Money And Banking Essay

953 words - 4 pages

1) Financial Instruments
Using your own words, in no more than 10 short clear sentences; describe each of the following financial instruments, including the kind of claim (debt or equity), maturity (money market or capital market), risk, and liquidity characteristics, and any other distinguishing characteristics. Identify a type of financial institution or other participant in the financial market (individuals, government, business) that are most likely to borrow using these instruments (hold as liabilities on their balance sheet), and a type of institution or other participant that is most likely to lend using these instruments (i.e., buy and hold these instruments as assets on ...view middle of the document...

(c) Residential Mortgages
Residential Mortgages: Capital Market Instrument. Residential mortgages are loans to households to purchase housing where the structure itself serves as collateral for these loans. Institutions that lend (assets) using this instrument are: savings and loans associations, mutual saving banks, commercial banks. They are typically long maturity, more risky than government securities but less risky than uncollateralized debt.

(d) Repurchase Agreements
Repurchase Agreements: Money Market Instrument. Short-term loans (maturity less than two weeks) in which Treasury bills serve as collateral, thus they are low risk. They are an important source of bank funds. The most important lenders are large corporations.

(e) Commercial Paper
Commercial Paper: Money Market Instrument. Is a short term debt instrument issued by large banks and well known corporations such as General Electric and GM. Although they are not as liquid and safe as Treasury bills (there is a possibility of default), they are relatively liquid and safe. Before the 1960s, corporations
usually borrowed their short-term funds from banks, but since then they have come
to rely more heavily on selling commercial paper to other financial intermediaries and corporations for their immediate borrowing needs; in other words, they engage in direct finance. Growth of the commercial paper market has been substantial: The amount of commercial paper outstanding has increased by over 3,900% (from $33 billion to $1.3 trillion) in the period 1970–2002.

(f) Federal Funds

Federal Funds: Money Market Instrument. Despite the name, they are not made by the Federal Reserve. They are over-night loans between banks of their deposits at the Fed. They are relatively safe

2) Financial Institutions

Describe each of the following financial institutions. If it is a financial intermediary, describe what type of liabilities it issues and who holds these liabilities, as well as what kinds of assets it holds and who issued these assets. If it is not a financial intermediary, describe the role of the...

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