Question 1

A tightening of the Federal Reserve's monetary policy would be indicated by:

Accepted Answer

Raising the Fed funds rate is a tightening of monetary policy because it makes it more expensive for banks to borrow money, which in turn makes it more expensive for businesses and consumers to borrow money.

Question 2

Adjustable-rate CDs are financial instruments that:

Accepted Answer

Adjustable-rate CDs vary with interest rates and may have renegotiated interest rates.

Question 3

A bankers acceptance is:

Accepted Answer

A banker's acceptance is a time draft on a bank that can be initiated by either an exporter or an importer and is used for transactions involving merchandise or the purchase of foreign currencies.

Question 4

A primary use of the bankers acceptance is to:

Accepted Answer

Banker's acceptances are primarily used to finance the purchase of internationally traded goods while those goods are in transit, acting as a short-term financial instrument.

Question 5

Acceptance financing:

Accepted Answer

Acceptance financing involves a bank accepting a draft, thereby assuming the importer's default risk from the lender.

Question 6

Bankers acceptances are considered prime quality instruments comparable to:

Accepted Answer

Bankers acceptances are considered prime quality instruments because they are short-term financial instruments backed by a guarantee from a bank, making them very secure. This level of security and liquidity makes them comparable to other prime quality instruments such as prime negotiable bank CDs, U.S. Treasury bills, and prime commercial paper.

Question 7

Bankers acceptances are considered prime quality instruments and have maturities of:

Accepted Answer

Bankers acceptances are short-term financial instruments that are considered prime quality due to their low default risk. They typically have maturities of 30, 90, or 270 days, making all the options (A, B, C) correct.

Question 8

The decline in bankers acceptances is due to:

Accepted Answer

The decline in bankers acceptances can be attributed to several factors: B) the increased use of foreign currencies in international transactions allows firms to bypass traditional banking instruments; C) major exporters and importers are relying more on direct bank loans, which can offer more tailored terms and potentially lower costs; and D) there's a trend of international corporations moving away from banks and towards open market instruments, which can offer more flexibility and efficiency. These shifts reflect broader changes in global finance and trade practices.

Question 9

The high quality of commercial paper results in:

Accepted Answer

Commercial paper is a short-term, unsecured debt instrument issued by corporations with high credit ratings. Because of the high credit quality of the issuers, commercial paper tends to offer lower yields compared to other, riskier investments. This is because investors are willing to accept lower returns for the perceived lower risk associated with these high-quality issuers.

Question 10

Commercial paper rates:

Accepted Answer

Commercial paper rates can fluctuate between extreme highs and lows and are considered highly volatile, making them unpredictable and not easy to forecast accurately.

Question 11

Which of the following statements regarding Fannie and Freddie, government-sponsored agencies, is/are true?

Accepted Answer

B and C are correct because, while Fannie Mae and Freddie Mac are government-sponsored enterprises, the federal government does not guarantee their principal or interest payments.

Question 12

Exactly how is the rate of return on commercial paper figured? Is the method used to determine paper's rate of return similar to the return calculation for any other money market instrument? Which one?

Accepted Answer

The answer of Exactly how is the rate of return...

Question 13

Federal agencies active in the financial markets are usually set up to aid so-called disadvantaged sectors of the economy. Please give some examples of disadvantaged sectors.

Accepted Answer

The answer of Federal agencies active in the financial markets...

Question 14

What exactly is a bankers acceptance? What is the meaning of the word "accepted"?

Accepted Answer

The answer of What exactly is a bankers acceptance? What...

Question 15

Why are acceptances not as widely used inside the United States as they are in international markets?

Accepted Answer

The answer of Why are acceptances not as widely used...

Question 16

Please evaluate bankers' acceptances as an investment instrument. What are its principal advantages and disadvantages to savers interested in finding a secure financial asset that is readily marketable?

Accepted Answer

The answer of Please evaluate bankers' acceptances as an investment...

Question 17

What is the discount rate (DR) and the investment return (IR) on the following commercial notes?

Accepted Answer

The answer of What is the discount rate (DR) and...

Question 18

A German manufacturer of furniture sells a large order of home furnishings to an outlet store in Houston. The Houston firm pays for the shipment by wiring funds from its local bank through Fed wire to the German firm's account at J.P. Morgan Chase Bank in New York City. Subsequently, the German manufacturer decides to invest half of the funds received in a dollar deposit offered by Barclays Bank in London, where interest rates are particularly attractive. No sooner are the funds deposited in London than a Japanese auto company, shipping cars to the U.S. and Europe, asks the London bank for a loan to purchase raw materials in the United States. Later, when the loan falls due, the Japanese firm will go into the currency market to purchase dollars in order to retire its Eurodollar loan at Barclays Bank, receiving a dollar deposit at a U.S. bank. When the loan is repaid, Barclays gains the dollar deposit in the United States and uses the deposit to pay off the German firm when its time deposit matures. The German firm chooses to deposit the funds received from Barclays in its demand deposit account at J.P. Morgan Chase Bank in New York City because it now needs to buy goods and services in the United States.
 Construct T accounts that reflect the foregoing transactions. In particular, show the proper entries for: (1) payment by the Houston firm to the German furniture company; (2) deposit of the funds in London; (3) the loan to the Japanese automaker; (4) repayment of the loan; and (5) return of funds to the United States. Indicate which deposit is a Eurodollar deposit and if any Eurodollars are destroyed at any particular stage.

Accepted Answer

The answer of A German manufacturer of furniture sells a...

Question 19

A company known as Standard Quality Importing ships videocassette recorders made in Japan to retail dealers in the United States and Western Europe. It decides to place an order with its Japanese supplier for 10,000 Hi-Fi VCRs at $575 each after securing a line of credit from Guaranty Security Bank in Los Angeles. Guaranty issues a credit letter to the Japanese supplier promising payment in U.S. dollars 90 days hence. However, the Japanese firm needs the promised funds within seven days from receipt of the credit letter to make purchases of technical components from an electronics firm in Phoenix, Arizona. Explain and illustrate with T accounts and diagrams how a bankers' acceptance would arise from the foregoing transactions, how the Japanese supplier could receive the dollars she needs in timely fashion and what would happen to the acceptance at the end of the 90-day period. Use T account entries to show the movement of funds from the importer to the Japanese supplier, to the electronics firm and to money market investors.

Accepted Answer

The answer of A company known as Standard Quality Importing...

Question 20

Instel Corporation has been offered a $100 million, 3-month loan at a fixed rate of 90-day LIBOR plus 3/8 % margin or at the prevailing federal funds rate plus 1/2 % margin with the loan rate adjusted every 24 hours to the federal funds rate prevailing at the close of business each day. These rates, along with prevailing yields on U.S. Treasury bills, are posted by London and New York as follows:
 90-day LIBOR rate on Eurodollar deposits 4.275% 3-month U.S. Treasury bill rate 4.12% Federal funds rate 4.08 6-month U.S. Treasury bill rate 4.20
 One-month (30 day) U.S. Treasury bills 4.05 1-year U.S. Treasury bill rate 4.30 Which set of loan terms would you recommend to Instel's treasurer? Why?

Accepted Answer

The answer of Instel Corporation has been offered a $100...

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