Deck 6: Money Markets

Question 1

A newly issued T-bill with a $10,000 par value sells for $9,750, and has a 90-day maturity. What is the discount?

A)10.26 percent
B)0.26 percent
C)$2,500
D)10.00 percent
E)11.00 percent

Answer 1

D

Question 2

____ is/are sold at an auction at a discount from par value.

A)Treasury bills
B)Repurchase agreements
C)Banker's acceptances
D)Commercial paper

Answer 2

A

Question 3

Which of the following is NOT a money market instrument?

A)banker's acceptance
B)commercial paper
C)negotiable CD
D)repurchase agreement
E)All of these are money market instruments.

Answer 3

E

Question 4

Assume investors require a 5 percent annualized return on a six-month T-bill with a par value of $10,000. The price investors would be willing to pay is $____.

A)10,000
B)9,524
C)9,756
D)None of these are correct.

Question 5

An investor initially purchased securities at a price of $9,923,418, with an agreement to sell them back at a price of $10,000,000 at the end of a 90-day period. The repo rate is ____ percent.

A)3.10
B)0.77
C)1.00
D)None of these are correct.

Question 6

An investor buys commercial paper with a 60-day maturity for $985,000. Par value is $1,000,000, and the investor holds it to maturity. What is the annualized yield?

A)8.62 percent
B)8.78 percent
C)8.90 percent
D)9.14 percent
E)9.00 percent

Question 7

Which of the following is true of money market instruments?

A)Their yields are highly correlated over time.
B)They typically sell for par value when they are initially issued (especially T-bills and commercial paper).
C)Treasury bills have the highest yield.
D)They all make periodic coupon (interest)payments.
E)They typically sell for par value when they are initially issued (especially T-bills and commercial paper)AND t reasury bills have the highest yield.

Question 8

The federal funds market allows depository institutions to borrow

A)short-term funds from each other.
B)short-term funds from the Treasury.
C)long-term funds from each other.
D)long-term funds from the Federal Reserve.
E)short-term funds from the Treasury AND long-term funds from the Federal Reserve.

Question 9

Securities with maturities of one year or less are classified as

A)capital market instruments.
B)money market instruments.
C)preferred stock.
D)None of these are correct.

Question 10

A firm plans to issue 30-day commercial paper for $9,900,000. Par value is $10,000,000. What is the firm's cost of borrowing?

A)12.12 percent
B)11.11 percent
C)13.00 percent
D)14.08 percent
E)15.25 percent

Question 11

When a bank guarantees a future payment to a firm, the financial instrument used is called

A)a repurchase agreement.
B)a negotiable CD.
C)a banker's acceptance.
D)commercial paper.

Question 12

T-bills and commercial paper are sold

A)with a stated coupon rate.
B)at a discount from par value.
C)at a premium above par value.
D)with a stated coupon rate AND at a premium above par value.
E)None of these are correct.

Question 13

Large corporations typically make ____ bids for T-bills so they can purchase larger amounts.

A)competitive
B)noncompetitive
C)very small
D)none of the above

Question 14

An investor purchased an NCD a year ago in the secondary market for $980,000. She redeems it today and receives $1,000,000. She also receives interest of $30,000. The investor's annualized yield on this investment is

A)2.0 percent.
B)5.10 percent.
C)5.00 percent.
D)2.04 percent.

Question 15

A repurchase agreement calls for an investor to buy securities for $4,925,000 and sell them back in 60 days for $5,000,000. What is the yield?

A)9.43 percent
B)9.28 percent
C)9.14 percent
D)9.00 percent

Question 16

Jarrod King, a private investor, purchases a Treasury bill with a $10,000 par value for $9,645. One hundred days later, Jarrod sells the T-bill for $9,719. What is Jarrod's expected annualized yield from this transaction?

A)13.43 percent
B)2.25 percent
C)10.55 percent
D)2.80 percent
E)None of these are correct.

Question 17

Which of the following is NOT a money market security?

A)Treasury bill
B)negotiable certificate of deposit
C)common stock
D)federal funds

Question 18

At any given time, the yield on commercial paper is ____ the yield on a T-bill with the same maturity.

A)slightly less than
B)slightly higher than
C)equal to
D)much less than

Question 19

Commercial paper has a maximum maturity of ____ days.

A)45
B)270
C)360
D)None of these are correct.

Question 20

The rate at which depository institutions effectively lend or borrow funds from each other is the ____.

A)federal funds rate
B)discount rate
C)prime rate
D)repo rate

Question 21

An investor, purchases a six-month (182-day)T-bill with a $10,000 par value for $9,700. If the Treasury bill is held to maturity, the annualized yield is ____ percent.

A)6.52
B)1.54
C)1.50
D)6.20
E)None of these are correct.

Question 22

Commercial paper is

A)always directly placed with investors.
B)always placed with the help of commercial paper dealers.
C)placed either directly or with the help of commercial paper dealers.
D)always placed by bank holding companies.

Question 23

The effective yield of a foreign money market security is ____ when the foreign currency weakens against the dollar.

A)increased
B)reduced
C)always negative
D)unaffected

Question 24

Which of the following may be issued in the primary market by well-known creditworthy firms to borrow funds?

A)banker's acceptances
B)retail CDs
C)commercial paper
D)federal funds

Question 25

Treasury bills

A)have a maturity of up to five years.
B)have an active secondary market.
C)are commonly sold at par value.
D)commonly offer coupon payments.

Question 26

The rate on Eurodollar floating-rate CDs is based on

A)a weighted average of European prime rates.
B)the London Interbank Offer Rate.
C)the U.S. prime rate.
D)a weighted average of European discount rates.

Question 27

The yield on NCDs is ____ the yield of Treasury bills of the same maturity. The difference between their yields would be especially large during a ____ period.

A)higher than; recessionary
B)higher than; boom economy
C)less than; boom economy
D)less than; recessionary

Question 28

Which money market transaction is most likely to represent a loan from one commercial bank to another?

A)banker's acceptance
B)negotiable CD
C)federal funds
D)commercial paper

Question 29

Treasury bills are sold through ____ when initially issued.

A)insurance companies
B)commercial paper dealers
C)auction
D)finance companies

Question 30

Robbins Corp. frequently invests excess funds in the Mexican money market. One year ago, Robbins invested in a one-year Mexican money market security that provided a yield of 25 percent. At the end of the year, when Robbins converted the Mexican pesos to dollars, the peso had depreciated from $.12 to $.11. What is the effective yield earned by Robbins?

A)25.00 percent
B)35.41 percent
C)14.59 percent
D)None of these are correct.

Question 31

The effective yield of a foreign money market security is ____ when the foreign currency strengthens against the dollar.

A)increased
B)reduced
C)always negative
D)unaffected

Question 32

When an investor purchases a six-month (182-day)T-bill with a $10,000 par value for $9,700, the Treasury bill discount is ____ percent.

A)5.93
B)6.12
C)6.20
D)6.02
E)None of these are correct.

Question 33

The minimum denomination of commercial paper is

A)$25,000.
B)$100,000.
C)$150,000.
D)$200,000.

Question 34

An increase in an indicator of inflation such as the consumer price index may create expectations of ________ interest rates and place _______ pressure on the prices of money market securities.

A)lower; downward
B)lower; upward
C)higher; downward
D)higher; upward

Question 35

The yield on commercial paper is ____ the yield of Treasury bills of the same maturity. The difference between their yields would be especially large during a ____ period.

A)higher than; recessionary
B)higher than; boom economy
C)less than; boom economy
D)less than; recessionary

Question 36

____ are the most active participants in the federal funds market.

A)Savings and loan associations
B)Securities firms
C)Credit unions
D)Commercial banks

Question 37

At a given point in time, the actual price paid for a three-month Treasury bill is

A)usually equal to the par value.
B)more than the price paid for a six-month Treasury bill.
C)equal to the price paid for a six-month Treasury bill.
D)None of these are correct.

Question 38

Which of the following is NOT true about Eurodollar securities?

A)Eurodollars are U.S. dollars deposited in the United States by European investors.
B)The interest rate on Eurodollar floating-rate CDs adjusts periodically to the LIBOR.
C)Eurodollar securities include Euronotes and Euro-commercial paper.
D)The volume of Eurodollar CDs has grown because the U.S. dollar is used in a significant number of international transactions.

Question 39

The yields offered on asset-backed commercial paper are often ______ the yields offered on unsecured commercial paper.

A)equal to
B)lower than
C)higher than
D)more variable

Question 40

Which of the following statements is incorrect with respect to the federal funds rate?

A)It is the rate charged by financial institutions on loans they extend to each other.
B)It is the interest rate in which the Federal Reserve charges on loans that it provides to commercial banks.
C)Commercial banks are the most active participants in the federal funds market.
D)Financial market participants view changes in the federal funds rate as an indicator of potential changes in other money market rates.
E)The Federal Reserve adjusts the amount of funds in depository institutions in order to influence the federal funds rate.

Question 41

An international interbank market facilitates the transfer of funds from banks with excess funds to those with deficient funds.

Question 42

Money market securities are issued in the primary market through a telecommunications network by the Treasury, corporations, and financial intermediaries that wish to obtain short-term financing.

Question 43

You purchase a six-month (182-day)T-bill with a $10,000 par value for $9,800. The Treasury bill discount is ____ percent.

A)3.96
B)4.09
C)6.20
D)3.56
E)None of these are correct.

Question 44

T-bills do not offer coupon payments but are sold at a discount from par value.

Question 45

A private investor purchases a six-month (182-day)T-bill with a $10,000 par value for $9,800. If she holds the Treasury bill to maturity, her annualized yield is ____ percent.

A)3.96
B)4.54
C)1.50
D)4.09
E)None of these are correct.

Question 46

The amount of commercial paper outstanding today is approximately twice as large as it was before the credit crisis that began in 2008.

Question 47

Most repo transactions use government securities.

Question 48

Junk commercial paper is commercial paper that is not rated or has a low rating.

Question 49

There is no limit to the amount of T-bills that can be purchased by noncompetitive bidders in a T-bill auction.

Question 50

T-bills must offer a premium above negotiable certificates of deposit (NCDs)to compensate for less liquidity and safety.

Question 51

Money markets are used to facilitate the transfer of short-term funds from individuals, corporations, or governments with excess funds to those with deficient funds.

Question 52

The price that competitive and noncompetitive bidders will pay at a Treasury bill auction is the

A)highest price entered by a competitive bidder.
B)highest price entered by a noncompetitive bidder.
C)lowest accepted bid price entered by a competitive bidder.
D)equally weighted average price paid by all competitive bidders whose bids were accepted.
E)None of these are correct.

Question 53

Because money market securities have a short-term maturity and typically cannot be sold easily, they provide investors with a low degree of liquidity.

Question 54

Exporters can hold a banker's acceptance until the date at which payment is to be made, but they frequently sell the acceptance before then at a discount to obtain cash immediately.

Question 55

Money market securities must have a maturity of three months or less.

Question 56

During periods of uncertainty about the economy, there is a shift from risky money market securities to Treasury securities.

Question 57

Money market security values are less sensitive to interest rate movements than bonds.

Question 58

If economic conditions cause investors to sell stocks because they want to invest in safer securities with much liquidity, this should cause a ____ demand for money market securities, which would place ____ pressure on the yields of money market securities.

A)weak; downward
B)weak; upward
C)strong; upward
D)None of these are correct.

Question 59

A line of credit provided by a commercial bank gives a company the right (but not the obligation)to borrow a specified maximum amount of funds over a specified period of time.

Question 60

The interest rate charged for a short-term loan from a bank to a corporation is referred to as the London Interbank Offer Rate (LIBOR).

Question 61

LIBOR is

A)the interest rate charged on international interbank loans.
B)the average rate charged on commercial loans in Europe
C)the rate charged by the Federal Reserve for loans to banks.
D)the rate charged by the European Central Bank for loans to banks.

Question 62

Ignoring transaction costs, the cost of borrowing with commercial paper is equal to

A)the yield on T-bills of the same maturity.
B)the yield earned by investors holding the paper until maturity.
C)the federal funds rate.
D)the par value of the paper.

Question 63

Credit guarantees for commercial paper

A)ensure that the issuer of commercial paper will use the funds obtained to provide credit.
B)are issued by the Federal Reserve Bank of New York.
C)are only as good as the credit of the guarantor.
D)ensure that the issuer of commercial paper will use the funds obtained to provide credit AND are only as good as the credit of the guarantor.

Question 64

A major drawback to investing in Treasury bills is that they cannot easily be liquidated.

Question 65

The money market interest rate paid by corporations that borrow short-term funds in a particular country is typically

A)equal to the rate paid by that country's government.
B)slightly higher than the rate paid by that country's government.
C)mostly influenced by the demand for and supply of long-term funds in that country.
D)set by the country's central bank.

Question 66

Which of the following securities is most likely to be used in a repo transaction?

A)commercial paper
B)certificate of deposit
C)Treasury bill
D)common stock
E)All of these are equally likely to be used in a repo transaction.

Question 67

At each T-bill auction, the prices paid for three-month T-bills are significantly lower than the prices paid for six-month bills.

Question 68

The LIBOR scandal in 2012 involved

A)banks reporting inflated earnings from their loans.
B)hackers breaking into the loan documentation files.
C)banks falsely reporting the interest rates they offered in the interbank market.
D)collusion among the banks when setting the commercial paper rate.

Question 69

Freeman Corp., a large corporation, plans to issue 45-day commercial paper with a par value of $3,000,000. Freeman expects to sell the commercial paper for $2,947,000. Freeman's annualized cost of borrowing is estimated to be ____ percent.

A)14.39
B)14.13
C)14.59
D)14.33
E)None of these are correct.

Question 70

A ____ is not a money market security.

A)Treasury bill
B)negotiable certificate of deposit
C)bond
D)banker's acceptance
E)All of these are money market securities.

Question 71

When a firm sells its commercial paper at a ____ price than projected, its cost of raising funds will be ____ than what it initially anticipated.

A)higher; higher
B)lower; lower
C)higher; lower
D)lower; higher
E)higher; lower AND lower; higher