1. How do the roles of money market dealers and brokers differ? 2. Define the following a. default..

QUESTION

1. How do the roles of money market dealers and brokers differ?2. Define the followinga. default riskb. liquidity riskc. reinvestment riskd. interest rate riske. prepayment risk3. What is the difference between a primary and a secondary market? Why does a primary market functionally depend on the secondary market?4. Distinguish between discount securities and coupon securities.5. What is an investment policy? What are the key inputs that a company might use in developing the policy?6. What are the pros and cons of using an outside advisors to manage a companys short-term portfolio?7. What types of risks are reduced by diversification?8. How do forecasting and short-term borrowing strategies relate?9. What factors cause the nominal rate on a credit line to differ from its effective rate?10. How does a firms short-term financing strategy impact its liquidity?
1. One of the main differences between a money market broker and dealer is their role within the market and the capital required. A broker is a person who executes the trade on behalf of others and a dealer is a person who trades business on their own behalf. A dealer will buy and sell securities on their own account, while a broker will buy and sell securities for their clients. 2. a. default risk The event in which companies or individuals will be unable to make the required payments on their debt obligations. b. liquidity risk The risk stemming from the lack of marketability of an investment that cannot be bought or sold quickly enough to prevent or minimize loss. c. reinvestment risk The risk that future coupons from a bond will not be reinvested at the prevailing interest rate when the bond was initially purchased. d. interest rate risk The risk that an investments value will change due to a change in the absolute level of interest rates, in the spread between two rates, in the shape of the yield curve or in any other interest rate relationship. e. prepayment risk The risk associated with the early unscheduled return of principal on a fixed income security. 3. The difference between the primary and secondary market is that the primary market is where securities are created. It is the market where firms sell new stocks and bonds to the public for the first time. A simple way to look at this is it is the market where IPOs are first sold to the public.

he secondary market is the place that people refer to when they are talking about the stock market. It includes The NYSE, Nasdaq, and the many other major markets of the world. In the secondary market, investors will trade among themselves. This is where all previously issued securities are traded without the issuing companies involvement. A primary market functionally depends on the secondary market for liquidity. The secondary market provides liquidation to the investors. 4. Discount securities are securities that are sold at a price below the face value, or a security that is issued for a price below the face value, but pays out the face value at maturity. Coupon securities are government securities which carry a coupon and pay interest, as opposed to one which pays no interest but is sold as a discount to its face value. 5. Investment policy is a statement that defines general investment goals and objectives. It will described specific strategies used to meet the stated objectives. Some key inputs that a company may use to develop this policy include asset allocation, risk tolerance, and liquidity requirements. 6. Some of the pros of having an outside advisor to manage a companys short-term portfolio is that outside advisors have the expertise and resources to efficiently conduct individual security and portfolio investment analysis. A con of using an outside advisor is the cost of utilizing them. It can become expensive to access their services. 7. A risk that is reduced through diversification is diversifiable risk. This is known as unsystematic risk, and it is specific to either a market, industry, company, economy, or country. The common sources that are derived from unsystematic risk are business risk and financial risk. The aim of this diversification is to invest in various different assets so that they will not all be affected in the same way during market events. 8. Forecasting and short -term borrowing strategies relate in that forecasting must be made to minimize the cost of short-term borrowing. If the span of time being forecasted is less than one year, then it is considered short term forecasting, and its implementation is essential for the success of short-term borrowing strategies. 9. Some factors that cause nominal interest rates to differ from it effective interest rate, is when the nominal rate is compounded. Nominal interest rates are the stated, advertised, or quoted rates. No time period is therefore stated, making per year time periods assumed. The effective interest rates are what borrowers have to actually pay, and they depend on how often the nominal rate is compounded to be known. When the nominal interest rate is compounded, its interest is added to the balance of the loan. 10. A firms short-term financing strategy impacts its liquidity through the management of short term funds. Effective management of short term funds is a primary generative source of liquidity. This includes financing for the short term, less than 1 year out, for trade credits and bank loans. When done effectively, the firms liquidity will increase.

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