Deck 7: Money Markets

Question 1

Treasury bills are sold on a discount basis, with interest paid separately at maturity.

Answer 1

False

Question 2

Bankers' acceptances are used primarily for financing international trade.

Answer 2

True

Question 3

Eurodollars are euro-denominated deposits in U.S. banks.

Answer 3

False

Question 4

For large corporations, commercial paper is more expensive but is a more assured alternative to bank borrowing.

Question 5

The Federal Funds market is not available for smaller, regional banks.

Question 6

Commercial paper is more likely to be placed directly by large finance companies.

Question 7

Commercial banks are important indirect guarantors of commercial paper.

Question 8

Federal Reserve open market operations, reserve requirement changes, and discount rate policy first impact the economy in the money market.

Question 9

The money market is a dealer market, not an exchange, and has no specific location.

Question 10

All money market instruments are short-term liability securities.

Question 11

Commercial banks are the major issuer and investor of money market securities.

Question 12

The money market is a market where liquidity is bought and sold.

Question 13

Individual investors most often have only indirect access to the money market through commercial banks.

Question 14

Treasury bills are least marketable among money market securities.

Question 15

Dealers bring buyers and sellers together; brokers make a market.

Question 16

Commercial banks act as dealers and are major investors in Treasury securities.

Question 17

Many diverse institutions borrow in the money markets, while relatively few invest.

Question 18

The higher yields of federal agency securities relative to T-bills is attributed mostly to the lower marketability of agency securities.

Question 19

Money market borrowers are small in number compared to money market lenders.

Question 20

Interest arbitrage keeps the interest rates of the many money market securities equal.

Question 21

Which of the following statements is true?

A) Discount yield is always lower than bond equivalent yield on the same security.
B) Discount yield is always higher than bond equivalent yield on the same security.
C) Discount yield is always equal to bond equivalent yield on the same security.
D) Discount yield can be lower or higher than bond equivalent yield on the same security.

Question 22

Banks can satisfy their short-term borrowing needs by Federal Funds purchased.
Federal Funds sold.
Issuing negotiable CDs.
Both a and c

Question 23

Fed funds are short term unsecured loans while repos are short term secured loans from Federal Reserve Banks.

Question 24

Non-competitive bidders in the U. S. Treasury security auctions pay the weighted average price of all accepted competitive bids.

Question 25

Which of the following statements about federal agency securities is true?

A) All federal agency debt is explicitly guaranteed by the federal government.
B) All federal agencies are owned by the federal government.
C) Federal agency securities usually have yields of 3 to 20 basis points below Treasury bills.
D) All of above statements are true.
E) None of the above statements is true.

Question 26

Which of the following may be a liability of a non-financial business corporation?

A) commercial paper
B) Federal Funds
C) Treasury securities
D) agency securities

Question 27

Which of the following is NOT a characteristic of money market instruments?

A) short term to maturity
B) small denominations
C) low default risk
D) high marketability
E) All of the above are characteristics of money market securities.

Question 28

Competitive bids in T-bill auctions require the bidder to specify only the quantity of bills desired.

Question 29

The money market provides liquidity for deficit spending units; the capital market finances economic growth.

Question 30

Which of the following statements about the money market is true?

A) The money market is a dealer market linked by efficient communications systems.
B) Money market transactions are seldom over $1 million.
C) Money market transactions include more "primary market" trades for a security than secondary market trades.
D) Most money market transactions are conducted by mail.
E) All of the above statements are true.

Question 31

Which of the following securities is not a money market security?

A) Ba-rated corporate bonds
B) Treasury bills
C) certificates of deposit
D) banker's acceptance
E) P2-rated commercial paper

Question 32

The benefits of money market securities are low denomination, low systemic risk investments designed to appeal to individual investors with excess cash.

Question 33

Small investors are likely to invest in the money market through ____.

A) directly; commercial paper
B) locally; their credit union
C) indirectly; negotiable CDs
D) indirectly; money market mutual funds

Question 34

Reverse repos are contracts that require a firm to first sell securities with the agreement to buy them back in a short period at a higher price.

Question 35

The most common money market instrument utilized in the Fed's open market operations is

A) Federal Funds.
B) commercial paper.
C) Treasury bills.
D) Agency securities.

Question 36

A short term unsecured promissory note issued by a company is Negotiable CD.

Question 37

Which of the following money market instruments would typically be used in international transactions?

A) a Treasury bill
B) a banker's acceptance
C) commercial paper
D) a negotiable CD

Question 38

Investors in the money markets are generally willing to take which of the following risks?

A) default risk
B) interest rate risk
C) liquidity risk
D) all of the above
E) none of the above

Question 39

Federal Funds are typically

A) Treasury deposits.
B) Federal Reserve assets.
C) commercial bank deposits at the Federal Reserve.
D) overnight interbank loans settled in immediately available funds

Question 40

Which statement about Treasury bills is NOT true?

A) They have maturities less than one year.
B) Most are sold by "book-entry" method.
C) They are sold at a discount.
D) Interest on T-bills is tax-deductible for federal income tax purposes.

Question 41

Calculate the bond equivalent yield on a 52-day T-bill selling for 98.555% of its face value.

A) 10.85%
B) 10.75%
C) 10.54%
D) 10.29%

Question 42

Issuers of commercial paper tend to be

A) large financial and nonfinancial firms
B) firms with high credit risk
C) small banks
D) wealthy individuals
E) both a and b

Question 43

Which of the following money market rates is studied closely for indicators of changes in Federal Reserve monetary policy?

A) Federal Funds
B) Treasury bills
C) commercial paper
D) banker's acceptances

Question 44

Which of the following money market instruments is not sold on a discount basis?

A) commercial paper
B) negotiable certificates of deposit
C) Treasury bills
D) banker's acceptances
E) All of the above instruments are sold on a discount basis.

Question 45

A time draft drawn on and accepted by a commercial bank that orders to pay a specified amount of money to the bearer on a given date is called a _______

A) letter of credit
B) negotiable certificate of deposit
C) banker's certificate of support
D) reverse repurchase agreement
E) banker's acceptance

Question 46

Which of the following money market securities is backed by specified collateral?

A) negotiable CDs
B) banker's acceptances
C) repurchase agreements
D) commercial paper

Question 47

What is the bank discount rate on a $100,000 face value T-bill priced at $97,500, maturing in 181days?

A) 2.50%
B) 4.84%
C) 4.97%
D) 5.10%
E) 5.17%

Question 48

The bank discount rate (ask) on a 71-day T-bill is 4.86%. What is the bond equivalent yield on the T-bill?

A) 4.86%
B) 4.92%
C) 4.98%
D) 5.14%

Question 49

The T-bill rate quoted by the Federal Reserve banks is the

A) bank discount rate.
B) the true rate.
C) effective annual rate.
D) bond equivalent rate.
E) the primary rate

Question 50

The smallest denomination of T-bills is

A) $1,000
B) $10,000
C) $100,000
D) $1,000,000
E) $5,000,000

Question 51

The money market security represented by the largest dollar amount outstanding is

A) commercial paper.
B) federal agency issues.
C) negotiable CDs.
D) Treasury bills.

Question 52

Purchasing T-bill via a computerized account without actually receiving the securities is achieved through a _______ Account.

A) Direct Purchase
B) Treasury Direct
C) Fed Purchase
D) Federal Benefit

Question 53

Money market securities have very little

A) default risk.
B) price risk.
C) marketability risk.
D) all of the above.

Question 54

Which of the following yield calculations on a Treasury bill provides the best comparison yield for competing coupon-bearing securities of the same maturity?

A) bank discount rate
B) CD equivalent rate
C) bond equivalent rate
D) the prime rate.

Question 55

An important economic function of the U.S. government security dealer is to

A) underwrite Treasury securities.
B) "make a market" for Treasury securities.
C) support open market operations of the Federal Reserve.
D) all of the above

Question 56

When a firm issuing commercial paper uses a backup line of credit, it _____.

A) increases the credit risk for investors
B) decreases the credit risk for investors
C) has no impact on investors
D) decreases the marketability of commercial paper

Question 57

The Wall Street Journal publishes T-bill price (bid/ask) based on the ___________ rate; with the __________ rate provided as the quoted (ask) yield on the T-bill.

A) bond equivalent; bank discount
B) effective annual; bank discount
C) bank discount; bond equivalent
D) bank equivalent; bank discount

Question 58

Large industrial U.S. corporations are involved in the money market by

A) investing excess cash balances.
B) buying and selling goods on credit in international trade.
C) issuing commercial paper.
D) all of the above

Question 59

Banks invest in government securities for a variety of reasons except

A) income.
B) safety.
C) acceptable for collateral.
D) high relative yield.

Question 60

The bank discount rate (ask) on a 91-day T-bill is 5.35%. What is the price of the $1000 T-bill?

A) $976.40
B) $986.48
C) $981.20
D) $989.45

Question 61

What are the fundamental characteristics of money market debt instruments? Explain why these characteristics are important to money market participants who are investing and financing.

Question 62

Federal agency securities have higher yields than Treasury securities because

A) they are less marketable than Treasury securities.
B) they have higher exchange rate risk than Treasuries.
C) they are more affected by interest rate risk.
D) they are associated with mortgages that are riskier securities.
E) Federal agency securities actually have lower yields than Treasury securities.

Question 63

The fed funds rate is very important to the economy because:

A) it measures the return on the most liquid of all the financial assets traded
B) it is closely related to the conduct of monetary policy
C) it measures directly the availability of excess reserves in the banking system
D) all of the above

Question 64

Yields on three-month T-bills are more similar to

A) Two-year Treasury notes rates.
B) Ninety-day commercial paper rates.
C) federal funds rates.
D) Aaa-rated corporate bond rates.

Question 65

What is a banker's acceptance? Why are banker's acceptances ideally suited for foreign trade transactions?

Question 66

A bank agrees to buy T-bills from a securities dealer for $997,250, and promises to sell the securities back to the dealer in 4 days for $997,575. The yield on this reverse repo for the bank is:

A) 3.00%
B) 2.97%
C) 2.91%
D) 2.86%
E) 2.93%

Question 67

Explain why most money market interest rates tend to move together over time.

Question 68

A repurchase agreement calls for

A) a firm to sell securities with the agreement to buy them back later at a higher price.
B) a firm to buy securities with the agreement to sell them back later at a higher price.
C) a firm to sell securities with the agreement to buy them back later at a lower price.
D) a firm to buy securities with the agreement to sell them back later at a lower price.

Question 69

Which of the following do not participate in the money markets?

A) commercial banks
B) the Federal Reserve
C) U.S. Treasury dealers
D) corporations
E) All of the above participate in the money markets.

Question 70

A repurchase agreement is like a secured loan because

A) it involves two parties.
B) it involves collateral, in this case the sale of a security under agreement to repurchase.
C) it is backed by a mortgage on real property.
D) it is like the secured lending in that a mortgage is effected by the lender.

Question 71

A competitive bid in the Treasury securities auction market has all of the following characteristics except:

A) the bidder specifying the quantity of bills desired
B) the price the investor wishes to pay
C) large, institutional investors
D) bids for a maximum of $5,000,000.

Question 72

A 90 day $3 million jumbo CD has a 5.75% annual rate quote. If you purchase the CD, how much will you collect in 90 days?

A) $3,043,125
B) $3,045.678
C) $3,062,877
D) $3,063,750

Question 73

Explain the economic function of money markets.

Question 74

A firm buys $1,000,000 of a 30-day commercial paper issue for $995,450. The bond equivalent yield on this commercial paper is:

A) 5.56%
B) 5.46%
C) 5.49%
D) 5.54%

Question 75

Which of the following statements about negotiable certificates of deposits (NCDs) is true?

A) NCDs usually have denominations of less than $100,000.
B) NCDs usually have lower yields than regular CDs.
C) NCDs have no secondary market
D) Large banks are usually able to pay lower interest rates on NCDs than smaller regional banks.
E) All of the above statements are true.

Question 76

A non-competitive bid in the Treasury securities auction market is characterized by:

A) the bidder specifying the quantity of bills desired
B) the bid not exceeding a specific dollar amount
C) the bidders paying a price equal to the weighted average price of all competitive bids accepted.
D) all of the above.

Question 77

A reverse repurchase agreement calls for

A) a firm to sell securities with the agreement to buy them back later at a higher price.
B) a firm to buy securities with the agreement to sell them back later at a higher price.
C) a firm to sell securities with the agreement to buy them back later at a lower price.
D) a firm to buy securities with the agreement to sell them back later at a lower price.

Question 78

A dealer is quoting a 180-day T-Bill with a face value of $10,000 that is quoted at 3.75 bid, 3.60 ask. This bill can be bought at ________ or can be sold at ________.

A) $9,879.23; $9,864.36
B) $9,864.36; $9,859.23
C) $9,820.00; $9,812.50
D) $9,802.50; $9,787.50

Question 79

In the stock market crashes of 1987, 1989, and shortly after September 11th, money market yields dropped. What caused this drop in money market interest rates? Discuss.

Question 80

In terms of dollars outstanding, in recent years, what is the largest money market security?

A) Commercial paper
B) Banker's acceptances
C) T-Bills
D) Federal funds and repos