Select Only 5 From The Questions Available Below

Mid Exam
Money Market and Capital Market (FEB 402)
April 24, 2020
13:00 – 15.30 (150 minute)
Select Only 5 from the questions available below
1. What are the fundamental differences in the money market and capital market?
Answer:
Capital Markets are financial markets for the buying and selling of long-term debt or equity-
backed securities. The primary role of the capital market is to raise long-term funds for
governments, banks, and corporations while providing a platform for the trading of securities.
Money Market is a market for short-term financial assets that can be turned over quickly at a low
cost. A short-term financial asset in this context may be construed as any financial asset which
can be quickly converted into money with minimum transaction cost within a period of one year.
2. Explain what is traded on the secondary market?
Answer:
The secondary market is where investors buy and sell securities from other investors (think of
stock exchanges). For example, if you go to buy Apple stock, you would purchase the stock from
investors who already own the stock rather than Apple. Apple would not be involved in the
transaction.
Examples of popular secondary markets are the National Stock Exchange (NSE), the New York
Stock Exchange (NYSE), the NASDAQ, and the London Stock Exchange (LSE).
3. What is the function and role of the underwriter?

Answer:
The underwriter involves four basic functions: 1) selection of risks, 2) classification and rating, 3)
policy forms, and 4) retention and reinsurance. By performing these four functions the
underwriter increases the possibility of securing a safe and profitable distribution of risks.
RISK SELECTION.
In this step the underwriter decides whether or not to accept a particular risk. It involves securing
factual information from the applicant, evaluating that information, and deciding on a course of
action. The underwriter is typically aided by a list of acceptable and prohibited risks.
CLASSIFICATION AND RATING.

Once the risk has been accepted, the underwriter then classifies and rates the policy. Several
tentative classifications are usually assigned before a final decision on classifying the risk is
reached. The purpose of using classifications is to separate risks into homogeneous groups to
which rates can be assigned. Insurers may have their own classification and rating system, or they
may obtain a system from a rating bureau.
POLICY FORMS.
After determining the acceptability of an applicant and assigning the proper classification and
rating, the underwriter is ready to issue an insurance policy. The underwriter must be familiar
with the different types of policies available as well as be able to modify the form to fit the needs
of the applicant.
The first three underwriting functions—risk selection, classification and rating, and policy
selection—are interdependent. That is, the underwriter determines that a certain risk is acceptable
when specified rates and forms are used. The underwriter also performs a fourth separate function
on every risk before the underwriting is complete: reinsurance.
RETENTION AND REINSURANCE.

Reinsurance involves protecting the insurance company against a certain portion of potential
losses. Every risk presents the possibility of loss that will equal or exceed the policy limits. It is
up to the underwriter to protect his or her company from undue financial strain. The underwriter
does this by retaining only a certain portion of the risk and securing reinsurance for the remainder
of the risk.
4. Explain the following terms:

Answer:
a. Call money
Answer:
Call money is any type of short-term, interest-earning financial loan that the borrower has to pay back
immediately whenever the lender demands it.
Call money allows banks to earn interest, known as the call loan rate, on their surplus funds.
Call money is typically used by brokerage firms for short-term funding needs.
b. Repurchase Agreement (Repo)

Answer:
A repurchase agreement, or 'repo', is a short-term agreement to sell securities in order to buy them
back at a slightly higher price.
The one selling the repo is effectively borrowing and the other party is lending, since the lender is
credited the implicit interest in the difference in prices from initiation to repurchase.
Repos and reverse repos are thus used for short-term borrowing and lending, often with a tenor of
overnight to 48 hours.
The implicit interest rate on these agreements is known as the repo rate, a proxy for the overnight risk-
free rate.
5. Explain the difference between Bonds and Shares (Stock)?

Answer:
The difference between stocks and bonds is that stocks are shares in the ownership of a business,
while bonds are a form of debt that the issuing entity promises to repay at some point in the
future. A balance between the two types of funding must be achieved to ensure a proper capital
structure for a business. More specifically, here are the key differences between stocks and
bonds:
 Priority of repayment. In the event of the liquidation of a business, the holders of its stock
have the last claim on any residual cash, whereas the holders of its bonds have a
considerably higher priority, depending on the terms of the bonds. This means that stocks
are a riskier investment than bonds.
 Periodic payments. A company has the option to reward its shareholders with dividends,
whereas it is usually obligated to make periodic interest payments to its bond holders for
very specific amounts. Some bond agreements allow their issuers to delay or cancel
interest payments, but this is not a common feature. A delayed payment or cancellation
feature reduces the amount that investors will be willing to pay for a bond.
 Voting rights. The holders of stock can vote on certain company issues, such as the
election of directors. Bond holders have no voting rights.
6. Explain the difference between the primary market and the secondary market in the capital market?
7. Explain the functions of the following Self-Regulatory Organizations (SRO):
a. KPEI (Indonesian Securities Guarantor Clearing)

b. KSEI (Indonesian Securities Depository)
8. Explain what is meant by an Initial Public Offering (IPO)
9. Explain what is meant by the foreign exchange market?
10. Explain according to what you know, explain the regulatory structure that exists in the money market
and capital market?

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Mid Exam

Money Market and Capital Market (FEB 402)

April 24, 2020

13:00 – 15.30 (150 minute)

Select Only 5 from the questions available below

3. What is the function and role of the underwriter?

CLASSIFICATION AND RATING.

RETENTION AND REINSURANCE.

4. Explain the following terms:

b. Repurchase Agreement (Repo)

5. Explain the difference between Bonds and Shares (Stock)?

7. Explain the functions of the following Self-Regulatory Organizations (SRO):

a. KPEI (Indonesian Securities Guarantor Clearing)

8. Explain what is meant by an Initial Public Offering (IPO)

9. Explain what is meant by the foreign exchange market?

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