Deck 5: The Money Markets

Question 1

Characteristics of money market instruments include all the following except:

A) high liquidity
B) low default risk
C) short-term maturity
D) small denominations

Answer 1

small denominations

Question 2

The money market

A) is geographically located in New York City
B) is a network of borrowers, lenders, brokers, and dealers linked together by telecommunications
C) provides the trading floor for securities such as stocks and bonds
D) None of the above

Answer 2

is a network of borrowers, lenders, brokers, and dealers linked together by telecommunications

Question 3

Commercial Banks and Savings Associations participate in the money market by performing the following except:

A) serving as agents and underwriters in issuing commercial paper
B) providing a backup line of credit against commercial paper issue
C) investing in money market instruments such as Treasury bills
D) pooling investor's money and invest them in securities

Answer 3

pooling investor's money and invest them in securities

Question 4

The Fed controls the level of bank reserves in the economy

A) through the open market operations
B) by changing the level of required reserves in the banking system
C) through the purchase and sale of government securities
D) all of the above are correct

Question 5

The interest earned on which securities are exempt from federal taxation?

A) commercial paper
B) treasury bills
C) municipal notes
D) negotiable certificates of deposit

Question 6

Issuing commercial papers is an attractive alternative of funding compared to short-term promissory notes from banks because

A) the maturity is longer
B) the interest is lower for credit worthy issuers
C) the interest earned on interest is free from federal income tax
D) the amount can be tailored according to the specific needs of the issuer

Question 7

The ________ market is the market for borrowing and lending reserves on an overnight basis.

A) money
B) capital
C) federal funds market
D) overnight market

Question 8

An important innovation in the money market was the creation of _________ that pool together funds from many small investors to purchase large denomination money market instruments.

A) eurodollar market
B) international banking facilities
C) money market mutual funds
D) direct placements

Question 9

The fed funds rate increases

A) when there is a short supply of fed funds relative to demand
B) when there is an increase in supply relative to demand
C) when the fed buys securities decreasing the demand for reserves
D) none of the above are correct

Question 10

A repurchase agreement is

A) a security that allows the investor to purchase the underlying stock of the issuer in the future.
B) a commitment to purchase additional government securities in the future.
C) a short-term agreement in which the seller sells a government security and agrees to repurchase it back in the future
D) an agreement that entitles the holder the option to repurchase the security at a lower price in the future.

Question 11

The interests earned on __________ are free from state and local income taxes.

A) money market mutual funds
B) commercial paper
C) negotiable CDs
D) treasury bills and bonds

Question 12

Eurodollar deposits

A) are European deposits in dollars in the United States
B) are dollar deposits outside the United States subject to U.S. regulations
C) are deposits in U.S. banks outside the U.S. regulations
D) are U.S. dollar deposits outside the U.S. and not subject to U.S. regulations

Question 13

In the Eurodollar market, the rate at which banks are willing to lends funds is called

A) fed funds rate
B) London Interbank bid rate
C) London Interbank offered rate
D) Prime rate

Question 14

The rate at which banks are willing to borrow in the Eurodollar market is called

A) fed funds rate
B) London Interbank bid rate
C) London Interbank offered rate
D) Prime rate

Question 15

An exporter may require the importer to get a ___________ to guarantee payment of the importing firm.

A) Banker's acceptance
B) commercial paper
C) repurchase agreement
D) certificate of deposit A

Question 16

Any dollar denominated deposit liability outside the United States banking system is called?

A) Banker's acceptance
B) Eurodollar
C) foreign deposit
D) money market funds

Question 17

To avoid SEC disclosure requirements when issuing securities, commercial papers are issued with all the following characteristics except:

A) it matures in 270 days or less
B) issued in large denominations
C) issued at a fixed interest rate paid based on the par value
D) proceeds are used to fund current operations

Question 18

Dealers in the commercial paper market earn their fees by

A) charging a higher interest rate than they paid for it
B) charging origination fees as a percentage of face value
C) charging processing fees as a percentage of face value
D) purchasing the commercial paper for less than they sell them

Question 19

The following are characteristics of noncompetitive bids to buy Treasury bills except

A) it includes both the quantity desired and the discount rate offered
B) they are limited to $1 million maximum per bidder
C) are guaranteed to receive the amount of T-bills requested but must accept the market determined price and yield
D) none of the above

Question 20

Which of the following is false?

A) Negotiable CDs are debt instruments issued by commercial banks that generally have maturities of 1 to 3 months and minimum denominations of $1 million or more
B) Negotiable CDs can be resold before maturity
C) Money market mutual funds are designed for large investors who have $1 million or more to invest
D) Banker's acceptances have declined in importance as a money market instrument.

Question 21

Disintermediation is

A) withdrawing funds from a bank and putting them into a money market mutual fund
B) withdrawing funds from a depository institution and using them to purchase a government bond
C) selling bonds and using the proceeds to purchase share of stocks
D) transferring funds from checkable to savings deposits

Question 22

CDs issued by foreign branches of commercial banks and denominated in the currency of the branch's host country are

A) euro CDs.
B) Yankee CDs.
C) Foreign CDs.
D) Thrift CDs.

Question 23

CDs issues by a foreign bank in a foreign currency but sold in the United States are

A) euro CDs..
B) Yankee CDs.
C) Foreign CDs.
D) Thrift CDs.

Question 24

CDs issues by savings associations are

A) euro CDs..
B) Yankee CDs.
C) Foreign CDs.
D) Thrift CDs.

Question 25

CDs issued by foreign branches of commercial banks in a host country but denominated in the currency of the branch's home country are

A) euro CDs..
B) Yankee CDs.
C) Foreign CDs.
D) Thrift CDs.

Question 26

Which of the following is true?

A) Treasury bills pay a lower coupon rate than Treasury bonds.
B) Eurodollar deposits pay a higher interest rate than T-bills of the same maturity.
C) The fed funds rate is always lower than the repurchase agreement rate.
D) Interest is paid monthly on T-bills

Question 27

________________ are financial institutions located in the United States that cater to the needs of foreign individuals, corporations, and/or government that allow non-U.S. residents to hold unregulated eurodollar deposits.

A) London Interbanks
B) Foreign banks
C) Money market mutual funds
D) International Banking Facilities (IBFs)

Question 28

Which of the following is not a characteristic of money markets?

A) Money market instruments are usually issued in large denominations.
B) Money market participants include primarily large institutions..
C) Money market instruments trade the components of M1.
D) Money market instruments have short term maturities.

Question 29

Which of the following is FALSE?

A) Commercial paper is short-term, large-denomination, unsecured promissory notes issued by creditworthy corporations as an alternative to bank borrowing.
B) Commercial paper is sold on a discount basis and used to fund current transactions.
C) The primary benefits to issuers of commercial paper is that it is cheaper than borrowing from a bank.
D) Commercial paper is sold only through brokers and only used by nonfinancial corporations.

Question 30

Which of the following is FALSE?

A) Money market mutual funds pool the funds of shareholders and use them to purchase a variety of money market instruments.
B) The interest earned on the instruments invested in by a money market mutual fund minus a small management fee is returned to the shareholders in the fund.
C) When funds are removed from a bank and put into a money market mutual fund, disintermediation has occurred.
D) Money market mutual funds were created in the late 1970s to bring safety, liquidity, and money market rates of interest to individuals while also providing access to their funds through limited check writing.

Question 31

The ____________ is the rate at which large banks in London are willing to borrow eurodollars.

A) London Interbank Offer Rate (LIBOR)
B) London Interbank Bid Rate (LIBID)
C) London eurodollar rate
D) Overnight fed funds rate

Question 32

The ____________ is the rate at which large banks in London are willing to lend eurodollars.

A) London Interbank Offer Rate (LIBOR)
B) London Interbank Bid Rate (LIBID)
C) London eurodollar rate
D) Overnight fed funds rate

Question 33

Which of the following has the lowest interest rate?

A) fed funds
B) eurodollar borrowings
C) repurchase agreements
D) None of the above.

Question 34

Which of the following is TRUE?

A) The LIBID is always higher than the LIBOR.
B) In 1998, the Treasury adopted the multiple-price method in auctioning treasury securities.
C) The uniform-price method is an auction method whereby the buyers of the securities all pay the same price for the securities based on the stop-out yield.
D) Yankee CDs are issued by foreign banks, denominated in U.S. dollars, and sold in the United States.

Question 35

Which of the following money market instruments have decreased significantly in recent years?

A) bankers' acceptances
B) fed funds
C) commercial paper
D) repurchase agreements

Question 36

A major source of funds for finance companies is borrowings in the ________________ market.

A) fed funds
B) eurodollars
C) commercial paper
D) All of the above.

Question 37

Which of the following money market instruments does not have a secondary market?

A) commercial paper
B) municipal notes
C) federal agency securities
D) repurchase agreements

Question 38

Which of the following institutions use the money market for cash management purposes?

A) pension funds
B) insurance companies
C) corporations
D) All of the above use the money market for cash management purposes.

Question 39

Which of the following is false?

A) Back-up lines of credit are a stronger credit enhancement than letters of credit.
B) Depository institutions hold significant levels of Treasury securities on the asset side of their balance sheets.
C) Banks and savings associations provide credit enhancements for a fee to issuers of commercial paper.
D) Banks can serve as agents and underwriters in the commercial paper market.