Question 1

T-bills and commercial paper are sold

Accepted Answer

T-bills and commercial paper are sold at a discount from par value. This means that investors pay less than the face value at the time of purchase, but receive the full value of the security at maturity.

Question 2

Jarrod King, a private investor, purchases a Treasury bill with a $10,000 par value for $9,645. One hundred days later, Jarrod sells the T-bill for $9,719. What is Jarrod's expected annualized yield from this transaction?

Accepted Answer

D

Question 3

A firm plans to issue 30-day commercial paper for $9,900,000. Par value is $10,000,000. What is the firm's cost of borrowing?

Accepted Answer

The cost of borrowing can be calculated as follows:

Cost of borrowing = (Par value - Net proceeds) / Net proceeds x (360 / Days to maturity)

Net proceeds = Par value - Discount
Discount = Par value - Issue price = $10,000,000 - $9,900,000 = $100,000

Net proceeds = $10,000,000 - $100,000 = $9,900,000

Therefore,

Cost of borrowing = ($10,000,000 - $9,900,000) / $9,900,000 x (360 / 30) = 12.12 percent

Question 4

When firms sell commercial paper at a ____ price than they projected, their cost of raising funds is ____ than projected.

Accepted Answer

When firms sell commercial paper at a lower price than projected, their cost of raising funds is higher than projected, and vice versa. Therefore, none of the given options correctly describe the relationship.

Question 5

An investor buys a T-bill with 180 days to maturity and $250,000 par value for $242,000. He plans to sell it after 60 days, and forecasts a selling price of $247,000 at that time. What is the annualized yield based on this expectation?

Accepted Answer

The answer of An investor buys a T-bill with 180...

Question 6

The federal funds market allows depository institutions to borrow

Accepted Answer

The federal funds market is a market for very short-term borrowing and lending of funds between depository institutions, such as banks and credit unions. The Federal Reserve does play a role in this market by setting a target federal funds rate, but it does not directly loan long-term funds to depository institutions. Therefore, the correct answer is A - depository institutions can borrow short-term funds from each other.

Question 7

Which of the following is not a money market instrument?

Accepted Answer

All of the above options are money market instruments.

Question 8

Commercial paper has a maximum maturity of ____ days.

Accepted Answer

The answer of Commercial paper has a maximum maturity of...

Question 9

A newly issued T-bill with a $10,000 par value sells for $9,750, and has a 90-day maturity. What is the discount?

Accepted Answer

The answer of A newly issued T-bill with a $10,000...

Question 10

Large corporations typically make ____ bids for T-bills so they can purchase larger amounts.

Accepted Answer

Large corporations typically have the financial resources and creditworthiness to make competitive bids, allowing them to purchase larger amounts of T-bills at potentially lower yields. Noncompetitive bids, on the other hand, are typically reserved for smaller investors who are not able to bid on large quantities. Very small bids may not meet the minimum threshold required to participate in the auction.

Question 11

____ are sold at an auction at a discount from par value.

Accepted Answer

Treasury bills are short-term government securities that are sold at a discount from their par value and mature at par, meaning the investor receives the full face value at maturity.

Question 12

An investor buys commercial paper with a 60-day maturity for $985,000. Par value is $1,000,000, and the investor holds it to maturity. What is the annualized yield?

Accepted Answer

The answer of An investor buys commercial paper with a...

Question 13

When a bank guarantees a future payment to a firm, the financial instrument used is called

Accepted Answer

When a bank guarantees a future payment to a firm, the financial instrument commonly used is called a banker's acceptance. This is a type of short-term, fixed-income financial instrument that is issued by the bank and guaranteed by the bank. It is typically used to finance trade or other commercial transactions. Repurchase agreements, negotiable CDs, and commercial paper are all different types of financial instruments, but they are not typically used by banks to guarantee future payments.

Question 14

____ is a short-term debt instrument issued only be well-known, creditworthy firms and is normally issued to provide liquidity or finance a firm's investment in inventory and accounts receivable.

Accepted Answer

Commercial paper is a short-term debt instrument issued by creditworthy firms to provide liquidity or finance a firm's investment in inventory and accounts receivable. It is typically issued for a period of up to 270 days and can be traded on the open market. Options A, B, and D are not the best choices as they do not fit the description provided in the question.

Question 15

Securities with maturities of one year or less are classified as

Accepted Answer

Securities with maturities of one year or less are classified as money market instruments. Capital market instruments have longer maturities, typically over one year, and include stocks and bonds. Preferred stock is a type of equity security that represents ownership in a company but does not have the same voting rights as common stock.

Question 16

A repurchase agreement calls for an investor to buy securities for $4,925,000 and sell them back in 60 days for $5,000,000. What is the yield?

Accepted Answer

The answer of A repurchase agreement calls for an investor...

Question 17

Which of the following is not a money market security?

Accepted Answer

Common stock is not considered a money market security, as it is a form of equity rather than a debt instrument like the other options listed. Money market securities are typically short-term, highly liquid investments with low risk and low returns.

Question 18

If an investor buys a T-bill with a 90-day maturity and $50,000 par value for $48,500 and holds it to maturity, what is the annualized yield?

Accepted Answer

The formula for annualized yield on a T-bill is:
(Par Value – Purchase Price) / Purchase Price X (360 / Days to Maturity)
Plug in the values:
(50,000 – 48,500) / 48,500 X (360 / 90) = 0.025 X 4 = 0.1 or 10%
Therefore, the annualized yield is 10%.Since there are 4 90-day cycles in a year, multiplying by 4 will result in 40% which gives us 10% for a 90-day period. Hence the answer is option B.

Question 19

At any given time, the yield on commercial paper is ____ the yield on a T-bill with the same maturity.

Accepted Answer

Commercial paper is considered a riskier investment than a T-bill, so investors demand a slightly higher yield on commercial paper to compensate for this higher risk. Therefore, the yield on commercial paper is slightly higher than the yield on a T-bill with the same maturity.

Question 20

Assume investors require a 5 percent annualized return on a six-month T-bill with a par value of $10,000. The price investors would be willing to pay is $____.

Accepted Answer

The answer of Assume investors require a 5 percent annualized...

Quiz 6: Money Markets