ANSWERS TO END-OF-CHAPTER QUESTIONS

ANSWERS TO END-OF-CHAPTER QUESTIONS
1. Financial instruments with a maturity of one year or less are traded in money markets. Instruments with maturities greater than one year are traded in capital markets.
2. The federal funds market is a money market in which excess reserves are borrowed and loaned, often on an overnight basis. Term federal funds are traded for longer periods of time, usually no more than 90 days. Continuing contract federal funds transactions are essentially overnight transactions that are renewed each day. The excess reserves are in the form of deposits with the Federal Reserve System or interbank deposits. Transactions are recorded on a book—entry (as compared to physical— document) basis.
The call money market in Japan is similar to the U.S. federal funds market. Transactions are arranged through Tanshi companies that are licensed by Japan’s Ministry of Finance. The duration of call money transactions can be as short of half a day or as long as 7 days. Before 1985 all call money transactions were collateralized.
The interbank market in Hong Kong does not involve an intermediary. No collateral is required.
In the United Kingdom, discount houses have traditionally borrowed and loaned short—term money in transactions with the banking system. Recently, a parallel market or interbank market has developed to facilitate this type of transaction.
3. a. Twenty years ago, only domestic commercial banks were engaged in the federal funds and repurchase agreement markets. Now, however, foreign commercial banks, domestic savings and loan associations, mutual savings banks, and securities brokers and dealers together comprise as much as 40 percent of the market.
b. In the late 1960s, domestic commercial banks were the only issuers of negotiable certificates of deposit (NCD5). By 1979,