Question

1. What do you think is the need for a company to issue securities in the money and stock markets?

2. Your broker has offered you to invest in mortgage-backed securities as a lifelong investment opportunity. The broker explained that these securities are entitled to receive principal and interest payments from the mortgage fund. To assess the risk of this investment, make a list of questions you should ask your broker.

Answer 1

1]

Money market is the market for short-term debt. It is the market where lenders of short term funds supply funds to borrowers of short term funds.

A company would issue securities in the money market because :

• It enables the company to borrow at the lowest cost possible because a liquid and well-functioning money market enables discovery of the market interest rate
• It enables the company to borrow at the lowest cost possible because the risk is shared by the many investors, whereas in case of a bank loan, the lender bears all the risk
• For some companies which are well established, issuing money market securities can be cheaper and more efficient than approaching banks for funds
• Financial institutions may be unable to supply the company with the required amount of funds at the best interest rate

Stock market is the market for long term capital. It is the market where suppliers of long term capital supply long term capital to those who need long term capital.

A company would issue securities in the stock market because :

• Private investors or promoters may be unable to invest a huge amount of capital
• Public listing of a company raises its profile and reputation