Essay Revision Q5

Question 1

Describe functions of the money market?

Answer 1

Surplus (investor) funds moved to deficit (borrower) shortfall.

Strong degree of reliability.

Question 2

4 other functions of money market?

Answer 2

1) the way a government can raise funds
2) the way a country’s MONETARY POLICY is implemented
3) a way to determine short term IR
4) a market for short term international trade finance

Question 3

What is a treasury bill?

Answer 3

Also known as a T-note, this is a short term (similar to promissory note)misused by RBA for the government.
- issued weekly by tender
- maturities of 5, 13, 26 weeks
- actively traded on secondary market
- considered most liquid of instruments (besides cash)
- banks are main purchasers
- RBA will use to influence money supply/inflation/growth
- yields are lower because less risky
-

Question 4

What is a certificate of deposit?

Answer 4

COD’s are issued by banks to bearers
They agree to pay a sum at a specific date

• similar to promissory notes (IOU) but are issued by banks not corporations which means they are more secure
• maturities of 90-180 days
• are approved by banks so firmly safe
• can be traded on secondary market
• min is $50,000

Question 5

Main differences between T-notes and COD’s (certificates of deposits)?

Answer 5

T- notes issued by government : COD’s by the banks
T-notes issued by tender in multiples of $1million .
COD’s min of of $50,000
T- notes maturities= 5, 13 and 26 weeks , COD’s 90-180 days

Question 6

Describe the nature of the money market?

Answer 6

Short term in nature.
Less than 12 months (longer is deemed capital market)
Have become more integrated due to 
- deregulation
- technology change 
- more informed consumers