Money market environment
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1. Why is information important to lenders? To borrowers? What type of information do parties engaging in financial transactions need? Why does it make sense to centralize information gathering and provision? How is this done? Is good availability of information beneficial to borrowers? For which borrowers in particular?
2. In many developing countries where debt financing is scarce, the deficiency is made up to some extent by the informal sector. A common device is to secure the loan with a postdated check. In countries where this device is used, failure to honor a check is a felony. If the borrower fails to pay, the lender deposits the check. If it bounces, the borrower goes to jail (in Bolivia, for about 4 years).
A. Is this a good method of dealing with default? How does the answer depend on the riskiness of the loan?
B. How will reliance on this method affect the amount of lending that takes place?
3. Why is it surprising that money markets exist? Why do they exist nonetheless? What factors explain the relative size of money markets in different countries?
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Solution Summary
This solution desribes players in money market.
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1. Why is information important to lenders?
Answer:
The primary purpose of information to lenders is avoidance of financial losses. Information gives them a clear picture of the economy in macro and micro level. In case of a plan to deposit substantial amount to the bank, a clear picture of the financial situation of the bank must be established and made available to prospective depositors. These will unburden them later of troubles associated with bank runs/defaults.
To borrowers?
Answer:
Borrowers, on the other hand, must be updated of financial information to guide them which lending agency has the least interest rates on loans.
What type of information do parties engaging in financial transactions need?
Answer:
For those in the financial transaction business, the following information minimizes financial risks:
- a daily update on the stock exchange
- annual reports of companies
- daily updates/news from around the world
Why does it make sense to centralize information gathering and provision? How is this done?
Answer:
Centralized information gathering and ...
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