Deck 5: Money Market Securities

Question 1

In Australia, is used to calculate interest.

Answer 1

A
Explanation: Simple discount is used in countries like Australia,USA,Malaysia and Singapore.

Question 2

The liquidity premium theory is consistent with the observed concentration of investors in particular segments of the term structure.

Answer 2

False
Explanation: The segmented market theory is consistent with the observed concentration of investors in particular segments of the term structure.For example,superannuation funds,and to some extent insurance companies,may focus on the longer end of the yield curve in line with expected future cash demands.

Question 3

The preferred habitat theory of term structure generally implies an upward-sloping yield curve.

Answer 3

False
Explanation: The preferred habitat theory implies that participants match asset life and liability life to establish the lowest possible risk position.a substantial premium may be required to encourage participants to invest in other than the preferred habitat,and so this premium tends to be greatest where demand is least.

Question 4

A bank-accepted bill with a face value of $100 000 currently has 30 days to expiry.If the current price of the bank-accepted bill is $93 809,what is the implied annual yield?

Question 5

Interest rate risk arises due to the possibility that the RBA will change rates to stay within its inflation targets that are set from time to time.

Question 6

Assume that the current yield for a 90-day $100 000 bill is 6.5%.This yield is expected to decrease to 5%.If an investor traded on this information,what would be the profit on this information trading?

Question 7

Securities traded on the money market include

Question 8

Inflation risk does not affect security investors.

Question 9

A bill with 90 days to maturity initially has a yield of 8% p.a.and a face value of $100 000.This bill is held for 45 days and sold as a 45-day bill at a yield of 6%.What is the continuously compounding holding period rate of returns over the 45 days?

Question 10

The yield curve plots the relationship between time to maturity and yield.

Question 11

Assume that the current yield for a 90-day $100 000 bill is 7.0%.This yield is expected to decrease to 6.15%.If an investor traded on this information,what would be the profit on this information trading?

Question 12

Those who trade in the money market can deal only in cash.

Question 13

The elasticity of commercial bill changes in the yield is the time to maturity.

Question 14

The value of a bank-accepted bill with a face value of $100 000,180 days to maturity and a current yield of 4% p.a.is $98 066.

Question 15

What would be the maturity price of a promissory note with a term of 90 days,interest rate of 5.7% and a face value of $100 000?

Question 16

Default risk is not important for money market securities.

Question 17

Given that the quoted yield for a 90-day dealer's bill is 4.14%,what is the price of the bill,if it has a face value of $100 000?

Question 18

If the nominal interest rate is 5.05% per annum,what is the interest rate for a 180-day period?

Question 19

A 90-day bill was purchased at a price of $98 520 and sold 30 days later at a price of $99 882.Given this information,calculate the continuously compounding holding period rate of return over the 30-day period.

Question 20

The expectations theory implies that short-term yields are a function of the current interest rates and the expected future interest rates.

Question 21

A $500 000 180-day note is purchased with a yield of 6% and sold 90 days later with a yield of 4.5%.Calculate the continuously compounded holding period return for this note over the 90 days.

Question 22

The yield of a $100 000 180-day bill decreases from 6% to 7%.What is the effect on the price of the bill?

Question 23

A $100 000 90-day bill with yield of 5% is purchased now.Assuming the term structure is flat at 5% and does not change,by how much will the price of the bill change in the next in 30 days?

Question 24

The yield of a $50 000 45-day bill decreases from 4% to 5%.What is the change in price of the bill?

Question 25

Say the current one-month interest rate is 3.75%.Further,the three-month rate is 6.25%.According to the expectation theory,what is the predicted rate for the coming two-month period?

S

Question 26

For a market security,if the yield curve and time to maturity is known:

Question 27

Provided the return on a security is 5% p.a.and the inflation rate is 3.5%,what is the real rate of return on this security per year?

Question 28

The yield of a $50 000 45-day bill is currently 4%.If over the next 15 days the yield changes to 6%,the change in price will have both a time component and a yield component.In discrete percentage terms over the 15 days,calculate the amount by which the time component exceeds the yield component.

Question 29

The risk that is associated with the difficulty to find a buyer or seller when it is necessary to buy or sell securities is known as:

Question 30

A $100 000,90-day bill with a yield of 6.5% is purchased now.Assuming the term structure is flat at 6.5% and does not change,in 30 days' time the price of the bill will be:

Question 31

Suppose the expected one-month rates of return are 3% p.a. ,4.5% p.a.and 7% p.a.for the month ending in one,two and three months' time respectively.Further,it is found that the liquidity premium for the second and third month is 1.75% and 2.40% respectively.According to the liquidity premium theory,what is the three-month yield?

Question 32

The yield of a $50,000 45 day bill is currently 5%.If over the next 15 days the yield changes to 6%,the change in price will have both a time component and a yield component.What is the size of the yield component expressed in dollars?

Question 33

Using the elasticity approach,estimate the change in the price of a $500 000 90-day bank-accepted bill when the yield increases from 5% to 6%.

Question 34

Which theory is consistent with an observed concentration of investors in particular segments of the term structure?

Question 35

The major risks of money market securities are interest rate risk,default risk and

Question 36

Which of the following term structure theories predicts an upward-sloping yield curve?

Question 37

According to which theory do participants match asset and liability lives in order to establish the lowest possible risk position?

Question 38

Using the elasticity approach,estimate the new price of a $100 000 90-day bank-accepted bill when the yield decreases from 9% to 7% p.a.

Question 39

A $500 000 180-day note is purchased with a yield of 8% and sold 90 days later with a yield of 6%.Calculate the discrete holding period return for this note expressed as an annual nominal return.

Question 40

Suppose the expected one-month rates of return are 3% p.a. ,4.5% p.a.and 7% p.a.for the month ending in one,two and three months' time respectively.According to the expectations theory,what is the three-month nominal yield?

Question 41

As an inquisitive student of finance,you were sceptical when your lecturer told you that the price changes of bills could be accurately measured using the elasticity approach.Assuming a $100 000 face value 180-day bill with 45 days to maturity,calculate the pricing error from using the elasticity approach if the yield changes from 7% to 8.5% p.a.