Money and Capital Markes
4. A customer has approached a commercial bank seeking to invest funds for a period of six months. The customer is considering lodging the funds in a term deposit or, alternatively, purchasing a negotiable certificate of deposit.
(a) Explain each of these investment products to the customer.
Term Deposits are funds lodged in an account for a predetermined period and at a specified fixed interest rate. A Certificate of Deposit (CD) is a short-term discount security issued by a bank; face value repayable at maturity.
(b) Why might the CD be a more appropriate investment choice?
A CD would be the more appropriate investment choice, as the customer is only looking to invest his/her money for six months. Though the bank may offer a term deposit to suit him/her, CDs are much more flexible. If the CD has a maturity of longer than six months, it can be reissued into the deeply liquid secondary money markets whenever the customer chooses.
6. Commercial banks are the principal providers of loan finance to the household sector. Identify five different types of loan finance that a bank offers to individuals.
Briefly explain the nature and purpose of each of these types of loans.
Housing Finance - the provision of long-term funds to enable the purchase of residential property. The bank registers a mortgage over the property as security for the loan, such that it will tank possession of the house and sell it should the borrowers fail to meet their housing loan commitments.
Investment Property Finance - funding that enables a borrower to purchase property to rent or lease to a third party. Again, the bank will take a registered mortgage over the property as security for the loan.
Fixed-term Loan - a loan provided for a predetermined period; use to purchase specified goods or services. The bank will require some form of security to support the loan.
Credit Card - a card facility that provides access to funds through electronic distribution systems. They typically have
(a) Explain each of these investment products to the customer.
Term Deposits are funds lodged in an account for a predetermined period and at a specified fixed interest rate. A Certificate of Deposit (CD) is a short-term discount security issued by a bank; face value repayable at maturity.
(b) Why might the CD be a more appropriate investment choice?
A CD would be the more appropriate investment choice, as the customer is only looking to invest his/her money for six months. Though the bank may offer a term deposit to suit him/her, CDs are much more flexible. If the CD has a maturity of longer than six months, it can be reissued into the deeply liquid secondary money markets whenever the customer chooses.
6. Commercial banks are the principal providers of loan finance to the household sector. Identify five different types of loan finance that a bank offers to individuals.
Briefly explain the nature and purpose of each of these types of loans.
Housing Finance - the provision of long-term funds to enable the purchase of residential property. The bank registers a mortgage over the property as security for the loan, such that it will tank possession of the house and sell it should the borrowers fail to meet their housing loan commitments.
Investment Property Finance - funding that enables a borrower to purchase property to rent or lease to a third party. Again, the bank will take a registered mortgage over the property as security for the loan.
Fixed-term Loan - a loan provided for a predetermined period; use to purchase specified goods or services. The bank will require some form of security to support the loan.
Credit Card - a card facility that provides access to funds through electronic distribution systems. They typically have