Question 1

Clearinghouse funds are transferred from bank to bank through the Federal Reserve's wire transfer network in order to make payments in the money market.

Accepted Answer

The answer of Clearinghouse funds are transferred from bank to...

Question 2

With a federal funds transaction, the seller of securities has funds available from the buyer the same day the trade is carried out.

Accepted Answer

Federal funds transactions are typically settled on the same day, meaning the seller receives funds from the buyer immediately.

Question 3

Federal funds, due to their nature, could be labeled "same-day money."

Accepted Answer

Federal funds are often referred to as "same-day money" because they are short-term funds transferred between financial institutions that are typically settled on the same day the transfer is initiated.

Question 4

There is no difference in risk between federal funds and clearinghouse funds.

Accepted Answer

Federal funds are overnight loans between banks with minimal risk due to their short duration and the credit quality of most banks. Clearinghouse funds, however, can involve a broader range of transactions with potentially varying degrees of risk depending on the specific arrangements and the entities involved.

Question 5

The money market of the U.S. is dominated by a relatively small number of large financial institutions.

Accepted Answer

The U.S. money market is indeed dominated by a small number of large financial institutions, which include banks, money market funds, and other entities that deal with short-term borrowing, lending, buying, and selling of financial instruments.

Question 6

Treasury bills tend to carry the lowest rate among money market instruments because they have zero default risk and minimal market risk.

Accepted Answer

Treasury bills are considered to have the lowest risk among money market instruments because they are backed by the full faith and credit of the U.S. government, effectively eliminating default risk. Their short maturities also minimize market risk.

Question 7

The money market instrument with the largest dollar volume outstanding in 1995 was U.S. Treasury bills.

Accepted Answer

The answer of The money market instrument with the largest...

Question 8

The Federal Reserve's discount rate is determined by demand and supply forces in the financial marketplace.

Accepted Answer

The Federal Reserve's discount rate is set by the Federal Reserve itself, not by market forces. It is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility.

Question 9

A high discount rate relative to other money market interest rates promotes a stable money market, according to your text.

Accepted Answer

A high discount rate relative to other money market interest rates discourages borrowing from the central bank, potentially leading to tighter liquidity and less stability in the money market.

Question 10

Money market CDs have minimum denominations of $100,000.

Accepted Answer

Money market CDs have minimum denominations of $100,000.

Question 11

Money market loans all share the same purpose for borrowing money.

Accepted Answer

Money market loans can serve various purposes, including managing short-term liquidity needs, financing inventory, or bridging gaps between receivables and payables, among others.

Question 12

A money market participant with a surplus cash position is likely to withdraw from that market until a cash deficit arises, according to your text.

Accepted Answer

A money market participant with a surplus cash position is more likely to lend or invest in the money market to earn interest, rather than withdraw from it.

Question 13

The interest rate on money market loans defines the cost of borrowing in the money market, but there is no cost faced by a potential lender of funds in the money market.

Accepted Answer

Lenders in the money market face opportunity costs, risks associated with the borrower's creditworthiness, and potential inflation impacts, which all contribute to the costs of lending in the money market.

Question 14

The risk that an investor will be forced to place earnings from a loan or security into a lower yielding investment because interest rates have subsequently fallen is known as market risk, according to your text.

Accepted Answer

This is known as reinvestment risk, not market risk. Market risk refers to the risk of losses in positions arising from movements in market prices.

Question 15

A money market lender of funds benefits when money market rates fall because reinvestment risk is then lower.

Accepted Answer

A money market lender of funds actually faces higher reinvestment risk when money market rates fall because they will have to reinvest their returns at lower interest rates, potentially reducing their income.

Question 16

U.S. Government securities traded in the money market are assumed by investors to carry zero reinvestment risk.

Accepted Answer

U.S. Government securities traded in the money market, like Treasury bills, indeed have very low credit risk, but they still carry reinvestment risk because the rates at which investors can reinvest their returns can fluctuate.

Question 17

If a money market investor has a temporary cash surplus but fails to invest that surplus for a day, the income lost can be made up by investing the funds at interest the following day.

Accepted Answer

The income lost from not investing the cash surplus for a day cannot be made up simply by investing at interest the following day, as the opportunity to earn interest on that specific day is permanently lost.

Question 18

One of the principal uses of the money market is to finance capital investment projects, according to the text.

Accepted Answer

The money market is primarily used for short-term financing and liquidity purposes, not for financing long-term capital investment projects, which are typically funded through the capital market.

Question 19

The largest of all borrowers in the money market is the Bank of Japan.

Accepted Answer

The largest borrower in the money market is typically the government of a country, not the Bank of Japan or any other central bank. Governments often issue short-term debt instruments to finance budget deficits and manage liquidity.

Question 20

Actual maturity of a security is always less than that security's original maturity.

Accepted Answer

Actual maturity of a security is the actual time until the security is due to be repaid, which can be equal to or less than the original maturity if the security is held until its due date without any early redemption features being exercised.

Quiz 10: Factors Affecting the Volume of CDs

Clearinghouse funds are transferred from bank to bank through the Federal Reserve's wire transfer network in order to make payments in the money market.

With a federal funds transaction, the seller of securities has funds available from the buyer the same day the trade is carried out.

Federal funds, due to their nature, could be labeled "same-day money."

There is no difference in risk between federal funds and clearinghouse funds.

The money market of the U.S. is dominated by a relatively small number of large financial institutions.

Treasury bills tend to carry the lowest rate among money market instruments because they have zero default risk and minimal market risk.

The money market instrument with the largest dollar volume outstanding in 1995 was U.S. Treasury bills.

The Federal Reserve's discount rate is determined by demand and supply forces in the financial marketplace.

A high discount rate relative to other money market interest rates promotes a stable money market, according to your text.

Money market CDs have minimum denominations of $100,000.

Money market loans all share the same purpose for borrowing money.

A money market participant with a surplus cash position is likely to withdraw from that market until a cash deficit arises, according to your text.

The interest rate on money market loans defines the cost of borrowing in the money market, but there is no cost faced by a potential lender of funds in the money market.

The risk that an investor will be forced to place earnings from a loan or security into a lower yielding investment because interest rates have subsequently fallen is known as market risk, according to your text.

A money market lender of funds benefits when money market rates fall because reinvestment risk is then lower.

U.S. Government securities traded in the money market are assumed by investors to carry zero reinvestment risk.

If a money market investor has a temporary cash surplus but fails to invest that surplus for a day, the income lost can be made up by investing the funds at interest the following day.

One of the principal uses of the money market is to finance capital investment projects, according to the text.

The largest of all borrowers in the money market is the Bank of Japan.

Actual maturity of a security is always less than that security's original maturity.