Question 1

A one-year Treasury bill that sells for $943.40 and has a face value of $1,000 has an annual yield of

Accepted Answer

The answer of A one-year Treasury bill that sells for...

Question 2

__________ bidders in a Treasury auction are guaranteed their bids at the __________ price resulting from the auction.

Accepted Answer

Noncompetitive bidders in a Treasury auction are guaranteed their bids at the market-clearing price, meaning they agree to accept whatever yield is determined at the auction, ensuring they receive the security without specifying a price.

Question 3

A one-year Treasury bill with an annual yield of 10 percent and a price of $909.09 has a face value of

Accepted Answer

The face value can be calculated using the formula:

Face Value = Price / (1 + Yield/360)

Substituting the given values, we get:

Face Value = $909.09 / (1 + 10%/360) = $1,000

Therefore, the correct answer is option B, $1,000.

Question 4

The __________ is always larger than the __________.

Accepted Answer

The coupon equivalent yield (CEY) is always larger than the yield on a discount basis because CEY accounts for the compounding effect over a year, whereas the yield on a discount basis does not.

Question 5

The difference in the selling and purchase prices of government securities in a typical overnight repurchase agreement is set to reflect

Accepted Answer

The difference in the selling and purchase prices of government securities in a typical overnight repurchase agreement is set to reflect the overnight cost of funds, which is the interest rate charged by financial institutions for borrowing funds overnight. This is the most common way in which repo rates (the rate of interest on overnight repurchase agreements) are determined. The difference between the purchase price and the selling price of the securities in a repo agreement is the interest earned by the lender and the cost of funds to the borrower.

Question 6

A 91-day $10,000 Treasury bill is selling for $9,000. The bill's yield on a discount basis is __________ percent.

Accepted Answer

The discount on the bill is $1,000 ($10,000 - $9,000). The yield on a discount basis is the discount divided by the face value of the bill, multiplied by 360 divided by the number of days to maturity. So, the yield on a discount basis would be:
($1,000/$10,000) x (360/91) = 0.0396, or 3.96%. Therefore, the correct answer is B.

Question 7

An important market for overnight borrowing and lending is the

Accepted Answer

The repo market is designed for overnight lending and borrowing transactions between financial institutions and the Federal Reserve. In these transactions, institutions can use securities such as Treasury bills and bonds as collateral for short-term loans. The other markets listed may also involve short-term borrowing and lending, but the repo market specifically focuses on overnight transactions.

Question 8

A 91-day $10,000 Treasury bill is selling for $9,000. The bill's coupon equivalent yield is __________ percent.

Accepted Answer

The formula for coupon equivalent yield is:

Coupon Equivalent Yield = ((Face Value - Purchase Price)/Purchase Price) x (360/days to maturity)

Substituting the given values:

Coupon Equivalent Yield = ((10,000-9,000)/9,000) x (360/91)
Coupon Equivalent Yield = (1,000/9,000) x 3.96

Coupon Equivalent Yield = 0.1111 x 3.96

Coupon Equivalent Yield = 0.4396 or 4.46% (rounded to two decimal places)

Therefore, the answer is choice B.

Question 9

The repo market is most closely related to the

Accepted Answer

The repo market is a market for repurchase agreements, which involves short-term borrowing and lending of cash in exchange for securities such as Treasury bills. The federal funds market is also a market for short-term borrowing and lending of cash, often between banks, making it the most closely related option listed. The Treasury bond and note markets involve longer-term borrowing and lending, and the commercial paper market involves short-term borrowing by corporations.

Question 10

The __________ is calculated as the face value minus the purchase price divided by the face value.

Accepted Answer

The yield on a discount basis is calculated as (Face value - Purchase price) / Face value. This is because the bond is originally issued at a discount to its face value, and the yield on a discount basis reflects the return earned by the investor as a percentage of the face value. The other options are not relevant in this context. Coupon equivalent yield is used for bonds that have a variable interest rate or no interest rate, bond equivalent yield is used to compare the yield on US Treasury bills with other fixed-income securities, and yield to maturity is the total return anticipated on a bond if it is held until it matures.

Question 11

The two kinds of yields used in the Treasury bill market are the

Accepted Answer

The two kinds of yields used in the Treasury bill market are the coupon equivalent yield and yield on a discount basis. These are specific calculations used to compare the returns on Treasury bills, which are short-term government securities sold at a discount from their face value.

Question 12

The main difference between a repo and federal funds transaction is that

Accepted Answer

The main difference between a repo and federal funds transaction is the use of collateral. In a repo transaction, securities are used as collateral while in federal funds transactions, collateral is generally not required. Other differences include the presence of an agreed upon interest rate in repo transactions and a spread between the sale and purchase price of securities in federal funds transactions, and the typical length of the transactions.

Question 13

A Treasury bill with an original maturity of six months currently sells for $972.58. The bill was issued 30 days ago. An investor who purchases this bill today would have a bond equivalent yield of __________ percent.

Accepted Answer

To calculate the bond equivalent yield, we need to first find the discount rate that equates the present value of the bill's future cash flows to its current price.

Discount rate = (Face value - Price) / (Face value * Days to maturity / 360)
= (1000 - 972.58) / (1000 * 180 / 360)
= 0.0541 or 5.41%

Next, we need to annualize the discount rate by multiplying it by 2, since the bill has a maturity of 6 months.

Bond equivalent yield = 2 * Discount rate
= 2 * 0.0541
= 0.1082 or 10.82%

Therefore, the correct answer is B) 6.77 (rounded to two decimal places).

Question 14

The coupon equivalent yield on a six-month Treasury bill that has a $1,000 face value and sells for $960 is

Accepted Answer

The coupon equivalent yield (CEY) for a Treasury bill can be calculated using the formula: CEY = [(Face Value - Purchase Price) / Purchase Price] * (365 / Days to Maturity) * 100. For a six-month (or approximately 182 days) Treasury bill with a face value of $1,000 and a purchase price of $960, the calculation is: CEY = [($1,000 - $960) / $960] * (365 / 182) * 100 = 8.3 percent.

Question 15

A Treasury bill with an original maturity of six months currently sells for $972.58. The bill was issued 30 days ago. An investor who purchases this bill today would have a yield on a discount basis of __________ percent.

Accepted Answer

The yield on a discount basis can be calculated using the formula: $$Yield = \left(\frac{Face\ Value - Purchase\ Price}{Face\ Value}\right) \times \left(\frac{360}{Days\ to\ Maturity}\right) \times 100\%$$Given that the Treasury bill was issued 30 days ago and originally had a maturity of six months (180 days), it has 150 days to maturity (180 - 30 = 150 days).Assuming the face value of the Treasury bill is $1,000 (as is standard), and it currently sells for $972.58, we can substitute these values into the formula:$$Yield = \left(\frac{1000 - 972.58}{1000}\right) \times \left(\frac{360}{150}\right) \times 100\% = 0.02742 \times 2.4 \times 100\% = 6.49\%$$Therefore, the yield on a discount basis is 6.49 percent.

Question 16

The Treasury bill auction is over when the market reaches the

Accepted Answer

The stop-out price is the highest accepted bid price in a Treasury bill auction. Once the market reaches this price, the auction is over and the Treasury bills are sold to the highest bidders at that price.

Question 17

All successful bidders in a Treasury bill auction pay the __________ price for their bids.

Accepted Answer

The answer of All successful bidders in a Treasury bill...

Question 18

A one-year Treasury bill that sells for $952.38 and has a face value of $1,000 has an annual yield of

Accepted Answer

The answer of A one-year Treasury bill that sells for...

Question 19

The coupon equivalent yield of a one-year Treasury bill with a $1,000 face value and a current price of $970 is __________ percent.

Accepted Answer

Coupon equivalent yield (CEY) is the annualized rate of return on a discount instrument. It is calculated by finding the yield that would produce the same cash flow as the discount bond.

In this case, the one-year Treasury bill is selling at a discount since its price ($970) is lower than its face value ($1,000). To calculate the CEY of the Treasury bill, we need to find the yield that would discount the face value to the current price over a one-year period.

Using the following formula:

CEY = (Face Value - Price)/Face Value x (360/days until maturity)

CEY = ($1,000 - $970)/$1,000 x (360/365)

CEY = 3.09%

Rounding to the nearest tenth, the CEY of the Treasury bill is 3.1%, which corresponds to answer choice A.

Question 20

The coupon equivalent yield on a three-month Treasury bill that has a $1,000 face value and a purchase price of $985 is

Accepted Answer

The coupon equivalent yield (CEY) for a Treasury bill can be calculated using the formula: CEY = [(Face Value - Purchase Price) / Purchase Price] * (365 / days to maturity) * 100. For this T-bill, CEY = [($1,000 - $985) / $985] * (365 / 90) * 100 = 6.1 percent.

Quiz 8: Money and Capital Markets