Deck 8: Money and Capital Markets

Question 1

Recent U.S. budget deficits have arguably been financed by foreigners; if it were not for foreign __________ of Treasury securities, U.S. interest rate would be much __________.

A) sales; higher
B) sales; lower
C) purchases; higher
D) purchases; lower

Answer 1

C

Question 2

A Treasury security with an original maturity of twenty years is called a

A) bond.
B) note.
C) bill.
D) debenture.

Answer 2

A

Question 3

__________ are issued with an original maturity of between one and ten years.

A) Treasury bills
B) Treasury notes
C) Treasury bonds
D) None of the above.

Answer 3

B

Question 4

Virtually all Federal Reserve open-market purchases and sales are conducted with government securities, mostly

A) Treasury bills.
B) Treasury notes.
C) Treasury bonds.
D) savings bonds.

Question 5

The original maturity on U.S. Treasury notes is between

A) three months and one year.
B) one and ten years.
C) six months and three years.
D) ten and thirty years.

Question 6

Which of the following statements is incorrect?

A) Government securities dealers often convert newly issued Treasury notes to zero-coupon form.
B) Marketable U.S. government securities are widely held throughout the world.
C) 5-year Treasury securities are unavailable as TIPS.
D) The Federal Reserve owns some government securities as a result of open market operations.

Question 7

Which type of U.S. government security is a kind of zero-coupon security?

A) Federal funds note
B) U.S. Treasury note
C) U.S. Treasury bill
D) U.S. Treasury bond

Question 8

Most government securities transactions take place in the

A) futures market.
B) commodities market.
C) over-the-counter dealer market.
D) New York securities market.

Question 9

Which of the following U.S. government securities are nonmarketable?

A) Treasury bills
B) Treasury notes
C) Treasury bonds
D) Savings bonds

Question 10

An investor wishing to minimize the risk of capital losses as a result of changing interest rates should avoid

A) U.S. savings bonds.
B) U.S. Treasury notes.
C) U.S. Treasury bills.
D) U.S. Treasury bonds.

Question 11

A good purchase for an investor seeking a high degree of liquidity with minimal market risk would be a U.S.

A) Treasury bill.
B) Treasury bond.
C) Treasury note.
D) savings bond.

Question 12

Marketable government securities consists of Treasury bills,

A) Treasury notes, and U.S. savings bonds.
B) Treasury notes, and Treasury bonds.
C) Treasury bonds, and federal funds.
D) U.S. saving bonds, and federal funds.

Question 13

The original maturity on U.S. Treasury bills is between

A) three months and six months.
B) one and ten years.
C) six months and three years.
D) ten and thirty years.

Question 14

A newly-issued eighteen-year Treasury security can be stripped into __________ separate zero coupon securities.

A) two
B) eighteen
C) thirty-seven
D) seventy-three

Question 15

Among marketable government securities, the largest dollar volume is in the form of

A) Treasury bonds.
B) Treasury notes.
C) Treasury bills.
D) federal funds.

Question 16

Which of the following statements is incorrect?

A) Trading in government securities averages more than twenty times a typical day's trading on the New York Stock Exchange.
B) All marketable government securities are initially issued at auctions held by the Federal Reserve.
C) Government security auction participants include government securities dealers and large banks.
D) U.S. government securities are increasingly traded around the clock on virtually a nonstop basis.

Question 17

A one-year Treasury bill with a face value of $1,000 and an annual yield of 5 percent sells for approximately

A) $1,005.
B) $995.
C) $952.
D) $948.

Question 18

The __________ serves as a practical reference point for all other securities markets.

A) commercial paper market
B) New York Stock Exchange
C) over-the-counter market
D) U.S. government securities market

Question 19

Dealers get much of their government securities inventories

A) through direct transfers from the Treasury.
B) through direct transfers from the Federal Reserve.
C) bidding at competitive auctions.
D) through purchases from commercial banks.

Question 20

About what percentage of marketable national debt is held by foreigners?

A) 5 percent
B) 15 percent
C) 25 percent
D) 50 percent

Question 21

A one-year Treasury bill that sells for $943.40 and has a face value of $1,000 has an annual yield of

A) 8 percent.
B) 7 percent.
C) 6 percent.
D) 5 percent.

Question 22

__________ bidders in a Treasury auction are guaranteed their bids at the __________ price resulting from the auction.

A) Competitive; market-clearing
B) Noncompetitive; highest
C) Competitive; lowest
D) Noncompetitive; market-clearing

Question 23

A one-year Treasury bill with an annual yield of 10 percent and a price of $909.09 has a face value of

A) $900.
B) $1,000.
C) $980.
D) $1,020.

Question 24

The __________ is always larger than the __________.

A) yield on a discount basis; coupon equivalent yield
B) yield on a discount basis; bond equivalent yield
C) coupon equivalent yield; yield on a discount basis
D) None of the above.

Question 25

The difference in the selling and purchase prices of government securities in a typical overnight repurchase agreement is set to reflect

A) the difference in the auction price of the securities and their current market price.
B) the overnight cost of funds.
C) LIBOR.
D) the discount on Treasury bills.

Question 26

A 91-day $10,000 Treasury bill is selling for $9,000. The bill's yield on a discount basis is __________ percent.

A) 3.36
B) 3.96
C) 7.91
D) 10.0

Question 27

An important market for overnight borrowing and lending is the

A) commercial paper market.
B) repo market.
C) Treasury bill market.
D) Treasury bond market.

Question 28

A 91-day $10,000 Treasury bill is selling for $9,000. The bill's coupon equivalent yield is __________ percent.

A) 3.96
B) 4.46
C) 8.02
D) 10.0

Question 29

The repo market is most closely related to the

A) federal funds market.
B) Treasury bond market.
C) Treasury note market.
D) commercial paper market.

Question 30

The __________ is calculated as the face value minus the purchase price divided by the face value.

A) coupon equivalent yield
B) bond equivalent yield
C) yield on a discount basis
D) yield to maturity

Question 31

The two kinds of yields used in the Treasury bill market are the

A) coupon equivalent yield and yield on a discount basis.
B) face yield and discount yield.
C) nominal yield and real yield.
D) yield to maturity and coupon equivalent yield.

Question 32

The main difference between a repo and federal funds transaction is that

A) the repo transaction uses the securities for collateral while the federal funds transaction does not have collateral.
B) the federal funds transaction uses securities for collateral while the repo transaction does not have collateral.
C) the repo transaction has an agreed upon interest rate while the federal funds transaction has a spread between the sale and purchase price of securities.
D) the federal funds transaction is normally overnight while the typical repo agreement is for 90 to 180 days.

Question 33

A Treasury bill with an original maturity of six months currently sells for $972.58. The bill was issued 30 days ago. An investor who purchases this bill today would have a bond equivalent yield of __________ percent.

A) 6.49
B) 6.77
C) 5.58
D) 5.65

Question 34

The coupon equivalent yield on a six-month Treasury bill that has a $1,000 face value and sells for $960 is

A) 6.5 percent.
B) 8.3 percent.
C) 9.5 percent.
D) 9.8 percent.

Question 35

A Treasury bill with an original maturity of six months currently sells for $972.58. The bill was issued 30 days ago. An investor who purchases this bill today would have a yield on a discount basis of __________ percent.

A) 6.58
B) 5.50
C) 5.42
D) 6.49

Question 36

The Treasury bill auction is over when the market reaches the

A) highest bid.
B) stop-out price.
C) discount price.
D) optimal price.

Question 37

All successful bidders in a Treasury bill auction pay the __________ price for their bids.

A) market-clearing
B) highest accepted
C) average
D) lowest accepted

Question 38

A one-year Treasury bill that sells for $952.38 and has a face value of $1,000 has an annual yield of

A) 10 percent.
B) 8 percent.
C) 6 percent.
D) 5 percent.

Question 39

The coupon equivalent yield of a one-year Treasury bill with a $1,000 face value and a current price of $970 is __________ percent.

A) 3.1
B) 3.0
C) 9.7
D) None of the above.

Question 40

The coupon equivalent yield on a three-month Treasury bill that has a $1,000 face value and a purchase price of $985 is

A) 6.1 percent.
B) 6.5 percent.
C) 7.2 percent.
D) 1.5 percent.

Question 41

"LIBID" is the rate at which U.S. banks

A) lend to their best customers.
B) borrow Eurodollar market.
C) lend in the Eurodollar market.
D) borrow in the jumbo CD market.

Question 42

A corporation is likely to "call" a bond if

A) it goes bankrupt.
B) it has short-term liquidity problems.
C) interest rates fall sharply.
D) interest rates rise sharply.

Question 43

Currently challenging Treasury bills as the centerpiece of the money market is (are)

A) federal funds.
B) Eurodollars.
C) commercial paper.
D) negotiable CDs.

Question 44

Compared with other bonds, convertible bonds usually have

A) less liquidity.
B) a higher price.
C) a higher yield.
D) low tax payments.

Question 45

The rate at which banks will lend Eurodollars is

A) the prime rate.
B) LIBOR.
C) the discount rate.
D) LIBID.

Question 46

Junk bonds are defined as those bonds the rating services consider to be

A) investment grade.
B) high risk or speculative grade.
C) financial grade.
D) in default.

Question 47

Which of the following usually has the highest yield at a given point in time?

A) Corporate bonds
B) Municipal bonds
C) Commercial paper
D) U.S. Treasury bonds

Question 48

Compared with other bonds, callable bonds usually have

A) less liquidity.
B) a higher price.
C) a higher yield.
D) low tax payments.

Question 49

The federal funds rate is always __________ the repo rate.

A) above
B) below
C) the same as
D) None of the above.

Question 50

Drexel Burnham Lambert pioneered the widespread issuance of

A) junk bonds.
B) commercial paper.
C) callable bonds.
D) convertible bonds.

Question 51

Because they combine high yield and high risk, junk bonds

A) should never be considered sound investments.
B) may increase the overall yield of a portfolio containing stocks without an undue increase in risk.
C) should be purchased only by risk lovers.
D) None of the above.

Question 52

Holders of __________ bonds can exchange their bonds into shares of the company's common stock at a predetermined price.

A) callable
B) convertible
C) investment grade
D) junk

Question 53

"LIBOR" is the rate at which U.S. banks

A) lend to their best customers.
B) borrow in the Eurodollar market.
C) lend in the Eurodollar market.
D) borrow in the jumbo CD market.

Question 54

A major purchaser of corporate bonds is

A) state and local governments.
B) money market mutual funds.
C) pension and retirement funds.
D) the Federal Reserve.

Question 55

Which of the following is most risky at a time of fluctuating interest rates?

A) Commercial paper
B) U.S. Treasury bill
C) Corporate bond
D) Large negotiable bank CD

Question 56

Which of the following statements is not true with regard to repurchase agreements?

A) In a typical repo, an entity sells government securities and agrees to repurchase them at a higher price the next day.
B) A reverse RP involves borrowing funds overnight.
C) The repo market has evolved into maturities ranging from one day to three months.
D) In practice, a repo is used to raise funds for anything the borrower chooses.

Question 57

The Eurodollar market is an alternative way for __________ to lend or borrow.

A) governments
B) corporations
C) banks
D) pension plans

Question 58

If an issuer has the right to pay off a bond before its maturity, the bond is

A) convertible.
B) speculative.
C) callable.
D) reversible.

Question 59

Moody's gives junk bonds a rating below

A) Aaa.
B) Aa.
C) A.
D) Baa.

Question 60

A "Jumbo" CD is one in excess of

A) $1,000.
B) $10,000.
C) $50,000.
D) $100,000.

Question 61

Which of the following is untrue?

A) New issues of commercial paper can be sold directly to buyers or through dealers
B) State and local governments buy commercial paper
C) Individuals are major purchasers of commercial paper
D) Nonfinancial firms buy commercial paper

Question 62

Securities dealers reduce the uncertainty associated with mortgage debt cash flows through the development of

A) convertible mortgages.
B) callable mortgages.
C) collateralized mortgage obligations.
D) tax-exempt commercial paper.

Question 63

All secondary trading of municipal bonds occurs

A) through commercial banks.
B) in the over-the-counter market.
C) through life insurance companies.
D) in the New York Municipal Bond Market.

Question 64

A municipal bond issued by the state of Colorado to construct a new toll highway is a __________ bond.

A) revenue
B) collateralized
C) general obligation
D) Treasury

Question 65

Most municipal bonds are issued in

A) serial maturity form.
B) single maturity form.
C) convertible form.
D) commercial form.

Question 66

__________ bonds are municipal bonds that are backed by the general taxing power of the state or local government.

A) General obligation
B) Revenue
C) Tax-anticipation
D) Bond-anticipation

Question 67

Most municipal bonds are

A) general obligation bonds.
B) revenue bonds.
C) callable bonds.
D) single maturity bonds.

Question 68

By convention, commercial paper issuers are divided into

A) individuals and corporations.
B) private institutions and government institutions.
C) large businesses and small businesses.
D) financial companies and nonfinancial companies.

Question 69

Compared to Treasury bills, commercial paper

A) has no default risk.
B) does not have much of a secondary market.
C) has a lower yield.
D) sells at a higher price for.

Question 70

For investors, commercial paper is a close substitute for

A) U.S. Treasury bills.
B) U.S. Treasury bonds.
C) corporate bonds.
D) municipal bonds.

Question 71

A bond issued by a local government to build a convention center that is to be financed by fees charged to users is an example of

A) commercial paper.
B) a general obligation bond.
C) a collateralized bond.
D) a revenue bond.

Question 72

For long-term stopgap financing of large projects, city governments can issue

A) tax-anticipation notes.
B) bond-anticipation notes.
C) general obligation bonds.
D) revenue bonds.

Question 73

Trading in collateralized mortgage obligations (CMOs)takes place in the __________ market between __________.

A) primary; specialists
B) organized exchange; dealers
C) over-the-counter; dealers
D) primary; Ginnie Mae and Freddie Mac

Question 74

Which of the following is least likely to issue commercial paper?

A) General Motors Acceptance Corporation
B) A large bank holding company
C) General Electric
D) The U.S. Treasury

Question 75

Almost all corporate bonds are sold through

A) auction markets.
B) brokers.
C) commercial banks.
D) underwriting syndicates.

Question 76

Commercial paper is most commonly issued with a maturity of __________ days.

A) 5
B) 10
C) 30
D) 270

Question 77

To borrow funds between tax payment dates, city governments can issue

A) tax anticipation notes.
B) corporate bonds.
C) general obligation bonds.
D) revenue bonds.

Question 78

In corporate bond market quotations, the current yield on convertible bonds is usually

A) included as a ratio to the previous day's high.
B) included as a ratio to the previous day's low.
C) included as a ratio to the previous day's close.
D) omitted.

Question 79

An insurance company holding a single-home mortgage should be most concerned about the mortgage's __________ risk.

A) default
B) prepayment
C) price fluctuation
D) collateral

Question 80

Most corporate bond trading takes place on the

A) New York Stock Exchange.
B) over-the-counter market.
C) Pacific Stock Exchange.
D) Nasdaq.