Question 1

Who are the principal buyers of Treasury bills today? Please make a list of the key factors that you believe motivate these investors to buy bills.

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Question 2

Explain why security dealers are essential to promote the smooth functioning of the securities markets and especially the money market.

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Question 3

What is a demand loan? How does it help security dealers obtain the financing they need?

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Question 4

What is a repurchase agreement or RP? Explain what an RP's role is in financing the operations of security dealers.

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Question 5

In what different ways do security dealers generate income and possibly make a profit?

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Question 6

To what types of risk is each form or source of dealer income subject? How might a dealer handle these different forms of risk exposure?

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Question 7

What causes the positions in securities that dealers hold to change over time?

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Question 8

How much interest would be earned (on a simple interest basis) from a three-day money market loan for $1 million at an interest rate of 12 percent (annual rate)? Suppose the loan were extended on the third day for an additional day at the going market rate of 11 percent. How much total interest income would the money-market lender receive?

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Question 9

Check the most recent issue of The Wall Street Journal you can find. Calculate the yield spreads in basis points between U.S. Treasury bills of varying maturity, the Federal funds rate and commercial paper, CD and bankers' acceptance rates. How do your calculated yield spreads compare with those shown in Exhibit 10-5? Can you explain the observed differences in yield spreads using your knowledge of the factors explaining movements in interest rates discussed in Chapters 5 through 9.
Refer to the interest rates released by the Federal Reserve on page 113.

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Question 10

Suppose the yield spread between the three-month U.S. Treasury bill rate and the three-month bank CD rate were 35 basis points. An investor has $250,000 to invest in either of these instruments for three months. How much does the investor surrender in total interest income for three months if he or she invests in Treasury bills instead of CDs? Does the investor receive any offsetting benefits by buying the bills and not the CDs?

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Question 11

From the following sets of figures: (1) calculate the bank discount rate on each T-bill; and (2) convert that rate to the appropriate investment (or coupon-equivalent) yield.

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Question 12

Calculate the holding-period yield for the following situations:

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Question 13

A dealer in government securities currently holds $875 million in 10-year Treasury bonds and $1,410 million in 6-month Treasury bills. Current yields on the T-bonds average 7.15 percent while 6-month T-bill yields average 3.38 percent. The dealer is currently borrowing $2,300 million through one-week repurchase agreements at an interest rate of 3.20 percent. What is the dealer's expected (annualized) carry income? Suppose that 10-year T-bond rates suddenly rise to 7.30 percent, T-bill rates climb to
5.40 percent and interest rates on comparable maturity RPs increase to 5.55 percent. What will happen to the dealer's expected (annualized) carry income and why? Should this dealer have moved to a long position or a short position before the interest rate change just described? Should the dealer alter his or her borrowing plans in any way? Please explain your answer.

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Question 14

A government securities dealer is currently borrowing $25 million from a money-center bank using repurchase agreements based on Treasury bills. If today's RP rate is 6.25 percent, how much in interest will the dealer owe for a 24 hour loan?

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Question 15

Suppose that a dealer borrows cash through a $40 million RP from a manufacturing corporation for one day. If the dealer will have to pay $3,500 in interest on this loan, what is the current RP loan rate?

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Question 16

An automobile company, NISSAN, has a temporary cash surplus and lends its funds overnight through a repurchase agreement to a government securities dealer, earning $55,600 in interest income when the RP loan rate stood at 5.70%. What was the size of the loan that NISSAN granted to the securities dealer?

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Question 17

Ninety-one day Treasury bills carry an investment yield (IR) of 6.25%. What is their purchase price?
What is their discount rate?

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Quiz 10: Introduction to the Money Market and the Roles Played by Governments and Security Dealers