Question 1

Credit guarantees for commercial paper:

Accepted Answer

Credit guarantees for commercial paper depend on the creditworthiness of the guarantor, meaning they are only as reliable as the guarantor's ability to fulfill the guarantee.

Question 2

You purchase a six-month (182-day) T-bill with a $10,000 par value for $9,700. The Treasury bill discount is ____ percent.

Accepted Answer

The T-bill discount is calculated as [(Par Value - Purchase Price) / Par Value] * (360 / Days to Maturity). Here, it is [($10,000 - $9,700) / $10,000] * (360 / 182) = 5.93%.

Question 3

A ____ is not a money market security.

Accepted Answer

A bond is a fixed income security with a maturity of more than one year and is therefore not considered a money market security. The other options listed (Treasury bill, negotiable certificate of deposit, and banker's acceptance) are all examples of money market securities.

Question 4

A major drawback to investing in Treasury bills is that they cannot easily be liquidated.

Accepted Answer

Treasury bills are one of the most liquid investments available, meaning they can be easily bought and sold on the secondary market. Therefore, the statement is false.

Question 5

Ignoring transaction costs, the cost of borrowing with commercial paper is equal to:

Accepted Answer

The cost of borrowing with commercial paper is equal to the yield earned by investors holding the paper until maturity, as this yield represents the interest rate the issuer must pay to the investor.

Question 6

Which of the following securities is most likely to be used in a repo transaction?

Accepted Answer

Treasury bills are typically used in repo transactions because they are considered to be the most risk-free and therefore the most desirable collateral. Commercial paper and certificates of deposit may also be used, but they carry more credit risk. Common stock is generally not used in repo transactions because it is too volatile and carries too much market risk.

Question 7

Bill Yates, a private investor, purchases a six-month (182-day) T-bill with a $10,000 par value for $9,700. If Bill holds the Treasury bill to maturity, his annualized yield is ____ percent.

Accepted Answer

The answer of Bill Yates, a private investor, purchases a...

Question 8

Freeman Corp., a large corporation, plans to issue 45-day commercial paper with a par value of $3,000,000. Freeman expects to sell the commercial paper for $2,947,000. Freeman's annualized cost of borrowing is estimated to be ____ percent.

Accepted Answer

The answer of Freeman Corp., a large corporation, plans to...

Question 9

LIBOR is:

Accepted Answer

LIBOR stands for London Interbank Offered Rate and is the interest rate at which banks can borrow funds from other banks in the London interbank market. It is used as a benchmark for short-term interest rates around the world and is widely used in financial markets as a reference rate for many financial instruments such as loans, mortgages, and derivatives.

Question 10

Money market security values are less sensitive to interest rate movements than bonds.

Accepted Answer

Money market securities typically have shorter maturities and lower credit risk than bonds, which means they are generally less sensitive to interest rate changes.

Question 11

When a firm sells its commercial paper at a ____ price than projected, their cost of raising funds will be ____ than what they initially anticipated.

Accepted Answer

The answer of When a firm sells its commercial paper...

Question 12

The LIBOR scandal in 2012 involved:

Accepted Answer

The LIBOR scandal in 2012 involved banks falsely reporting the interest rates they offered in the interbank market. The London Interbank Offered Rate (LIBOR) is a benchmark interest rate that is used worldwide, and the banks were found to have colluded to manipulate the rate for their own gain. This led to hefty fines for the banks involved and damaged their reputations.

Question 13

The price O bidders will pay at a Treasury bill auction is the

Accepted Answer

The price that bidders will pay at a Treasury bill auction is determined by the weighted average price paid by all competitive bidders whose bids were accepted. This means that the price is determined by the highest bids entered by competitive bidders, but the final price is a weighted average of all accepted bids. Noncompetitive bidders pay the prevailing market price, which is typically the same as the price paid by the highest competitive bidder. Therefore, choice C is the most accurate answer.

Question 14

During periods of uncertainty about the economy, there is a shift from risky money market securities to Treasury securities.

Accepted Answer

This is because Treasury securities are considered to be safer investments due to the backing of the U.S. government, while money market securities are perceived to have higher risk. As a result, investors tend to shift towards Treasury securities during times of economic uncertainty to minimize their risk.

Question 15

The money market interest rate paid by corporations that borrow short-term funds in a particular country is typically:

Accepted Answer

Corporations typically pay a slightly higher interest rate than the government due to the higher credit risk associated with them. The demand and supply of long-term funds also do not significantly influence the short-term money market interest rate. The central bank may set the benchmark interest rate, but the actual interest rates paid by corporations depend on market forces such as supply and demand.

Question 16

Most repo transactions use government securities.

Accepted Answer

Most repo transactions involve the use of government securities as collateral.

Question 17

At each T-bill auction, the prices paid for three-month T-bills are significantly lower than the prices paid for six-month bills.

Accepted Answer

This statement is false. In general, the prices paid for longer-term T-bills (such as six-month bills) are higher than for shorter-term bills (such as three-month bills). This is because longer-term bills carry a higher risk of inflation and interest rate changes over time, so investors require a higher return to compensate for that risk. However, there may be specific circumstances or market conditions that cause the prices to deviate from this general trend.

Question 18

Exporters can hold a banker's acceptance until the date at which payment is to be made, yet they frequently sell the acceptance before then at a discount to obtain cash immediately.

Accepted Answer

This statement is true. Exporters can choose to hold onto a banker's acceptance until the payment date, but they also have the option to sell it at a discount to obtain immediate cash. This allows them to improve their cash flow and reduce their risk of non-payment or late payment.

Quiz 6: Money Markets