Philippine School of Business Administration Manila Campus Managerial Economics Midterm Examination

PHILIPPINE SCHOOL OF BUSINESS ADMINISTRATION
MANILA CAMPUS
MANAGERIAL ECONOMICS MIDTERM EXAMINATION
INSTRUCTIONS:
This examination will assess how much you have learned from the lessons given to you. Since
this is a summative assessment, you are required to:
a. Open your camera all the time

b. Refrain from doing unnecessary movements
c. Make sure to complete the assessment
d. Do not open any other platform or tab other than your gclassroom account
e. Do not send any message to your classmates nor to your Professor.
f. Focus and finalize your answer.
QUESTIONS:
1. Explain the different types of financial markets. Give examples to each financial market.
1. Primary Market: This is the market where freshly issued securities are bought and sold directly
between the issuer and the investor. Examples: Initial Public Offerings (IPOs), bond issues, private
placements.
2. Secondary Market: This is the market where investors trade securities that were previously issued by
the primary market. Examples: Stock exchanges, bond exchanges.
3. Money Market: This is the market where short-term debt securities are traded, usually for periods of
up to one year. Examples: Treasury bills, certificates of deposit, commercial paper.
4. Derivatives Market: This is the market where derivatives are traded. Derivatives are contracts
between two or more parties that are based on the value of an underlying asset. Examples: Options,
futures, swaps.
5. Foreign Exchange Market: This is the market where currencies are traded. Examples: Spot
transactions, forward contracts, currency swaps.
6. Over-the-Counter (OTC) Market: This is the market where securities are traded directly between two
parties without the use of an exchange. Examples: Credit default swaps, interest rate swaps, currency
swaps.
2. Illustrate and discuss how funds flow in a financial system.
The flow of funds in a financial system can be broken down into four stages:
1. Savings: This is when individuals, businesses, and the government put their money into financial
institutions such as banks, investment funds, and insurance companies. These funds are then invested in
a variety of assets, such as stocks, bonds, and mortgages.
2. Borrowing: Financial institutions also provide loans to individuals and businesses, which are then used
for a variety of purposes such as purchasing homes, cars, and investments.
3. Investment: Funds from savings and borrowing are then used to invest in a variety of assets, such as
stocks, bonds, and mortgages. These investments can generate returns in the form of dividends and
interest payments.
4. Distribution: Finally, the returns from investments are distributed back to the individuals, businesses,
and the government who originally invested the funds. This money is then used to pay down debt, fund
new investments, and save for the future.
3. Differentiate between debt market and equity market. Cite examples.

Debt markets are where people and institutions buy and sell debt securities, such as bonds, Treasury
bills, and commercial paper. These investments offer a fixed rate of return and are typically backed by
the issuing institution or government. Examples of debt securities include US Treasury Bonds and
corporate bonds.
Equity markets are where people and institutions buy and sell stocks, which are ownership interests in
companies. These investments offer a variable rate of return and are not backed by any issuing
institution or government. Examples of stocks include Apple, Microsoft, and Amazon.
4. Elaborate transaction costs in relation to economies of scale.

Transaction costs refer to the costs incurred when carrying out a business transaction. They include
costs such as search costs, negotiation costs, information costs, and bargaining costs. In relation to
economies of scale, transaction costs can impact the ability of a firm to benefit from economies of scale.
For example, if a firm has high transaction costs, it may not be able to achieve the same cost savings
from bulk purchasing as a firm with lower transaction costs. This can reduce the potential returns from
economies of scale. Transaction costs can also prevent firms from taking advantage of economies of
scale through mergers and acquisitions. The costs associated with researching and negotiating a
potential merger or acquisition can be quite high, and if these costs are too high, a firm may not be able
to benefit from economies of scale.
5. Discuss how demand and supply for bonds shift through its determinants.
When economic growth is strong, investors may choose to invest in riskier assets, such as stocks and
commodities, which may lead to a decrease in demand for bonds. On the other hand, when economic
growth is weak, investors may choose to invest in less risky assets like bonds, which may lead to an
increase in demand for bonds. When risk increases, investors may choose to invest in assets with lower
risk, such as bonds, which may lead to an increase in demand for bonds. Conversely, when risk
decreases, investors may choose to invest in higher-risk assets, such as stocks or commodities, which
may lead to a decrease in demand for bonds. The demand and supply for bonds are heavily influenced
by macroeconomic factors, such as interest rates, inflation, economic growth, and risk. When these
factors shift, it will lead to a corresponding shift in demand and supply for bonds.
6. Analyze how interest rate risk and credit risk are managed.
Interest rate risk is managed by using a variety of financial instruments such as futures, forwards, swaps,
and options. These instruments allow investors to hedge their interest rate exposure by locking in
specific rates for a predetermined time period.
Credit risk is managed by assessing a potential borrower's creditworthiness, which is typically done using
credit scoring. Credit scoring provides lenders with a score based on the borrower's credit history and
other factors. A higher credit score typically indicates a lower risk of defaulting on the loan. Lenders also
use other measures such as collateral and personal guarantees to reduce their exposure to credit risk.
7. Evaluate the roles and responsibilities of Banko Sentral ng Pilipinas.
The Banko Sentral ng Pilipinas (BSP) is the central monetary authority of the Philippines. It is responsible
for maintaining price stability and ensuring the soundness and stability of the banking and financial
system. The BSP’s primary roles and responsibilities include:
• Formulating and implementing monetary policies. This includes setting the interest rate and managing
the country’s money supply.
• Regulating the country’s banking and financial system. This includes setting the minimum capital
requirements for banks, approving mergers and acquisitions, and setting the rules for the use of
financial products such as credit cards and debit cards.
• Supervising banks, non-bank financial institutions, and money service businesses. This includes
ensuring that these institutions comply with BSP regulations and international standards.
• Establishing and enforcing rules on anti-money laundering and combating the financing of terrorism.
• Acting as lender of last resort in times of financial crisis. The BSP provides liquidity to the banking
system when the private sector is unable to do so.
• Issuing the country’s currency and coins.
• Promoting financial literacy and consumer protection.
• Monitoring the foreign exchange market and intervening

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PHILIPPINE SCHOOL OF BUSINESS ADMINISTRATION

a. Open your camera all the time

3. Differentiate between debt market and equity market. Cite examples.

4. Elaborate transaction costs in relation to economies of scale.

7. Evaluate the roles and responsibilities of Banko Sentral ng Pilipinas.

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