Deck 7: Money Markets 1

Question 1

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

Answer 1

False

Question 2

All money market instruments are short-term liability securities.

Answer 2

True

Question 3

Commercial banks are important indirect guarantors of some commercial paper.

Answer 3

True

Question 4

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

Question 5

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

Question 6

Finance company commercial paper is more likely to be placed directly than corporate commercial paper.

Question 7

The money market is a dealer market rather than an exchange and has no specific location.

Question 8

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

Question 9

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

Question 10

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

Question 11

Federal Reserve open market operations, reserve requirement changes, and discount rate policy directly impact interest rates in the money market.

Question 12

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

Question 13

Individual investors are typically indirect investors in money markets.

Question 14

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

Question 15

Bankers' acceptances are used primarily for financing international trade.

Question 16

Treasury bills are sold on an add-on basis, with interest paid separately at maturity.

Question 17

The majority of fed funds loan are for 30 days.

Question 18

One would expect commercial banks to hold more money market investments than pension funds.

Question 19

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

Question 20

Treasury bills are the least marketable among money market securities.

Question 21

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

Question 22

Fed funds are short term unsecured loans while repos are short term secured loans.

Question 23

Money market securities provide low denominations, low default risk investmentsand are designed to appeal to individual investors with excess cash.

Question 24

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

Question 25

Explain the economic function of money markets.

Question 26

The money market provides liquidity for deficit spending units (DSUs); the capital market provides opportunities for capital growth for DSUs.

Question 27

Describe how commercial banks participate in the money markets.

Question 28

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

Question 29

The money markets are generally not risky. Why did the money markets experience a crisis in 2007 and 2008 and how did the Fed respond?

Question 30

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 31

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

Question 32

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

Question 33

On August 8, 2011, Finance Yahoo! reported a 90-day T-Bill with a face value of $10,000 that was quoted at 3.25 bid, 3.05 ask. Given the above information, what were the sell and buy prices of this T-bill?