F02.V9.1 FINANCIAL INSTITUTIONS AND MARKETS – Assignment 3_03
What are the fundamental characteristics of money market debt instruments? Explain why
these characteristics are important to money market participants who are investing and
financing.
•Money market securities are attractive to investors for three reasons. They are high
quality (low default risk), marketable, and short-term. These types of instruments
protect the investor’s principal and offer liquidity via a ready market or maturity in
the near future. They also can be a source of income. For the borrower, money
market is a source of relatively cheap funds, with low financing costs.
What is a banker’s acceptance? Why banker’s acceptances are ideally suited for foreign
trade transactions?
•A banker’s acceptance is a trade bill of exchange (draft on a counter party in a
transaction) that has been accepted (liability of the bank) by a third party with an
excellent credit rating, in this case a large commercial back. With limited
knowledge of counter parties in transactions, third party “accepter “or guarantor is
welcome. Banks and competitors that participate in acceptances “grease the
wheels” of international trade.
Discuss three ways in which a change in the rate of an adjustable-rate mortgage can affect
the borrower’s mortgage.
•A mortgage may be adjustable a number of ways including, monthly payments,
varying maturity and loan expansion/contraction adjustments.