interest rate and maturity date of the deposit.
b. A negotiable certificate of deposit is classified as an order instrument.
c. Investors can buy or sell certificates of deposit up until the instruments mature.
d. Upon maturity, the banks shall pay the principal plus interest to the investor who holds the
certificate of deposit.
8. Which of the following is INCORRECT about the types of money market?
a. For a newly issued T-bill that is held to maturity, the annualized investment rate will always
be higher than the discount rate.
b. In an auction, the BTr announces the type and quantity of securities that they will sell.
c. When the BSP entered into a repo, it is doing a contractionary monetary policy.
d. Competitive bidders of Treasury bills are guaranteed to receive the securities.
9. Which of the following is CORRECT about the participants in the money market?
a. Commercial banks issue treasury securities; sell certificates of deposits and extend loans;
offer individual investor accounts that can be used to invest in money markets.
b. Private individuals made their investment through the stock market.
c. Insurance companies permit small investors to invest in the money market by accumulating
funds from numerous small investors.
d. The Bangko Sentral ng Pilipinas sells government securities to raise funds.
10. Which of the following is INCORRECT about repurchase agreement?
a. The commitment of the seller to buy back the asset in the future means that the buyer has
only temporary use of that asset.
b. The return of the seller in a repo is the difference between the price paid by the buyer at
the start of the repo and the price the seller receives at the end.
c. If the seller defaults during the life of the repo, the buyer, as the new owner, can sell the
asset to a third party to offset his loss.
d. Repurchase agreements are usually treated as high-risk investments with low interest.

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III. CASE ANALYSES (25 points: 5 items x 5 points)

Analyze the cases and answer the given questions.

1. Mandaue Foam (MF) is a leading company in the furniture and fixture industry in the country. It has
obtained substantial loans from finance companies and commercial banks. The interest rate on the
loans is tied to market interest rates and is adjusted every six (6) months. MF has a credit line with a
bank in case it suddenly needs to obtain funds for a temporary period. It previously purchased
Treasury securities that it could sell if it experiences any liquidity problems. If the economy continues
to be strong, MF may need to increase its production capacity by about 50% over the next few years
to satisfy demand. It is concerned about a possible slowing of the economy because of potential
actions of Bangko Sentral ng Pilipinas (BSP) to reduce inflation. It needs funding to cover payments
for supplies. It is also considering issuing stock or bonds to raise funds in the next year. The
prevailing commercial paper rate on paper issued by large publicly traded firms is lower than the
rate MF would pay when using a line of credit.

Questions:
a. Do you think that MF could issue commercial paper at the prevailing market rate?
 The risk of default of a commercial paper is influenced by issuer’s financial conditions
and cash flows. Higher the risk, higher would be the premium required to compensate the
excess risk. The large publicly traded firm is less prone to default sop the premium required
would be less. The risk of default by is more as compared to large publicly traded firm so the
rate on paper would be more. So, it cannot issue commercial paper at prevailing price.

b. Should MF obtain funds to cover payments for supplies by selling its holdings of Treasury
securities or by using its credit line? Which alternative has a lower cost? Explain.
 If the economy continues to be strong and the market interest rate increases, it would prefer
selling its treasury securities since the increasing market interest rate causes a national loss on
the risk free treasury securities. If it foresees a slow moving economy, it would cover payments
of its suppliers by using credit line which could be obtained at decreased market interest rates.

2. As the treasurer of a corporation, one of your jobs is to maintain investments in liquid securities such
as Treasury securities and commercial paper. Your goal is to earn a high return as possible but
without taking much of a risk.

Questions:
a. The yield curve is currently upward sloping, such that 10-year Treasury bonds have an
annualized yield of 3% above the annualized yield of three-month T-bills. Should you consider
using some of your funds to invest in 10-year Treasury securities?
 The goal of the treasurer is to maintain investment in liquid securities as well as to earn higher
return with lower risk. The yield on 10 year bond is 3 percent higher than the 3 months TBILLS. If
the company decides to invest in long-term securities, then it will have higher return but at the
same time the risk will also be high in long term. In order to maintain investment in liquid
securities and low risk we have to invest in 3 months T-bills.

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b. Assume that you have substantially more cash than you would possibly need for any liquidity
problems. Your boss suggests that you should consider investing the excess funds in some
money market securities that have a higher return than short-term Treasurysecurities, such as
negotiable certificates of deposit (NCDs). Even though NCDs are less liquid, this would not
cause a problem if you have more funds than you need. Given the situation, what use of the
excess funds would benefit the firm the most?
 The excess funds should be invested in money market securities. If these funds are
needed for liquidity purposes, they should be used to support the firm’s operations (and
therefore reduce the amount of funds that have to be borrowed)

c. Assume that commercial paper is currently offering an annualized yield of 7.5%, while Treasury
securities are offering an annualized yield of 7 %. Economic conditions have been stable, and
you expect conditions to be very favorable over the next six (6) months. Given this situation,
would you prefer to hold T-bills or a diversified portfolio of commercial paper issued by
various corporations?
 Since economic conditions are stable and are expected to have favorable condition in the
next six months, the best investment is the commercial paper. When economic conditions
are stable, it means that the interest rate will increase.

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

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