Deck 7: The Money Market

Question 1

Dealers trade money-market securities on the basis of quoted bid and offer prices.

Answer 1

False

Question 2

Commercial paper yields are lower than those for BABs with the same term to maturity.

Answer 2

False

Question 3

The money market facilitates direct financing in wholesale amounts.

Answer 3

True

Question 4

The money market is an over-the-counter (OTC)market.

Question 5

The BBSW is the average of the best tradable bid and offer quotes of the main dealers calculated at 10 a.m.each business day.

Question 6

Both bills and promissory notes raise funds for a short period (up to a year)and interest is paid by the borrower at maturity.

Question 7

According to Moody's ratings designations, P-2 issuers have a 'superior' ability to repay short-term debt obligations

Question 8

An active and efficient money market greatly assists the RBA in carrying out its responsibilities.

Question 9

Bills and promissory notes are generally secured.

Question 10

The role of the money market in the flow-of-funds has expanded since the GFC.

Question 11

Both bills and promissory notes can be used to borrow funds only for periods that are less than a year.

Question 12

Money market dealer's quotes reflect their desire to 'buy low' and 'sell high' so their bid quotes will be lower than their offer quotes.

Question 13

Money market securities represent a high risk and return asset class.

Question 14

The LIBOR is the reference rate in Australia's money market.

Question 15

The money market assists banks with their liquidity management.

Question 16

Treasury notes are issued by the state and Commonwealth governments.

Question 17

Treasury notes are issued through a dealer panel.

Question 18

Banks lend to and borrow from the money market.

Question 19

A repurchase agreement is effectively an interest-free loan from the RBA.

Question 20

The reference rate discovered by trading in the money market is used in many fixed-rate loans.

Question 21

Austraclear is the clearinghouse for the money market.

Question 22

When a money market investment is held to maturity, the yield to maturity at purchase and the holding period yield will be identical.

Question 23

Monetary policy influences short-term interest rates generally.

Question 24

The board of the RBA makes changes to the cash-rate on an ad-hoc basis.

Question 25

The BBSW (Australia's money market reference rate)is calculated from the yields at which _______________ trade.

A)Treasury notes
B)Treasury bonds
C)prime NCDs and BABs
D)ES funds
E)overnight interbank funds

Question 26

The principal objective of the RBA's monetary policy is stable economic growth.

Question 27

Money-market dealers want to be 'hit'.

Question 28

Which of the following is NOT a role of the short-term money market?

A)A direct, wholesale financing process.
B)The price discovery of long-term interest rates.
C)A means by which ADIs are provided with a source of liquidity.
D)A mechanism for the central bank to conduct its monetary policy.
E)All of these are functions of the market.

Question 29

The business cycle has a significant impact on short-term interest rates.

Question 30

An investor will experience a capital loss if a parcel of NCDs is purchased at 3.5% p.a.and later sold at 3.3% p.a.

Question 31

Trades in the money market are settled on a T + 2 basis.

Question 32

The RBA conducts its open market operations only when it wants to change the cash rate.

Question 33

The RBA has not been very successful in containing inflation within its target range over the past decade and a half.

Question 34

An investment in money-market securities when the yield is 5 per cent has an expected return of 5 per cent.

Question 35

Price risk is positively related to the security's time to maturity.

Question 36

The money market contributes to the banking system by:

A)being the main location for its liquid reserves, such as loans to the interbank overnight market
B)allowing the RBA to drop its requirement that banks hold liquid reserves with it
C)being a source of funds for banks, mainly through NCDs
D)enabling banks that accept bills to sell them to investors.
E)All of these.

Question 37

The RBA has to predict the future state of the economy when deciding whether to change the cash rate.

Question 38

Tick value is the change in a security's price as a result of a 1 per cent change in yield.

Question 39

The risk premium in the BBSW increased during the GFC and has remained at this higher level since.

Question 40

To enforce an increase in the cash rate the RBA will sell securities to ADIs (and other dealers).

Question 41

To promote liquidity, NCDs and BABs are divided into two 'buckets' based on their:

A)credit risk, as 'prime' or 'non-prime' banks
B)credit risk, as 'investment grade' or 'speculative grade' securities
C)credit risk, as 'domestic' or 'foreign' banks
D)maturity, which can be 'less than 30 days' or 'more than 30 days'
E)maturity, which can be 'early' or 'late' in the maturity month.

Question 42

The main difference between promissory notes and BABs is that:

A)the yield on promissory notes is considered a 'risk-free' rate
B)promissory notes trade at a common yield
C)BABs are much riskier because the borrowers are less creditworthy
D)BABs are accepted before they are issued
E)All of these.

Question 43

A dealer purchased a parcel of bank-accepted bills at a yield of 4.7% p.a., and sold the parcel a few weeks later at a yield of 4.5% p.a.; the dealer's holding-period yield (per annum)would be:

A)exactly 4.5%
B)exactly 4.7%
C)between 4.5% and 4.7%
D)less than 4.5%
E)more than 4.7%.

Question 44

A money market investor is exposed to:

A)credit risk
B)credit risk and less price risk than on longer-term securities
C)credit risk and more price risk than on longer-term securities
D)less price risk than on longer-term securities
E)more price risk than on longer-term securities.

Question 45

In Australia's money market:

A)dealers quote bid and offer prices
B)investors who sell prior to maturity face price risk
C)LIBOR is the main reference rate
D)acceptance fees are paid by the investor
E)All of these.

Question 46

Promissory notes can be divided into the categories of:

A)Treasury notes, bank accepted bills (BABs)and negotiable certificates of deposit (NCDs)
B)Treasury notes, BABs and commercial paper (CP)
C)Treasury notes, CP and NCDs
D)CP, BABs, NCDs and bonds
E)All of these.

Question 47

The main influences on short-term interest rates in recent years have been:

A)the business cycle
B)the RBA's monetary policy
C)changes in the risk premium in the 90-day BBSW
D)the demand for funds by business.
E)All of these.

Question 48

The bearer of the borrower's credit risk on a bank-accepted bill is:

A)the drawer
B)the acceptor
C)the investor
D)the issuer.
E)None of these.

Question 49

Commercial paper is issued through:

A)a dealer panel
B)a competitive tender
C)its sale by its acceptor
D)a deposit-taking process
E)a fund manager.

Question 50

A money market dealer who wishes to reduce their inventory of NCDs may:

A)attempt to attract buyers by decreasing their bid quote
B)attempt to attract buyers by increasing their offer quote
C)'hit' another dealer by accepting their offer.
D)All of these.
E)None of these.

Question 51

Dealers in the money market:

A)trade in both wholesale and retail amounts
B)must trade in accordance with the rules of the exchange
C)trade in 'same day' funds
D)earn a commission when a trade is completed
E)will set bid quotes lower than offer quotes.

Question 52

You are a fund manager wishing to purchase a parcel of BABs.In order to pay the lowest price you would accept the _______________ you can find from a dealer.

A)lowest bid
B)highest bid
C)lowest offer
D)highest offer
E)lowest acceptance fee

Question 53

Identify the correct statement below.

A)Money-market securities are a form of secured loan arrangement.
B)Most companies can raise funds by issuing commercial paper.
C)The return on promissory notes can be considered a 'risk-free' rate.
D)Money-market securities can trade at a premium to their face value.
E)Generally, the interest rate paid by issuers of BABs will exceed the rate earned by investors in BABs.

Question 54

The impact on a security's value caused by a one basis point change in its yield is known as:

A)shading
B)price risk
C)market risk
D)tick value
E)None of these.

Question 55

Which money-market security will trade at the lowest yield?

A)Treasury notes
B)Commercial paper
C)Certificates of deposit
D)Bank bills
E)These securities will trade at the same yield.

Question 56

In the Australian money market:

A)negotiable certificates of deposit are issued via a dealer panel
B)the bank acceptance process enables commercial paper to trade at a common yield
C)the primary market issue of Treasury notes is through a competitive tender
D)a dealer panel will make the market for BABs
E)None of these.

Question 57

Trades in the money market are settled on the following basis:

A)T + 0
B)T + 1
C)T + 2
D)T + 3
E)instantly.

Question 58

The money market assists the RBA carry out its functions by:

A)contributing the banking system's liquidity
B)holding reserves of ES funds
C)providing a forum for the implementation of monetary policy
D)contributing to financial system's stability
E)All of these.

Question 59

The principal objective of the RBA's monetary policy is:

A)stability of the currency - meaning a stable exchange rate
B)the maintenance of full employment, meaning no unemployment
C)stability of the currency - meaning low inflation
D)economic growth consistent with a high inflation
E)economic prosperity reflected in rising share prices.

Question 60

A bank agrees to accept 90-day bills on behalf of a company for a fee of 120 basis points.If the face value is $5 million and the yield at issue 5.6% p.a.then:

A)an investor who buys the bills and holds them to maturity will earn 6.8% p.a.
B)the borrower receives $4 917 546.89
C)the bank earns fees of $60 000
D)if yields increase in 30 days' time so will the borrower's cost of funds
E)More than one of these is correct.

Question 61

Suppose that the opening yield in the 90-day bill market usually varies by two basis points (up or down)from the closing rate on the previous business day.Calculate the price risk faced by a dealer who is holding 90-day bills with a face value of $100 million, given that the market closed at 5.00 per cent.

Question 62

A company issues 90-day bank bills with a face value of $5 000 000.The bank acting as acceptor charges a fee of 90 basis points.The BBSW at the time of issue is 4.3 per cent.
A.A fund manager purchases the bills in the primary market.How much do they pay?
B.How much does the company receive?
C.Calculate the fee earned by the acceptor.

Question 63

What have been the main influences on short-term rates in recent years?

Question 64

Changes in the RBA's monetary policy stance will directly or indirectly impact:

A)the overnight interbank rate
B)money market rates generally
C)variable housing loan interest rates
D)interest rates for business.
E)All of these.

Question 65

What is the BBSW and how is it 'discovered'?

Question 66

Calculate the yield to maturity given a $1 million 60-day Treasury bill is purchased for $994 848.59.

Question 67

Explain the risks and possible returns from an investment in the money market given the 90-day BBSW is currently 4.75 per cent.

Question 68

Calculate the yield from an investment in a 90-day bank-accepted bill purchased at 4.75 per cent and sold 35 days later at 4.92 per cent.

Question 69

Explain the sources of revenue to a money-market dealer.Demonstrate using a round-trip transaction on a $10 million (face value)parcel of 90 day bills given the dealer's quote is 5.65-5.60 per cent.

Question 70

Suppose that the 90-day yield BBSW just rose from 3.8% p.a.to 4.10% p.a.What does this imply for
(i)prospective investors and (ii)investors holding money market securities?

Question 71

What are the main differences between bills of exchange and promissory notes?

Question 72

Calculate the capital gain or loss that results when a parcel of 90 day NCDs with a face value of $50 million is bought at 3.25% p.a.and sold later the same day after yields have fallen to 3% p.a.

Question 73

Suppose you expect that short-term yields are about to fall.Suggest an investment strategy that would profit from this expectation.

Question 74

Explain the settlement arrangements in the money market.

Question 75

Explain the activities of dealers in the money market.

Question 76

Explain the role of dealer panels in the commercial paper market.

Question 77

What contributions does the money market make to the financial system?

Question 78

A parcel of 90 day BABs with a face value of $10 million is purchased at 3.25% p.a.and sold 40 days later when yields have increased to 3.5% p.a.Calculate
(i)the holding period yield achieved, (ii)the amount of interest earned on the investment and (iii)any capital gains or losses that resulted.

Question 79

How has the GFC impacted the contribution of the money market to the flow-of-funds?

Question 80

The RBA's uses open market operations:

A)once a month, if the cash rate is changed
B)to increase the cash rate by buying securities from ADIs and other dealers
C)to decrease the cash rate by selling securities to ADIs and other dealers
D)daily, to maintain the cash rate at its target.
E)All of these.