Question 1

Compared to U.S. Treasury bills, money market CDs issued by the nation's largest, financially sound banks have ____ risk, ____ average yields and are ____ marketable. The three words which correctly complete the above sentence in the right order are:

Accepted Answer

The answer of Compared to U.S. Treasury bills, money market...

Question 2

Most money market CDs have maturities of ____ months or less, according to the textbook.

Accepted Answer

Most money market CDs typically have maturities of 6 months or less, as they are designed for short-term investment.

Question 3

The American commercial bank that developed rollover (or roly-poly) CDs was:

Accepted Answer

The answer of The American commercial bank that developed rollover...

Question 4

The strategy of varying rates offered on alternative sources of funds to gain a measure of control over incoming funds is known as:

Accepted Answer

Liability management involves adjusting the rates on different sources of funds, such as deposits, to influence the volume and cost of funds obtained. This strategy allows financial institutions to manage their liabilities actively to meet their funding needs and manage interest rate risk.

Question 5

Negotiable CDs issued in the United States by foreign banks operating branches or agency offices in the U.S. are known as:

Accepted Answer

Yankee CDs are negotiable certificates of deposit issued in the U.S. by foreign banks or branches. They are a way for these banks to raise capital in U.S. dollars.

Question 6

The time period over which a depository institution must hold average legal reserves at the required level is known as the:

Accepted Answer

The reserve maintenance period is the specific time frame during which banks and other depository institutions are required to hold an average amount of reserves that meets the legal requirement set by the central bank or regulatory authority. This period is crucial for ensuring that these institutions maintain sufficient reserves to meet withdrawal demands and other financial obligations.

Question 7

The two-week period over which the Federal Reserve calculates the daily average level of transaction deposits a bank holds for purposes of determining its legal reserve requirements is known as the:

Accepted Answer

The Reserve computation period is the correct term for the two-week period over which the Federal Reserve calculates the daily average level of transaction deposits a bank holds for purposes of determining its legal reserve requirements.

Question 8

One of the items listed below is not a component of Federal funds. Which one is not a component of Federal funds?

Accepted Answer

Federal funds consist of reserve balances that banks maintain at Federal Reserve Banks and the deposits that banks hold with each other, not the vault cash held by individual banks. Vault cash does satisfy a bank's legal reserve requirements but is not considered a component of Federal funds, which are primarily concerned with interbank balances and the reserves maintained at the Federal Reserve.

Question 9

A CD whose maturity extends beyond one year is referred to as a:

Accepted Answer

CDs, or Certificates of Deposit, are typically short- to medium-term interest-bearing financial instruments offered by banks. By definition, they do not extend beyond one year; thus, any term suggesting a CD extends beyond one year does not align with the standard characteristics of CDs. Therefore, none of the provided options accurately describe a CD whose maturity extends beyond one year, as traditional CDs are not categorized in this manner.

Question 10

CDs issued by smaller banks or by those banks viewed by capital-market investors as less stable are known as:

Accepted Answer

Nonprime CDs are typically issued by smaller banks or those perceived as less stable by capital-market investors, reflecting a higher risk compared to prime CDs issued by more stable financial institutions.

Question 11

CDs in maximum denominations of $100,000 sold through security brokers are known as:

Accepted Answer

CDs sold through security brokers in maximum denominations of $100,000 do not have a specific name among the options provided. The terms Thrift CDs, Rollover CDs, Trading CDs, and Yankee CDs refer to different types of CDs or financial instruments but do not specifically describe CDs sold through brokers in maximum denominations of $100,000.

Question 12

Contemporaneous reserve accounting:

Accepted Answer

Contemporaneous reserve accounting requires banks to hold reserves based on their deposit levels at the same time. This means money managers must continuously monitor the bank's reserve position to ensure compliance, making their job more complex and demanding constant attention to the bank's reserve status.

Question 13

The largest banks rely heavily on the ____ for daily reserve management.

Accepted Answer

The Federal funds market is crucial for daily reserve management among the largest banks, as it allows them to lend or borrow reserves overnight from each other to meet their reserve requirements.

Question 14

Large banks tend to be net _______ in the federal funds market, while small banks tend to be net _______.

Accepted Answer

Large banks tend to be net borrowers in the federal funds market because they often have greater funding needs, while small banks typically have excess reserves and thus tend to be net lenders.

Question 15

____ ensures that the rates on the various money market instruments move together.

Accepted Answer

Arbitrage ensures that the rates on various money market instruments move together by taking advantage of price differences between markets. Traders will buy a security in one market where the price is low and sell it in another where the price is higher, which helps to equalize prices and rates across different markets.

Question 16

The item that is part of legal reserves whose daily average amount is figured over the same computation period as transaction deposits is:

Accepted Answer

Vault cash is part of the legal reserves of a bank, and its daily average amount is calculated over the same computation period as transaction deposits. This is because vault cash is readily available to meet the demands of depositors, similar to how transaction deposits are directly available for withdrawal or payment.

Question 17

Bank CDs that may carry fixed or floating interest yields based on the prevailing level of SIBOR are known as:

Accepted Answer

Bank CDs that may carry fixed or floating interest yields based on the prevailing level of SIBOR (Singapore Interbank Offered Rate) do not match the description of any of the specific types of CDs listed (A-D). Therefore, the correct answer is E) None of the above.

Question 18

A bank deposit developed in 1966 which can carry maturities longer than one year with an interest rate that may be adjusted every 3 to 6 months to match changes in LIBOR is known as the:

Accepted Answer

Eurodollar CDs are bank deposits that are denominated in U.S. dollars but are held in banks outside the United States, not under U.S. jurisdiction. They can have maturities longer than one year, and their interest rates may be adjusted periodically, often in relation to changes in the London Interbank Offered Rate (LIBOR). This financial instrument was developed to work within the international banking system, allowing for flexibility in interest rates to reflect the changing market conditions.

Question 19

The new system of lagged reserve requirements and lower reserve requirements overall have had what effect on borrowing from the Federal Reserve?

Accepted Answer

The answer of The new system of lagged reserve requirements...

Question 20

Immediately after the terrorist attacks of September 2001, there was a serious shortage of Treasury notes because:

Accepted Answer

After the terrorist attacks of September 2001, there was a surge in demand for Treasury notes as investors sought safe havens (A), and dealers in the repurchase agreement (RP) market needed them to cover their positions (B), leading to a shortage. There's no evidence provided that the U.S. Treasury cancelled auctions, making options A and B correct.

Quiz 11: Exploring the Reserve Accounting System, Money Markets, and Financial Instruments

Compared to U.S. Treasury bills, money market CDs issued by the nation's largest, financially sound banks have risk, average yields and are marketable. The three words which correctly complete the above sentence in the right order are: