Ch. 7 Markets
10. Eurodollars are euro-denominated deposits in U.S. banks.
F
11. Individual investors most often have only indirect access to the money market through commercial banks.
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17. Dealers bring buyers and sellers together; brokers make a market.
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20. Interest arbitrage keeps the interest rates of the many money market securities equal.
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22. Competitive bids in T-bill auctions require the bidder to specify only the quantity of bills desired.
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24. Reverse repos are contracts that require a firm to first sell securities with the agreement to buy them back in a short period at a higher price.
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25. The benefits of money market securities are low denomination, low systemic risk investments designed to appeal to individual investors with excess cash.
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26. Fed funds are short term unsecured loans while repos are short term secured loans from Federal Reserve Banks.
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27. A short term unsecured promissory note issued by a company is Negotiable CD.
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3. Treasury bills are sold on a discount basis, with interest paid separately at maturity.
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4. Treasury bills are least marketable among money market securities.
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6. For large corporations, commercial paper is more expensive but is a more assured alternative to bank borrowing.
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8. The Federal Funds market is not available for smaller, regional banks.
F
9. Banks can satisfy their short-term borrowing needs by
Federal Funds purchased. issuing negotiable CDs.
1. Many diverse institutions borrow in the money markets, while relatively few invest.
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12. The money market is a dealer market, not an exchange, and has no specific location.
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13. Money market borrowers are small in number compared to money market lenders.
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14. The money market is a market where liquidity is bought and sold.
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15. Commercial banks are the major issuer and investor of money market securities.
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16. Federal Reserve open market operations, reserve requirement changes, and discount rate policy first impact the economy in the money market.
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18. The higher yields of federal agency securities relative to T-bills is attributed mostly to the lower marketability of agency securities.
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19. Commercial banks are important indirect guarantors of commercial paper.
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2. All money market instruments are short-term liability securities.
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21. The money market provides liquidity for deficit spending units; the capital market finances economic growth.
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23. Non-competitive bidders in the U. S. Treasury security auctions pay the weighted average price of all accepted competitive bids.
T
5. Commercial banks act as dealers and are major investors in Treasury securities.
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7. Commercial paper is more likely to be placed directly by large finance companies.
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9. Bankers' acceptances are used primarily for financing international trade.
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4. Which of the following statements about the money market is true?
The money market is a dealer market linked by efficient communications systems.
31. The smallest denomination of T-bills is
a. $1,000
47. A 90 day $3 million jumbo CD has a 5.75% annual rate quote. If you purchase the CD, how much will you collect in 90 days?
a. $3,043,125
49. You spent $9,675 to buy a Treasury bill with a par of $10,000 and sell it 180 days later for $9,875. What is the effective annual rate?
a. 4.24%
38. A firm buys $1,000,000 of a 30-day commercial paper issue for $995,450. The bond equivalent yield on this commercial paper is:
a. 5.56%
11. Which of the following statements about federal agency securities is true?
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.
13. Which of the following securities is not a money market security?
a. Ba-rated corporate bonds
10. Which of the following statements is true?
a. Discount yield is always lower than bond equivalent yield on the same security
23. Which of the following money market rates is studied closely for indicators of changes in Federal Reserve monetary policy?
a. Federal Funds
40. A repurchase agreement calls for
a. a firm to sell securities with the agreement to buy them back later at a higher price.
30. The T-bill rate quoted by the Federal Reserve banks is the
a. bank discount rate.
45. Which of the following do not participate in the money markets?
a. commercial banks b. the Federal Reserve c. U.S. Treasury dealers d. corporations e. All of the above participate in the money markets.
6. Which of the following may be a liability of a non-financial business corporation?
a. commercial paper
15. The money market security represented by the largest dollar amount outstanding is
a. commercial paper.
2. Investors in the money markets are generally willing to take which of the following risks?
a. default risk b. interest rate risk c. liquidity risk d. all of the above e. none of the above
17. Money market securities have very little
a. default risk. b. price risk. c. marketability risk. d. all of the above.
19. Large industrial U.S. corporations are involved in the money market by
a. investing excess cash balances. b. buying and selling goods on credit in international trade. c. issuing commercial paper. d. all of the above
43. The fed funds rate is very important to the economy because:
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
14. Issuers of commercial paper tend to be
a. large financial and nonfinancial firms
42. A non-competitive bid in the Treasury securities auction market is characterized by:
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.
34. Federal agency securities have higher yields than Treasury securities because
a. they are less marketable than Treasury securities.
18. An important economic function of the U.S. government security dealer is to
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
26. The bank discount rate (ask) on a 91-day T-bill is 5.35%. What is the price of the $1000 T-bill?
b. $986.48
33. Purchasing T-bill via a computerized account without actually receiving the securities is achieved through a _______ Account.
b. Treasury Direct
12. Which of the following money market instruments would typically be used in international transactions?
b. a banker's acceptance
39. A reverse repurchase agreement calls for
b. a firm to buy securities with the agreement to sell them back later at a higher price.
24. When a firm issuing commercial paper uses a backup line of credit, it _____.
b. decreases the credit risk for investors
36. A repurchase agreement is like a secured loan because
b. it involves collateral, in this case the sale of a security under agreement to repurchase
21. Which of the following money market instruments is not sold on a discount basis?
b. negotiable certificates of deposit
46. A dealer is quoting a 180-day T-Bill with a face value of $10,000 that is quoted at 3.75 bid, 3.60 ask. This bill can be bought at ________ or can be sold at ________.
c. $9,820.00; $9,812.50
50. If a $10,000 par T-Bill has a 2.75% discount quote and a 180 day maturity, what is the price of the T-Bill to the nearest dollar?
c. $9,863
25. What is the bank discount rate on a $100,000 face value T-bill priced at $97,500, maturing in 181days?
c. 4.97%
27. The bank discount rate (ask) on a 71-day T-bill is 4.86%. What is the bond equivalent yield on the T-bill?
c. 4.98%
8. The most common money market instrument utilized in the Fed's open market operations is
c. Treasury bills.
32. The Wall Street Journal publishes T-bill price (bid/ask) based on the ___________ rate; with the __________ rate provided as the quoted (ask) yield on the T-bill.
c. bank discount; bond equivalent
29. Which of the following yield calculations on a Treasury bill provides the best comparison yield for competing coupon-bearing securities of the same maturity?
c. bond equivalent rate
35. Yields on three-month T-bills are more similar to
c. federal funds rates.
16. Which of the following money market securities is backed by specified collateral?
c. repurchase agreements
28. Calculate the bond equivalent yield on a 52-day T-bill selling for 98.555% of its face value.
d. 10.29%
37. A bank agrees to buy T-bills from a securities dealer for $997,250, and promises to sell the securities back to the dealer in 4 days for $997,575. The yield on this reverse repo for the bank is:
d. 2.86%
48. In terms of dollars outstanding, in recent years, what is the largest money market security?
d. Federal funds and repos
5. Which statement about Treasury bills is NOT true?
d. Interest on T-bills is tax-deductible for federal income tax purposes.
44. Which of the following statements about negotiable certificates of deposits (NCDs) is true?
d. Large banks are usually able to pay lower interest rates on NCDs than smaller regional banks.
41. A competitive bid in the Treasury securities auction market has all of the following characteristics except:
d. bids for a maximum of $5,000,000.
20. Banks invest in government securities for a variety of reasons except
d. high relative yield.
3. Small investors are likely to invest in the money market through ____.
d. indirectly; money market mutual funds
7. Federal Funds are typically
d. overnight interbank loans settled in immediately available funds
22. A time draft drawn on and accepted by a commercial bank that orders to pay a specified amount of money to the bearer on a given date is called a _______
e. banker's acceptance
1. Which of the following is NOT a characteristic of money market instruments?
small denominations