Name:
Class:
Date:
chapter 6
Indicate whether the statement is true or false.
1. During periods of uncertainty about the economy, there is a shift from risky money market securities to Treasury
securities.
a. True
b. False
2. A line of credit provided by a commercial bank gives a company the right (but not the obligation) to borrow a specified
maximum amount of funds over a specified period of time.
a. True
b. False
3. A major drawback to investing in Treasury bills is that they cannot easily be liquidated.
a. True
b. False
4. T-bills do not offer coupon payments but are sold at a discount from par value.
a. True
b. False
5. An international interbank market facilitates the transfer of funds from banks with excess funds to those with deficient
funds.
a. True
b. False
6. The amount of commercial paper outstanding today is approximately twice as large as it was before the credit crisis that
began in 2008.
a. True
b. False
7. There is no limit to the amount of T-bills that can be purchased by noncompetitive bidders in a T-bill auction.
a. True
b. False
8. Exporters can hold a banker’s acceptance until the date at which payment is to be made, but they frequently sell the
acceptance before then at a discount to obtain cash immediately.
a. True
b. False
9. Money markets are used to facilitate the transfer of short-term funds from individuals, corporations, or governments
with excess funds to those with deficient funds.
a. True
b. False
Name:
Class:
Date:
chapter 6
10. The interest rate charged for a short-term loan from a bank to a corporation is referred to as the London Interbank
Offer Rate (LIBOR).
a. True
b. False
11. Junk commercial paper is commercial paper that is not rated or has a low rating.
a. True
b. False
12. Money market securities are issued in the primary market through a telecommunications network by the Treasury,
corporations, and financial intermediaries that wish to obtain short-term financing.
a. True
b. False
13. T-bills must offer a premium above negotiable certificates of deposit (NCDs) to compensate for less liquidity and
safety.
a. True
b. False
14. Money market security values are less sensitive to interest rate movements than bonds.
a. True
b. False
15. At each T-bill auction, the prices paid for three-month T-bills are significantly lower than the prices paid for six-
month bills.
a. True
b. False
16. Most repo transactions use government securities.
a. True
b. False
17. Money market securities must have a maturity of three months or less.
a. True
b. False
18. Because money market securities have a short-term maturity and typically cannot be sold easily, they provide
investors with a low degree of liquidity.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
19. An investor initially purchased securities at a price of $9,923,418, with an agreement to sell them back at a price of
$10,000,000 at the end of a 90-day period. The repo rate is ____ percent.
Name:
Class:
Date:
chapter 6
a. 3.10
b. 0.77
c. 1.00
d. None of these are correct.
20. The effective yield of a foreign money market security is ____ when the foreign currency strengthens against the
dollar.
a. increased
b. reduced
c. always negative
d. unaffected
21. Treasury bills are sold through ____ when initially issued.
a. insurance companies
b. commercial paper dealers
c. auction
d. finance companies
22. The minimum denomination of commercial paper is
a. $25,000.
b. $100,000.
c. $150,000.
d. $200,000.
23. The rate at which depository institutions effectively lend or borrow funds from each other is the ____.
a. federal funds rate
b. discount rate
c. prime rate
d. repo rate
24. When a bank guarantees a future payment to a firm, the financial instrument used is called
a. a repurchase agreement.
b. a negotiable CD.
c. a banker’s acceptance.
d. commercial paper.
25. Robbins Corp. frequently invests excess funds in the Mexican money market. One year ago, Robbins invested in a
one-year Mexican money market security that provided a yield of 25 percent. At the end of the year, when Robbins
converted the Mexican pesos to dollars, the peso had depreciated from $.12 to $.11. What is the effective yield earned by
Robbins?
a. 25.00 percent
b. 35.41 percent
c. 14.59 percent
d. None of these are correct.
Name:
Class:
Date:
chapter 6
26. An investor buys commercial paper with a 60-day maturity for $985,000. Par value is $1,000,000, and the investor
holds it to maturity. What is the annualized yield?
a. 8.62 percent
b. 8.78 percent
c. 8.90 percent
d. 9.14 percent
e. 9.00 percent
27. At any given time, the yield on commercial paper is ____ the yield on a T-bill with the same maturity.
a. slightly less than
b. slightly higher than
c. equal to
d. much less than
28. The LIBOR scandal in 2012 involved
a. banks reporting inflated earnings from their loans.
b. hackers breaking into the loan documentation files.
c. banks falsely reporting the interest rates they offered in the interbank market.
d. collusion among the banks when setting the commercial paper rate.
29. The effective yield of a foreign money market security is ____ when the foreign currency weakens against the dollar.
a. increased
b. reduced
c. always negative
d. unaffected
30. A ____ is not a money market security.
a. Treasury bill
b. negotiable certificate of deposit
c. bond
d. banker’s acceptance
e. All of these are money market securities.
31. Commercial paper is
a. always directly placed with investors.
b. always placed with the help of commercial paper dealers.
c. placed either directly or with the help of commercial paper dealers.
d. always placed by bank holding companies.
32. Treasury bills
a. have a maturity of up to five years.
b. have an active secondary market.
c. are commonly sold at par value.
d. commonly offer coupon payments.
33. Commercial paper has a maximum maturity of ____ days.
Name:
Class:
Date:
chapter 6
a. 45
b. 270
c. 360
d. None of these are correct.
34. Which of the following is NOT a money market instrument?
a. banker’s acceptance
b. commercial paper
c. negotiable CD
d. repurchase agreement
e. All of these are money market instruments.
35. Which of the following is true of money market instruments?
a. Their yields are highly correlated over time.
b. They typically sell for par value when they are initially issued (especially T-bills and commercial paper).
c. Treasury bills have the highest yield.
d. They all make periodic coupon (interest) payments.
e. They typically sell for par value when they are initially issued (especially T-bills and commercial paper) AND
treasury bills have the highest yield.
36. The yield on NCDs is ____ the yield of Treasury bills of the same maturity. The difference between their yields would
be especially large during a ____ period.
a. higher than; recessionary
b. higher than; boom economy
c. less than; boom economy
d. less than; recessionary
37. Which of the following is NOT a money market security?
a. Treasury bill
b. negotiable certificate of deposit
c. common stock
d. federal funds
38. The federal funds market allows depository institutions to borrow
a. short-term funds from each other.
b. short-term funds from the Treasury.
c. long-term funds from each other.
d. long-term funds from the Federal Reserve.
e. short-term funds from the Treasury AND long-term funds from the Federal Reserve.
39. Which of the following statements is incorrect with respect to the federal funds rate?
a. It is the rate charged by financial institutions on loans they extend to each other.
b. It is the interest rate in which the Federal Reserve charges on loans that it provides to commercial banks.
c. Commercial banks are the most active participants in the federal funds market.
d. Financial market participants view changes in the federal funds rate as an indicator of potential changes in other
money market rates.
Name:
Class:
Date:
chapter 6
e. The Federal Reserve adjusts the amount of funds in depository institutions in order to influence the federal funds
rate.
40. When a firm sells its commercial paper at a ____ price than projected, its cost of raising funds will be ____ than what
it initially anticipated.
a. higher; higher
b. lower; lower
c. higher; lower
d. lower; higher
e. higher; lower AND lower; higher
41. A repurchase agreement calls for an investor to buy securities for $4,925,000 and sell them back in 60 days for
$5,000,000. What is the yield?
a. 9.43 percent
b. 9.28 percent
c. 9.14 percent
d. 9.00 percent
42. Which of the following may be issued in the primary market by well-known creditworthy firms to borrow funds?
a. banker’s acceptances
b. retail CDs
c. commercial paper
d. federal funds
43. A newly issued T-bill with a $10,000 par value sells for $9,750, and has a 90-day maturity. What is the discount?
a. 10.26 percent
b. 0.26 percent
c. $2,500
d. 10.00 percent
e. 11.00 percent
44. Credit guarantees for commercial paper
a. ensure that the issuer of commercial paper will use the funds obtained to provide credit.
b. are issued by the Federal Reserve Bank of New York.
c. are only as good as the credit of the guarantor.
d. ensure that the issuer of commercial paper will use the funds obtained to provide credit AND are only as good as
the credit of the guarantor.
45. Jarrod King, a private investor, purchases a Treasury bill with a $10,000 par value for $9,645. One hundred days later,
Jarrod sells the T-bill for $9,719. What is Jarrod’s expected annualized yield from this transaction?
a. 13.43 percent
b. 2.25 percent
c. 10.55 percent
d. 2.80 percent
e. None of these are correct.
Name:
Class:
Date:
chapter 6
46. T-bills and commercial paper are sold
a. with a stated coupon rate.
b. at a discount from par value.
c. at a premium above par value.
d. with a stated coupon rate AND at a premium above par value.
e. None of these are correct.
47. You purchase a six-month (182-day) T-bill with a $10,000 par value for $9,800. The Treasury bill discount is ____
percent.
a. 3.96
b. 4.09
c. 6.20
d. 3.56
e. None of these are correct.
48. ____ is/are sold at an auction at a discount from par value.
a. Treasury bills
b. Repurchase agreements
c. Banker’s acceptances
d. Commercial paper
49. 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.
a. 14.39
b. 14.13
c. 14.59
d. 14.33
e. None of these are correct.
50. At a given point in time, the actual price paid for a three-month Treasury bill is
a. usually equal to the par value.
b. more than the price paid for a six-month Treasury bill.
c. equal to the price paid for a six-month Treasury bill.
d. None of these are correct.
51. The price that competitive and noncompetitive bidders will pay at a Treasury bill auction is the
a. highest price entered by a competitive bidder.
b. highest price entered by a noncompetitive bidder.
c. lowest accepted bid price entered by a competitive bidder.
d. equally weighted average price paid by all competitive bidders whose bids were accepted.
e. None of these are correct.
52. The yield on commercial paper is ____ the yield of Treasury bills of the same maturity. The difference between their
yields would be especially large during a ____ period.
a. higher than; recessionary
b. higher than; boom economy
Name:
Class:
Date:
chapter 6
c. less than; boom economy
d. less than; recessionary
53. An investor, purchases a six-month (182-day) T-bill with a $10,000 par value for $9,700. If the Treasury bill is held to
maturity, the annualized yield is ____ percent.
a. 6.52
b. 1.54
c. 1.50
d. 6.20
e. None of these are correct.
54. The money market interest rate paid by corporations that borrow short-term funds in a particular country is typically
a. equal to the rate paid by that country’s government.
b. slightly higher than the rate paid by that country’s government.
c. mostly influenced by the demand for and supply of long-term funds in that country.
d. set by the country’s central bank.
55. LIBOR is
a. the interest rate charged on international interbank loans.
b. the average rate charged on commercial loans in Europe
c. the rate charged by the Federal Reserve for loans to banks.
d. the rate charged by the European Central Bank for loans to banks.
56. Which money market transaction is most likely to represent a loan from one commercial bank to another?
a. banker’s acceptance
b. negotiable CD
c. federal funds
d. commercial paper
57. Assume investors require a 5 percent annualized return on a six-month T-bill with a par value of $10,000. The price
investors would be willing to pay is $____.
a. 10,000
b. 9,524
c. 9,756
d. None of these are correct.
58. An increase in an indicator of inflation such as the consumer price index may create expectations of ________ interest
rates and place _______ pressure on the prices of money market securities.
a. lower; downward
b. lower; upward
c. higher; downward
d. higher; upward
59. An investor purchased an NCD a year ago in the secondary market for $980,000. She redeems it today and receives
$1,000,000. She also receives interest of $30,000. The investor’s annualized yield on this investment is
a. 2.0 percent.
Name:
Class:
Date:
chapter 6
b. 5.10 percent.
c. 5.00 percent.
d. 2.04 percent.
60. If economic conditions cause investors to sell stocks because they want to invest in safer securities with much
liquidity, this should cause a ____ demand for money market securities, which would place ____ pressure on the yields of
money market securities.
a. weak; downward
b. weak; upward
c. strong; upward
d. None of these are correct.
61. A firm plans to issue 30-day commercial paper for $9,900,000. Par value is $10,000,000. What is the firm’s cost of
borrowing?
a. 12.12 percent
b. 11.11 percent
c. 13.00 percent
d. 14.08 percent
e. 15.25 percent
62. Ignoring transaction costs, the cost of borrowing with commercial paper is equal to
a. the yield on T-bills of the same maturity.
b. the yield earned by investors holding the paper until maturity.
c. the federal funds rate.
d. the par value of the paper.
63. ____ are the most active participants in the federal funds market.
a. Savings and loan associations
b. Securities firms
c. Credit unions
d. Commercial banks
64. Large corporations typically make ____ bids for T-bills so they can purchase larger amounts.
a. competitive
b. noncompetitive
c. very small
d. none of the above
65. The rate on Eurodollar floating-rate CDs is based on
a. a weighted average of European prime rates.
b. the London Interbank Offer Rate.
c. the U.S. prime rate.
d. a weighted average of European discount rates.
66. A private investor purchases a six-month (182-day) T-bill with a $10,000 par value for $9,800. If she holds the
Treasury bill to maturity, her annualized yield is ____ percent.
Name:
Class:
Date:
chapter 6
a. 3.96
b. 4.54
c. 1.50
d. 4.09
e. None of these are correct.
67. Which of the following securities is most likely to be used in a repo transaction?
a. commercial paper
b. certificate of deposit
c. Treasury bill
d. common stock
e. All of these are equally likely to be used in a repo transaction.
68. When an investor purchases a six-month (182-day) T-bill with a $10,000 par value for $9,700, the Treasury bill
discount is ____ percent.
a. 5.93
b. 6.12
c. 6.20
d. 6.02
e. None of these are correct.
69. The yields offered on asset-backed commercial paper are often ______ the yields offered on unsecured commercial
paper.
a. equal to
b. lower than
c. higher than
d. more variable
70. Which of the following is NOT true about Eurodollar securities?
a. Eurodollars are U.S. dollars deposited in the United States by European investors.
b. The interest rate on Eurodollar floating-rate CDs adjusts periodically to the LIBOR.
c. Eurodollar securities include Euronotes and Euro-commercial paper.
d. The volume of Eurodollar CDs has grown because the U.S. dollar is used in a significant number of international
transactions.
71. Securities with maturities of one year or less are classified as
a. capital market instruments.
b. money market instruments.
c. preferred stock.
d. None of these are correct.
Name:
Class:
Date:
chapter 6
Answer Key
Name:
Class:
Date:
chapter 6
Name:
Class:
Date:
chapter 6