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CHAPTER 7
TRUE-FALSE QUESTIONS
alternative to bank borrowing.
commercial banks.
policy first impact the economy in the money market.
lower marketability of agency securities.
finances economic growth.
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desired.
price of all accepted competitive bids.
buy them back in a short period at a higher price.
investments designed to appeal to individual investors with excess cash.
Federal Reserve Banks.
MULTIPLE-CHOICE QUESTIONS
a. short term to maturity
b. small denominations
c. low default risk
d. high marketability
e. All of the above are characteristics of money market securities.
a. default risk
b. interest rate risk
c. liquidity risk
d. all of the above
e. none of the above
a. directly; commercial paper
b. locally; their credit union
c. indirectly; negotiable CDs
d. indirectly; money market mutual funds
a. The money market is a dealer market linked by efficient communications
systems.
b. Money market transactions are seldom over $1 million.
c. Money market transactions include more “primary market” trades for a security
than secondary market trades.
d. Most money market transactions are conducted by mail.
e. All of the above statements are true.
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a. They have maturities less than one year.
b. Most are sold by “book-entry” method.
c. They are sold at a discount.
d. Interest on T-bills is tax-deductible for federal income tax purposes.
a. commercial paper
b. Federal Funds
c. Treasury securities
d. agency securities
a. Treasury deposits.
b. Federal Reserve assets.
c. commercial bank deposits at the Federal Reserve.
d. overnight interbank loans settled in immediately available funds
is
a. Federal Funds.
b. commercial paper.
c. Treasury bills.
d. Agency securities.
Federal Funds purchased.
Federal Funds sold.
issuing negotiable CDs.
both a and c
a. Discount yield is always lower than bond equivalent yield on the same security.
b. Discount yield is always higher than bond equivalent yield on the same security.
c. Discount yield is always equal to bond equivalent yield on the same security.
d. Discount yield can be lower or higher than bond equivalent yield on the same
security.
a. All federal agency debt is explicitly guaranteed by the federal government.
b. All federal agencies are owned by the federal government.
c. Federal agency securities usually have yields of 3 to 20 basis points below
Treasury bills.
d. All of above statements are true.
e. None of the above statements is true.
international transactions?
a. a Treasury bill
b. a banker’s acceptance
c. commercial paper
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d. a negotiable CD
a. Ba-rated corporate bonds
b. Treasury bills
c. certificates of deposit
d. banker’s acceptance
e. P2-rated commercial paper
a. large financial and nonfinancial firms
b. firms with high credit risk
c. small banks
d. wealthy individuals
e. both a and b
a. commercial paper.
b. federal agency issues.
c. negotiable CDs.
d. Treasury bills.
(c) 16. Which of the following money market securities is backed by specified collateral?
a. negotiable CDs
b. banker’s acceptances
c. repurchase agreements
d. commercial paper
a. default risk.
b. price risk.
c. marketability risk.
d. all of the above.
a. underwrite Treasury securities.
b. “make a market” for Treasury securities.
c. support open market operations of the Federal Reserve.
d. all of the above
a. investing excess cash balances.
b. buying and selling goods on credit in international trade.
c. issuing commercial paper.
d. all of the above
a. income.
b. safety.
c. acceptable for collateral.
d. high relative yield.
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a. commercial paper
b. negotiable certificates of deposit
c. Treasury bills
d. banker’s acceptances
e. All of the above instruments are sold on a discount basis.
amount of money to the bearer on a given date is called a _______
a. letter of credit
b. negotiable certificate of deposit
c. banker’s certificate of support
d. reverse repurchase agreement
e. banker’s acceptance
Federal Reserve monetary policy?
a. Federal Funds
b. Treasury bills
c. commercial paper
d. banker’s acceptances
a. increases the credit risk for investors
b. decreases the credit risk for investors
c. has no impact on investors
d. decreases the marketability of commercial paper
maturing in 181days?
a. 2.50%
b. 4.84%
c. 4.97%
d. 5.10%
e. 5.17%
T-bill?
a. $976.40
b. $986.48
c. $981.20
d. $989.45
yield on the T-bill?
a. 4.86%
b. 4.92%
c. 4.98%
d. 5.14%
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value.
a. 10.85%
b. 10.75%
c. 10.54%
d. 10.29%
yield for competing coupon-bearing securities of the same maturity?
a. bank discount rate
b. CD equivalent rate
c. bond equivalent rate
d. the prime rate.
a. bank discount rate.
b. the true rate.
c. effective annual rate.
d. bond equivalent rate.
e. the primary rate
a. $1,000
b. $10,000
c. $100,000
d. $1,000,000
e. $5,000,000
with the __________ rate provided as the quoted (ask) yield on the T-bill.
a. bond equivalent; bank discount
b. effective annual; bank discount
c. bank discount; bond equivalent
d. bank equivalent; bank discount
(b) 33. Purchasing T-bill via a computerized account without actually receiving the securities is
achieved through a _______ Account.
a. Direct Purchase
b. Treasury Direct
c. Fed Purchase
d. Federal Benefit
a. they are less marketable than Treasury securities.
b. they have higher exchange rate risk than Treasuries.
c. they are more affected by interest rate risk.
d. they are associated with mortgages that are riskier securities.
e. Federal agency securities actually have lower yields than Treasury securities.
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a. Two-year Treasury notes rates.
b. Ninety-day commercial paper rates.
c. federal funds rates.
d. Aaa-rated corporate bond rates.
(b) 36. A repurchase agreement is like a secured loan because
a. it involves two parties.
b. it involves collateral, in this case the sale of a security under agreement to
repurchase.
c. it is backed by a mortgage on real property.
d. it is like the secured lending in that a mortgage is effected by the lender.
the securities back to the dealer in 4 days for $997,575. The yield on this reverse repo for
the bank is:
a. 3.00%
b. 2.97%
c. 2.91%
d. 2.86%
e. 2.93%
equivalent yield on this commercial paper is:
a. 5.56%
b. 5.46%
c. 5.49%
d. 5.54%
a. a firm to sell securities with the agreement to buy them back later at a higher
price.
b. a firm to buy securities with the agreement to sell them back later at a higher
price.
c. a firm to sell securities with the agreement to buy them back later at a lower
price.
d. a firm to buy securities with the agreement to sell them back later at a lower
price.
a. a firm to sell securities with the agreement to buy them back later at a higher
price.
b. a firm to buy securities with the agreement to sell them back later at a higher
price.
c. a firm to sell securities with the agreement to buy them back later at a lower
price.
d. a firm to buy securities with the agreement to sell them back later at a lower
price.
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characteristics except:
a. the bidder specifying the quantity of bills desired
b. the price the investor wishes to pay
c. large, institutional investors
d. bids for a maximum of $5,000,000.
a. the bidder specifying the quantity of bills desired
b. the bid not exceeding a specific dollar amount
c. the bidders paying a price equal to the weighted average price of all competitive
bids accepted.
d. all of the above.
a. it measures the return on the most liquid of all the financial assets traded
b. it is closely related to the conduct of monetary policy
c. it measures directly the availability of excess reserves in the banking system
d. all of the above
true?
a. NCDs usually have denominations of less than $100,000.
b. NCDs usually have lower yields than regular CDs.
c. NCDs have no secondary market
d. Large banks are usually able to pay lower interest rates on NCDs than smaller
regional banks.
e. All of the above statements are true.
a. commercial banks
b. the Federal Reserve
c. U.S. Treasury dealers
d. corporations
e. All of the above participate in the money markets.
at 3.75 bid, 3.60 ask. This bill can be bought at ________ or can be sold at
________.
a. $9,879.23; $9,864.36
b. $9,864.36; $9,859.23
c. $9,820.00; $9,812.50
d. $9,802.50; $9,787.50
the CD, how much will you collect in 90 days?
a. $3,043,125
b. $3,045.678
c. $3,062,877
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d. $3,063,750
security?
a. Commercial paper
b. Banker’s acceptances
c. T-Bills
d. Federal funds and repos
later for $9,875. What is the effective annual rate?
a. 4.24%
b. 4.39%
c. 4.45%
d. 4.52%
is the price of the T-Bill to the nearest dollar?
a. $9,625
b. $9,706
c. $9,863
d. $9,927
ESSAY QUESTIONS
1. What are the fundamental characteristics of money market debt instruments? Explain why these
characteristics are important to money market participants who are investing and financing.
2. Explain the economic function of money markets.
3. Explain why most money market interest rates tend to move together over time.
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4. What is a banker’s acceptance? Why are banker’s acceptances ideally suited for foreign trade
transactions?
5. In the stock market crashes of 1987, 1989, and shortly after September 11th, money market yields
dropped. What caused this drop in money market interest rates? Discuss.
6. Describe in what ways commercial banks participate in the money markets.
7. On August 8, 2011, Finance Yahoo! reports a 90-day T-Bill with a face value of $10,000
that is quoted at 3.25 bid, 3.05 ask. Given the above information, what are the selling and
purchasing prices of this T-bill?