JAIIB Paper 1 Module D Quiz 1

Price discovery is the process through which trading interest and information are reflected in market prices. Regulation may set trading rules, but it does not normally fix every traded security’s price.

Liquidity concerns how readily an asset can be traded without materially affecting its price. High liquidity does not guarantee high returns or eliminate risk.

New securities are issued in the primary market, and the issuer receives the funds raised, subject to issue costs and terms. Secondary-market trades generally transfer ownership between investors.

Secondary markets allow investors to trade existing securities. This liquidity can make primary issues more attractive, but resale prices and the ability to sell at a desired price are not guaranteed.

The money market deals mainly in short-term borrowing and lending instruments, while the capital market provides medium- and long-term funding through instruments such as shares and bonds.

Informed trading can cause publicly available information to be reflected in prices. The speed and completeness of this process vary, and prices can still be wrong or volatile.

Markets provide direct financing routes and tradable instruments, complementing bank lending. They do not guarantee funding or remove the need to assess credit, market and operational risks.

Diversification can reduce unsystematic, issuer-specific risk, but broad market movements can affect many securities simultaneously. This systematic risk cannot be eliminated simply by holding more shares.

Market makers quote prices at which they are willing to buy and sell, subject to market rules and their risk limits. Registrars and rating agencies have different functions.

Clearing calculates obligations and settlement completes the exchange of securities and funds. Robust systems reduce settlement risk but do not guarantee investment returns.

Call money is overnight, notice money is longer than overnight up to 14 days, and term money generally refers to borrowing/lending beyond 14 days. A 30-day borrowing therefore falls under term money.

Treasury Bills are short-term government securities commonly issued below face value and redeemed at face value. The discount represents the investor’s return rather than a periodic coupon payment.

Common T-bill maturities include 91 days, 182 days and 364 days. Longer dated government borrowing is generally undertaken through dated government securities rather than Treasury Bills.

A CD is a negotiable instrument representing a deposit raised by an eligible bank or permitted financial institution for a specified period. It differs from a normal savings account in form, tenor and marketability.

Commercial Paper is generally unsecured, so issuer credit quality matters. Investors may require a higher yield for greater perceived default risk; CP is not automatically sovereign-guaranteed.

A repo is economically a collateralised funding transaction. The repurchase price exceeds the initial price in a conventional positive-rate repo, with the difference reflecting financing cost under the contract.

In a repo transaction, one party provides cash and receives securities under an agreement to reverse the transaction later. Terminology can depend on the viewpoint and market framework, so the transaction mechanics matter.

Tri-party repo arrangements can include collateral management functions such as allocation, valuation, margining and permitted substitution. Substitution must meet eligibility and coverage requirements.

Rediscounting allows a holder of an eligible bill to obtain liquidity before maturity by discounting it with another institution. The bill remains a claim payable according to its terms.

LTROs provide banks with liquidity for a longer tenor than routine short-term operations, against eligible collateral and under the terms announced by the central bank. Their policy objective depends on the design of the operation.