Deck 11: Commercial Banks, Major Corporations, and Federal Credit Agencies in the Money Market

Question 1

Flex REPOs permit the seller of securities to repurchase securities from the lender that are similar to, but not necessarily the same as, the securities originally sold.

Answer 1

False

Question 2

Dollar REPOs usually involve a securities dealer and a state or local unit of government and allow partial withdrawal of funds committed to the borrower.

Answer 2

False

Question 3

The Dutch auction differs from the English auction because in a Dutch auction all bidders pay the same price.

Answer 3

True

Question 4

The winners' curse explains the incentive for bidders in a U.S. Treasury auction to attempt to corner the market.

Question 5

When carry income is positive, the dealer pays more to borrow funds than is earned on the securities held.

Question 6

The Korean government issues Treasury bills every week through an auction with competitive bids similar to the process used in the United States.

Question 7

U.S. Treasury bills are sold in the United States in what is known as a nondiscriminatory price auction.

Question 8

T-bills can now be purchased in sizes as low as $1,000.

Question 9

The ratio of the total amount of bids received by the Treasury over the actual amount of securities to be sold is known as the cover. It is a measure of the strength of the public's interest in the securities being sold.

Question 10

Reserve requirements for depository institutions are stated as a daily average for a five-day period beginning on Thursday of each week.

Question 11

A depository institution can run a deficiency in its legal reserve account at the Federal Reserve provided that deficiency does not exceed 5 percent and provided another deficiency is not recorded in the same month.

Question 12

Two banks in the New York money market involved in a federal funds loan simply exchange checks.

Question 13

The volatility of the federal funds rate tends to increase toward the close of the reserve settlement period.

Question 14

Commercial banks may buy back their own CDs in the money market.

Question 15

U.S. banks cannot issue Eurodollar CDs.

Question 16

With the system known as lagged reserve accounting the reserve maintenance period lasts one week, from a Thursday to the following Wednesday.

Question 17

Non personal time deposits are a type of transaction deposit.

Question 18

Transaction deposits consist of checking accounts and NOWs.

Question 19

A check exchanged between two banks in the same city and cleared through the local clearinghouse is referred to as "same-day money".

Question 20

Nonprime CDs pay investors lower interest yields than prime CDs.

Question 21

Brokered CDs are issued in multi-million dollar minimum denominations.

Question 22

There is no interbank loan market in Russia.

Question 23

Some Canadian-bank CDs are available in both Canadian and U.S. dollars.

Question 24

Japanese bank CDs were first permitted by the Ministry of Finance at the beginning of the 1980s.

Question 25

Asian dollar CDs may carry either fixed or floating interest yields based upon the prevailing level of the Singapore interbank offer rate.

Question 26

Recently the financial condition of the two top government-sponsored home mortgage agencies, Fannie Mae and Freddie Mac came under heavy scrutiny in the financial press.

Question 27

The principal and interest of Fannie Mae and Freddie Mac are guaranteed by the federal government.

Question 28

During 2006 the volume of commercial paper outstanding first exceeded $2 trillion.

Question 29

Bankers' acceptances expanded rapidly in the 1970s in the 1980s.

Question 30

The Dutch auction has the advantage over the English or first price sealed-bid auction of ____.

A) Reducing the incentive for price manipulation
B) Increasing the likelihood that the entire issue will sell
C) Increasing the interest rate received by an investor
D) Encouraging participation by primary dealers
E) There is no advantage. The Dutch auction discourages participation

Question 31

The "winner's curse" describes the problem that results from:

A) All dealers paying a single price at auction
B) Losing at a Dutch auction
C) Being the highest bidder at a Treasury auction
D) Market manipulation
E) None of the above

Question 32

As a result of the Salomon scandal where Salomon cornered the market in Treasury securities, the Treasury has:

A) Switched to the Dutch auction method of selling securities
B) Increased the number of dealers who can bid competitively
C) Switched to an open-outcry system similar to that in the futures and options markets
D) Increased the number of corporate bidders
E) Done nothing, relying on the courts to discourage market manipulation

Question 33

The nation whose provinces issues Provincial bills, comparable to U.S. Treasury bills, is:

A) The United Kingdom
B) Korea
C) The Philippines
D) Sweden
E) None of the above

Question 34

The nation that issues Financing Bills, with relatively short maturities (often about two months) is:

A) Japan
B) Korea
C) Great Britain
D) Germany
E) None of the above

Question 35

The nation that began issuing Treasury bills in 1966 and for which T-bills now represent one of the largest components of its money market is:

A) Japan
B) The Philippines
C) Korea
D) Canada
E) None of the above

Question 36

The auction method currently used in the United States to sell T-bills is known as a(n):

A) Dutch auction
B) Preferred price auction
C) Discriminatory price auction
D) Open-outcry auction
E) None of the above

Question 37

In the late 1990's, the U.S. Treasury reduced the amount of T-bills it issued. Reasons for this include:

A) The Treasury reached the congressionally-mandated ceiling for T-bill issuance
B) As commercial paper became more popular, the T-bill fell out of favor
C) Fewer needed to be issued due to U.S. Government budget surpluses
D) All of the above
E) Choices A and B only

Question 38

The large American commercial bank that first developed the money market CD was:

A) Bank of America
B) Manufacturers Hanover
C) First National City Bank
D) Chase Manhattan Bank
E) Franklin National Bank
F) Continental Illinois Bank
G) Wells Fargo

Question 39

A CD issued by the largest and most financially sound banks is normally rated:

A) Aaa
B) A-1
C) Investment grade
D) Prime
E) None of the above

Question 40

Compared to U.S. Treasury bills, money market CDs issued by the nation's largest, financially sound banks have ____. risk, ____. average yields and are ____. marketable. The three words which correctly complete the above sentence in the right order are:

A) Higher, lower, more
B) Lower, higher, less
C) Higher, higher, more
D) Higher, higher, less
E) None of the above

Question 41

The relatively long-term CD which consists of a package or series of 6-month CDs is known as the:

A) Variable-rate CD
B) Eurodollar CD
C) Prime negotiable CD
D) Rollover CD
E) Term CD
F) Serial CD
G) None of the above

Question 42

The system now in use in the United States for calculating the deposit reserve requirements of commercial banks is known as:

A) Contemporaneous reserve accounting
B) Lagged reserve accounting
C) Money position accounting
D) Reserve computation accounting
E) None of the above

Question 43

Checking accounts and NOWs are examples of:

A) Legal reserves
B) Non personal time deposits
C) Transaction deposits
D) Non transaction liabilities
E) None of the above

Question 44

Selected U.S. banks and foreign banks with U.S. branches began in the mid- 1980s to issue an innovative new hybrid financial instrument with some characteristics of term CDs and some similarity to medium-term corporate bonds with maturities reaching out beyond one year to as long as 10 years. These new instruments are known as:

A) Deposit notes
B) Hybrid CDs
C) Mixed-return certificates
D) Maturity CDs
E) None of the above

Question 45

The nation whose interbank loan market nearly collapsed in 1995 due to concerns over the financial condition of its domestic banks and the lack of adequate information on bank condition was:

A) Japan
B) Korea
C) Canada
D) China
E) None of the above

Question 46

Chartered Bank CDs and Bearer Deposit Notes are issued by banks from what country?

A) Japan
B) Great Britain
C) Canada
D) Australia
E) None of the above

Question 47

Sweep accounts are a relatively new product offered by banks. Some characteristics include:

A) Customer funds are swept out of demand deposits and into time and savings deposits overnight to earn interest
B) Customers can earn interest or, conversely save paying interest by having their revolving loans paid down overnight
C) Since time and savings deposits carry no reserve requirements, the machinations of the sweep accounts . cause reduced legal reserve levels at the participating banks
D) All of the above
E) Choices A and B only

Question 48

Partly as a result of sweep accounts, U.S. bank legal reserve balances have fallen by more than half. One of the consequences caused by this decline has been:

A) That banks must open many more savings accounts to raise reserves
B) That banks must curtail somewhat their commercial lending practices
C) An increase in the volatility of the Fed funds market due to the lessened supply of tradable reserves
D) All of the above
E) None of the above

Question 49

Sweep accounts have caused an increase in the volatility of the Fed funds market due to the lessened supply of tradable reserves. This is of some concern to the Federal Reserve since:

A) Sweep accounts are inherently unprofitable for banks
B) The Fed funds rate is the Federal Reserve's prime instrumental target for achieving the goals of monetary policy
C) Volatility in the Fed funds market will lead to volatility in the T-bill market
D) All of the above
E) None of the above

Question 50

A primary uses of the bankers acceptance

A) Is to finance the purchase of internationally traded goods while those goods are in transit
B) A bankers agreement to provide a mortgage
C) A bankers agreement to provide a corporate loan
D) All of the above
E) None of the above

Question 51

The volume of commercial paper outstanding exceeded $2 trillion for the first time in

A) 2000
B) 2002
C) 2004
D) 2006
E) None of the above

Question 52

Fannie and Freddie, government-sponsored agencies, the

A) Principal and interest is guaranteed by the federal government
B) Principal is not guaranteed by the federal government
C) Interest is not guaranteed by the federal government
D) B and C above
E) None of the above

Question 53

What do we mean by the term commercial paper?

Question 54

Why is commercial paper attractive to such money market investors as banks, insurance companies, money market funds and industrial companies?

Question 55

Please describe the functions that dealers perform in the functioning of the commercial paper market. In what market segments are they most active? Least active?

Question 56

Why do some investors (savers) find commercial paper unsatisfactory for their investment needs?

Question 57

Exactly how is the rate of return on commercial paper figured?Is the method used to determine paper's rate of return similar to the return calculation for any other money market instrument? Which one?

Question 58

What are the principal advantages accruing to a company large enough to tap the commercial paper market for funds?

Question 59

What are the principal disadvantages of commercial paper to an issuer? To potential buyers?

Question 60

Who are the principal investors in commercial paper? Why do the types of investor institutions you have named find commercial paper particularly attractive?

Question 61

How is commercial paper rated? Why does its rating matter?

Question 62

Please explain what credit enhancements are. What specifically is asset-backed commercial paper? How have these financial devices aided the growth of the paper market?

Question 63

Federal agencies active in the financial markets were usually set up to aid so-called "disadvantaged sectors" of the economy, Who are these?Please give some examples.

Question 64

What is the difference between a government-sponsored and a federal agency? Is there a practical difference between the two?

Question 65

What are the principal investment characteristics of federal agency securities? Which groups of investors are attracted to them and why?

Question 66

Can you explain how federal agency securities are marketed?

Question 67

Explain why acceptances over the years have been attractive to exporters and importers of goods moving between different countries. Why has the volume of acceptances declined in recent years?

Question 68

What is the Eurocurrency market and why is it needed?

Question 69

Please define the term Eurodollar. Can a U. S. bank create Eurodollars? How?

Question 70

Please describe the process by which Eurocurrency deposits are created. What happens to the total volume of domestic bank reserves and deposits in the process of creating Eurocurrency deposits?

Question 71

Can Eurocurrency deposits be destroyed? How can this happen?

Question 72

What are the principal sources of Eurocurrency deposits? Please make a list.

Question 73

What role do Eurodollar deposits play in reserve management operations of U.S. banking firms? What are the advantages of Eurodol1ar borrowings over other sources of reserves for banks? What about the disadvantages?

Question 74

Please evaluate the Eurocurrency markets from a social point of view. What are their major benefits and costs to the public and to market participants? In your opinion should these markets be more closely regulated or be relatively free of regulation?

Question 75

Commercial paper purchased in the secondary market 30 days from maturity at a discount yield of 9 percent is sold 10 days later at an 8 percent discount rate. What is the investor's holding-period yield?

Question 76

What is the difference in basis points between the discount rate of return (DR) and the investment rate of return (IR) on a $10 million commercial paper note purchased at a price of $9.85 million and scheduled to mature in 25 days?

Question 77

A commercial paper note with a $1 million par value and maturing in 60 days has an expected discount rate (DR) at maturity of 6 percent. What was its purchase price? What is this note's expected coupon equivalent (investment) yield (IR)?

Question 78

Alamo Corporation requests a $20 million, 90-day loan from its bank at an interest rate of 6 percent with a compensating balance requirement of 10 percent. What is Alamo's effective loan rate?

Question 79

What price would attach today to Euro paper issued at par (100) with a maturity of 18 days, carrying a discount rate of 7 percent?

Question 80

What is the appropriate discount rate for a 270-day Euro paper issue priced at par (100) and expected to sell today at a discounted price of 96?
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