Question

a) Discuss the role played by bond and money markets in an economy. Who are the main participants in these markets?

b) Discuss the view that the globalization of financial services is likely to increase the complexity of banking regulation.

c) What is the price of a 20-year, zero-coupon bond with a yield of 5.1% and a £1,000 face value?

d) Briefly discuss the following statement: “If interest rates decline, the buyers of both a Forward Rate Agreement (FRA) and interest rate futures contract will benefit”.

Answer 1

Role played by bond and money markets in an economy and their participants:

1. The bond market is a medium where investors can purchase debt security instruments issued by either Governmnt or Corporates.

2. The participants involved in the bond markets include:

Issuers who sell debt securities to raise funds for their business needs. Mostly debt issuers are Government, Corporates etc.

Underwriters, like investment banks and other agencies who help the bond issuers in selling their bonds

Bond purchasers, individuals or entities (Government, corporates) who buy the bonds at the issue price.

3. The Bond market helps an economy grow and survive by effectively transferring the funds from those who have in surplus (bond purchasers) to those who are in need of such funds (bond issuers). Ultimately these funds help the businesses in carrying our their short term and long term operations and thus effectively contribute to the GDP of the Economy.

4. Money market refers to dealing and trading in highly liquid short term securities (debt instruments). It is characterized by large degree of safety and a lower rate of interest.

5. The participants of money market include:

Banks who lend to one another and also to large Corporates

Companies that raise funds by selling short term instruments like commercial paper into the mone market

Investors who buy such securities to keep their funds for short term.

6. Money Market also helps in transferring surplus funds to those who need them for carrying out business operations. It helps individuals and entities to have a liquid investment and keep their funds parked in a safe place for short term. Thus on an overall level, it helps an Economy grow.

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