Chaoter 9 - Bond And Money Markets

Question 1

Types of cash on deposit instruments

Answer 1

Call deposits
Notice deposits
Term deposits

Question 2

Types of money market instruments

Answer 2

Treasury bills
Local authority bills
Bills of exchange and commercial paper

Question 3

The main players in the market

Answer 3

Clearing banks
Central banks
Other financial institutions

Question 4

Investment and risk characteristics of cash on deposit and money market instruments

Answer 4

Good security, short term, depened on borrower
Return through income
Income has loose direct link with inflatiron
Lower expected returns than equities and bond over long term
Stable market values
Short term
Low dealing expenses
Normally highly marketable
Return normally taxed as income

Question 5

Reasons for holding cash on deposit and money market instruments

Answer 5

Meet short term commitments
Outgo is uncertain
Ready to take advantage of investment opportunities 
Awaiting investment 
Protect monetary value of assets

Question 6

Reasons for holding cash on deposit and money arket instruments

Pessimistic about

Answer 6

Rising interest rates
Economic recession
Domestic currency weakening
General economic uncertainty

Question 7

Bonds

Answer 7

Fixed interest or index linked

Question 8

Bond markets

Answer 8

Government bonds
Corporate bonds
Overseas bonds

Question 9

Fixed interest bonds

Answer 9

Good security 
Yield is fixed in nominal terms
Lower expected return than equities
Market values volatile
Mixture of terms
Low dealing expenses
Highly marketable

Question 10

Index linked bonds

Answer 10

Linked to inflation index

Question 11

Nominal yield on a fixed interest government bond

Answer 11

NY = rf real yield + E(future inflation) + inflation risk premium

Question 12

Relative attractiveness of fixed interest and index linked bonds

Answer 12

Future inflation lower than implied means fixed interest bonds more attractive and vice versa