Question 1

Which of the following is a feature of the money market?&#10;A) Instruments are sold at a discount&#10;B) Investors are highly risk averse&#10;C) It is a wholesale market&#10;D) All of the above

Accepted Answer

All of the options listed are features of the money market. Instruments in the money market, such as Treasury bills, are often sold at a discount and redeemed at face value. Investors in the money market are typically highly risk-averse, seeking safe places to park funds for short periods. The money market is also considered a wholesale market, dealing in large sums of money and accessed by institutions more than individual investors.

Question 2

The interest rate on a money market instrument on an investment-yield basis&#10;A) Is always lower than the yield on a discount basis&#10;B) Is always higher than the yield on a discount basis&#10;C) Is the same as the yield on a discount basis&#10;D) Is always zero because money market instruments do not have coupons

Accepted Answer

The interest rate on a money market instrument on an investment-yield basis is always higher than the yield on a discount basis because the investment-yield basis takes into account the compounding effect, while the discount basis does not.

Question 3

The Treasury uses the money market&#10;A) Primarily to fund longer-term financing needs&#10;B) Primarily to raise its cash balance at the Fed&#10;C) Primarily to fund seasonal variations in cash flow&#10;D) The Treasury does not use the money market

Accepted Answer

The Treasury uses the money market primarily to fund seasonal variations in cash flow, as it needs to manage short-term cash requirements efficiently.

Question 4

Helping to stimulate investor interest in Treasury securities is&#10;A) Regular auctions of Treasury securities&#10;B) Transparent and fair auctions&#10;C) All winning bids get the lowest successful bid price (the cutoff price)&#10;D) All of the above

Accepted Answer

All of the options listed contribute to stimulating investor interest in Treasury securities. Regular auctions ensure a steady supply of securities, transparent and fair auctions build trust among investors, and the practice where all winning bids receive securities at the lowest successful bid price (the cutoff price) ensures fairness and encourages participation.

Question 5

The primary dealer system&#10;A) Is established by the Treasury for issuing debt&#10;B) Is established by the Fed for designating its counterparties to transactions in Treasury securities&#10;C) Is used by the Treasury for foreign exchange auctions&#10;D) Is used for over-the-counter trading in stock

Accepted Answer

The primary dealer system is established by the Federal Reserve (the Fed) to designate specific financial institutions as its counterparties in transactions involving Treasury securities. These primary dealers are a select group of banks and financial institutions that buy government securities directly from the government and sell them in the secondary market. This system helps facilitate the implementation of monetary policy and the efficient functioning of the government securities market.

Question 6

To be able to issue commercial paper, the issuer must&#10;A) Be highly rated by a credit rating agency&#10;B) Collateralize the paper&#10;C) Be endorsed by the SEC&#10;D) Both a and b

Accepted Answer

The answer of To be able to issue commercial paper,...

Question 7

The largest holder of commercial paper is&#10;A) Money market mutual funds&#10;B) The Fed&#10;C) Insurance companies&#10;D) The SEC

Accepted Answer

Money market mutual funds are the largest holders of commercial paper because they invest in short-term, high-quality debt instruments, which include commercial paper, to provide liquidity and safety for their investors.

Question 8

Growth in the asset-backed commercial paper market can be attributed to&#10;A) SEC encouragement&#10;B) Efforts by commercial and investment banks to move assets from their balance sheets to special-purpose vehicles (SPVs)&#10;C) Removal of regulatory barriers&#10;D) All of the above

Accepted Answer

Efforts by commercial and investment banks to move assets from their balance sheets to special-purpose vehicles (SPVs) have been a significant factor in the growth of the asset-backed commercial paper market.

Question 9

Smaller banks adjust to day-to-day balance sheet shocks largely by&#10;A) Issuing managed liabilities&#10;B) Borrowing from the Fed&#10;C) Adjusting their holdings of liquid assets (cash and securities)&#10;D) Issuing commercial paper

Accepted Answer

Smaller banks typically adjust to day-to-day balance sheet shocks by adjusting their holdings of liquid assets, such as cash and securities, because these assets can be quickly and easily converted to cash to meet immediate needs without significantly impacting the bank's operations or financial stability.

Question 10

Larger banks adjust to day-to-day balance sheet shocks more by&#10;A) Issuing managed liabilities&#10;B) Borrowing from the Fed&#10;C) Adjusting their holdings of liquid assets (cash and securities)&#10;D) Issuing capital market instruments

Accepted Answer

Larger banks typically adjust to balance sheet shocks by issuing managed liabilities, such as certificates of deposit or commercial paper, due to their ability to access capital markets more efficiently.

Question 11

Letters of credit (L/Cs)&#10;A) Address informational asymmetries in international trade&#10;B) Protect the interests of sellers&#10;C) Protect the interests of buyers&#10;D) All of the above

Accepted Answer

The answer of Letters of credit (L/Cs)&#10;A) Address informational asymmetries...

Deck 7: The Money Market