Question 1

At each T-bill auction, the prices paid for three-month T-bills are significantly lower than the prices paid for six-month bills.

Accepted Answer

The prices paid for T-bills at auction do not necessarily reflect a consistent pattern where three-month T-bills are priced significantly lower than six-month bills. The prices and yields of T-bills are influenced by market demand, interest rate expectations, and overall economic conditions, which can vary over time.

Question 2

When a firm sells its commercial paper at a ____ price than projected, its cost of raising funds will be ____ than what it initially anticipated.

Accepted Answer

The answer of When a firm sells its commercial paper...

Question 3

Credit guarantees for commercial paper:

Accepted Answer

Credit guarantees for commercial paper are only as good as the credit of the guarantor. The guarantor can be a bank, a parent company or a third party entity. The guarantee provides reassurance to investors that they will be paid even if the issuer of the commercial paper defaults. However, the creditworthiness of the guarantor is important because, if it defaults, the guarantee becomes worthless. Credit guarantees are not issued by the Federal Reserve Bank of New York. They are typically issued by the guarantor or a third-party entity. Option A is incorrect because credit guarantees do not ensure that the issuer of commercial paper will use the funds obtained to provide credit.

Question 4

Freeman Corp., a large corporation, plans to issue 45-day commercial paper with a par value of $3,000,000. Freeman expects to sell the commercial paper for $2,947,000. Freeman's annualized costof borrowing is estimated to be ____ percent.

Accepted Answer

The annualized cost of borrowing can be calculated using the formula: [(Par Value - Sale Price) / Sale Price] * (360 / Days to Maturity) * 100. Substituting the given values: [($3,000,000 - $2,947,000) / $2,947,000] * (360 / 45) * 100 = 14.39%.

Question 5

Ignoring transaction costs, the cost of borrowing with commercial paper is equal to:

Accepted Answer

The cost of borrowing with commercial paper is equal to the yield earned by investors holding the paper until maturity, as this yield represents the interest rate the issuer must pay to the investor.

Question 6

Which of the following securities is most likely to be used in a repo transaction?

Accepted Answer

Treasury bills are the most commonly used security in repo transactions as they are considered to be the safest and most liquid securities available in the market. Commercial paper and certificates of deposit may also be used but are less common, while common stock is not suitable for use in repo transactions.

Question 7

LIBOR is:

Accepted Answer

LIBOR stands for London Interbank Offered Rate, which is the interest rate at which banks can borrow funds from other banks in the London interbank market. It is a benchmark rate that serves as the reference rate for a wide range of financial instruments, including loans, bonds, and derivatives, across many currencies and maturities.

Question 8

The LIBOR scandal in 2012 involved:

Accepted Answer

The LIBOR scandal involved banks falsely reporting the interest rates they offered in the interbank market.

Question 9

A ____ is not a money market security.

Accepted Answer

A bond is not a money market security. Money market securities are short-term, low-risk debt securities such as Treasury bills, commercial paper, negotiable certificates of deposit, and banker's acceptances. Bonds, on the other hand, are typically longer-term debt securities with higher risks and potentially higher returns.

Question 10

A major drawback to investing in Treasury bills is that they cannot easily be liquidated.

Accepted Answer

Treasury bills are highly liquid and can easily be sold in the secondary market before maturity.

Question 11

The money market interest rate paid by corporations that borrow short-term funds in a particular country is typically:

Accepted Answer

The money market interest rate paid by corporations that borrow short-term funds in a particular country is typically slightly higher than the rate paid by that country's government. This is because corporations are viewed as having a higher credit risk than the government and must therefore pay a premium to borrow funds in the short-term money market.

Quiz 6: Money Markets