Questions one
The money market is very critical since with it, companies and many businesses with temporal cash can invest in the short term loans and securities adequately, on the other hand, they can sell the securities or borrow funds on short term basis in case they run short of capital for investments. The two securities or instruments which are in the money market are the short term debt and the securities. These tools possess characteristics which make them unique. The money market debt securities have the following features. The first characteristic is liquidity since they have loans or debts with short term maturities, for instance, they can take one year or even less. The second feature is that they are secured debt. They have high credit ratings which make them have a high degree of safety to the clients. Lastly, the debt money market instruments have discount pricing. This kind of debt have discount of that of their face value. These are the well-known characteristic of this sort of debt.
These characteristics are essential to the clients who want to have a mission of investing in the money market. First, they are assured of the security of their investment or the initial capital. The security rate of the investment is a significant factor to the investors. The second advantage is that it helps bail the financers in case they need money to invest on short term goals within the organization or any other project. Lastly is that there is a discount to the client who opts to take such kind of loans. Examples of the money market funds are inclusive but not limited to commercial paper, repurchase agreement, banker’s acceptance and many others.
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Question two
Banker's acceptance is a time draft drawn to the drawee or the bank by the drawer or the one party and is accepted by the drawee or the bank as a commitment of the bank to pay the payee or the third party in the future date some fixed amount of money. The bank makes a promised that at the maturity of the money, it would pay the draft. This acceptance or the agreement of the bank, therefore, makes it become liable primary for the payment of the draft on the stated date ( Havrylchyk, 2010).
Note that this type of transaction is very suitable for foreign trade or sales. The banker's acceptance is not a bank obligation. It is an order by a specific company to the bank in a certain country or a different country to pay a specific amount of money to a certain individual on a particular date. For instance, a company operating in France can get be interested in a supplier in the United States of America, since there is always less trust on this transaction between people who have not physically close, the company can opt to order a bank in the USA to pay the supplier on particular day which the company will receive the supplied commodities. The acceptance of the bank, in this case, is critical to both supplies and company since it creates trust.
Questions three
The adjustable mortgage is home loans with varying rates. These kinds of loans have some effects on the borrower's mortgages. First, there are lifetime’s caps which come with such kind of adjustable loans hence limits the rate of change of the adjustable rate mortgage on the borrower’s entire life. On the other hand, the adjustable rate mortgage has what is called the periodic caps which also have the capability of limiting the borrowers’ loans. The periodic caps restrict the rate of mortgage change during a given period, for instance, one year. Lastly, it may have a high rate of interest applied to the borrower's loans.
Reference
Havrylchyk, O. (2010). A macroeconomic credit risk model for stress testing the South African banking sector. South African Reserve Bank Working Paper, Vol. 3, No. 10.
