FIE100

Question 1

What characteristics define the money markets?

Answer 1

High Liquidity
Low Default risk
Short-term securities with high liquidity (makes the securities almost as Money itself)

Question 2

Why do government use money market?

Answer 2

They use it to support government spendings, by selling large number of securities, so that they can spend more money than the budget allows.

Question 3

Why do businesses use Money market?

Answer 3

To both invest and borrow money.

They borrow to meet short-term cash flow needs (möta kortfristiga lån).

And they invest in all kinds of market securities to an alternative to hold on to cash balances. (Slippa ha kontanter)

Question 4

A security’s price fully reflects all available information in an efficient market. True or false? explain.

Answer 4

TRUE!
A securities price is important because if the price is to high, no one will invest in the security and the money market will be less liquid.

Question 5

. What are the different forms of market efficiency? Explain.

Answer 5

1. Weak = Historical data
2. Semi-strong = Historical data+available information
3. Strong = Above + inside information.

Question 6

Provide three methods for testing for market efficiency?

Answer 6

1. Performance of investments, analysis and mutual funds.
2. Technological analysis
3. Random walk behavior. (Priset på en tillgång beror inte på historiska priser)

Question 7

Provide some evidence for and some evidence against market efficiency.

Answer 7

FOR:

• Performance of investment, analysis and mutual funds are NOT better than the average person.
• Analysis don’t get a higher return than average
• Random walk behavior is used in almost all markets.

AGAINST:
Small-firm effect
January effect
Mean reversion
Excessive volatility

Question 8

What is a premium bond?

Answer 8

A bond that is trading over its par value (nominella värde). When the coupon rate is higher than the interest rate.

Depend on if the investors want a higher yield and if so is, they will pay more for it.

Question 9

What is a discount bond?

Answer 9

A bond that is selling for less than its par value.

Question 10

What is the difference on a premium bond and a discount bond?

Answer 10

If both are sold for 1000sek, one with interest rate at 6% and one with 10%.

Everyone is going to buy the one with 10%.
So the other one needs to lower its price to be able to compete.

Question 11

What does par value mean?

Answer 11

The amount of Money that is promises to be repaid to investors at maturity date of a bond.

Question 12

What is asymmetric information?

Which two problems comes out of this?

Answer 12

The problem of asymmetrical information arises because buyers and sellers don’t have equal amounts of information.

1. Adverse selection.
   - When bad products are chosen because of Asymmetric information.
2. Moral Hazard.
   - When someone takes on a great risk because someone else is bearing the cost of that risk.

Question 13

What is the “Lemon-problem” ?

Answer 13

Two car sellers in the secondary market, one is honest about how well the car works and the other one is not honest (lemons problem).

Ex: An average car is worth 80 000 and a “lemon car” should only be worth 30 000.

Question 14

What is the main functions of Financial system?

Answer 14

1. Transfering resources across time and space.
2. Managing risk
3. Clearing and settling payments efficiently.
4. Subdiving shares.
5. Providing information
6. Dealing with asymmetric information.
   - Adverse selection
   - Moral Hazard

Question 15

Direct & Indirect finance means?

Answer 15

Direct: Borrowers borrow money directly from the financial market without using a third part.

Indirect: Borrowers go through a financial intermedia (ex. banks) to borrow money.

Question 16

Why is Indirect finance sometimes more important than direct finance?

Answer 16

Because when you ask a financial intermedia to help you, you now that you get the right information and can therefore avoid the problems that comes with asymmetric information, like adverse selection and moral hazard.

A financial intermedia can help planning your purchases and savings according to your needs.
This will improve the economies efficiency and the peoples economic welfare.