Chapter 5 Financial Institution

federal funds rate

The interest rate for borrowing fed funds.

Discount Yields formula (id)

id = Pi - Po / Pf x 360/n

A reverse repo is basically the _______ position on the ________ side of the repo. Multiple choice question. borrower's; same borrower's; opposite lender's; opposite lender's; same

lender's; opposite

Treasury bills

short-term obligations issued by the U.S. government

The maturity of commercial paper ranges from ______ to ______, with the most common maturities being between ______ and ______. Multiple choice question. 30 days; 270 days; 20 days; 75 days 1 day; 360 days; 30 days; 60 days 1 day; 270 days; 20 days; 45 days 1 day; 360 days; 90 days; 180 days

1 day; 270 days; 20 days; 45 days

The market makers in U.S. Treasury bills (and other Treasury securities) are the Multiple choice question. U.S. Treasury. 24 primary dealers. organized exchanges. commercial banks.

24 primary dealers.

The discount yield is used in security quotations but is not a correct measure of annual return because is uses a ______-day year and calculates the periodic return as _______. Multiple choice question. 365; (Pf - Po)/Po 360; (Pf - Po)/Po 360; (Pf - Po)/Pf 365; (Pf - Po)/Pf

360; (Pf - Po)/Pf

To convert a single payment yield to a bond equivalent yield, you must multiply the single payment yield by _____. Multiple choice question. Pf/Po Po/Pf 365/360 360/365

365/360

The effective annual return (EAR) assumes a ______-day year and a periodic rate calculated as ______. Multiple choice question. 365; (Pf - Po)/Pf 360; (Pf - Po)/Po 360; (Pf - Po)/Pf 365; (Pf - Po)/Po

365; (Pf - Po)/Po

reverse repurchase agreement (reverse repo)

An agreement involving the purchase of securities by one party from another with the promise to sell them back.

bearer instrument

An instrument in which the holder at maturity receives the principal and interest.

Between 1990 and 2019, the money market security that did not exhibit growth in total dollars outstanding was Multiple choice question. Banker's acceptances. Treasury bills. federal funds and repurchase agreements. commercial paper.

Banker's acceptances.

Finance companies are not banks and cannot issue deposits, so they raise large amounts of funds in the money markets, especially through the issuance of Multiple choice question. repurchase agreements. banker's acceptances. commercial paper. negotiable CD's.

COMMERCIAL PAPERS

A negotiable certificate of deposit (CD) has which of the following characteristics? Multiple select question. It can be traded in secondary markets. The most common denomination is $1 million. It is a bearer instrument: whoever holds it, owns it. It generally has a maturity of 30 days or less. It is a bank-issued time deposit. Investor ownership is registered with the issuer.

It can be traded in secondary markets. The most common denomination is $1 million. It is a bearer instrument: whoever holds it, owns it. It is a bank-issued time deposit

money markets

Markets that trade debt securities or instruments with maturities of less than one year.

True or false: Companies with strong credit ratings can borrow money at a lower rate by issuing commercial paper than by borrowing from banks. True false question. True FALSE

TRUE

True or false: T-bills are the most actively traded of the money market securities. True false question. True False

TRUE

opportunity cost

The forgone interest cost from the holding of cash balances when they are received.

Treasury bill auctions

The formal process by which the U.S. Treasury sells new issues of Treasury bills.

Which of the following are characteristics of commercial paper? Multiple select question. They are issued primarily by companies with strong credit ratings. They are secured. They are unsecured. They are short-term promissory notes. They are one of the least important of the money market instruments. They are long-term promissory notes.

They are issued primarily by companies with strong credit ratings. They are unsecured. They are short-term promissory notes.

True or false: Investors moving funds across borders seeking money markets that offer the most attractive yields is one result of the growth of global money markets. True false question. True False

True

Repurchase agreements

agreements involving the sale of securities by one party to another with a promise to repurchase the securities at a specified date and price.

Negotiable certificates of deposit

bank-issued time deposits that specify an interest rate and maturity date and are negotiable (saleable on a secondary market)

A correct measure of annual return on a discount security is the Multiple choice question. discount yield. yield to call. bond equivalent yield. coupon rate.

bond equivalent yield.

If a repurchase agreement is used to ______ funds, a reverse repurchase agreement must be used to _______ funds. Multiple choice question. borrow; borrow borrow; lend

borrow; lend

Borrowers who wish to borrow funds for more than one year will seek their funds in _______ markets. Multiple choice question. stock money capital bond

capital

As of 2019, the money market securities with the smallest dollar value outstanding (excluding Banker's acceptances) were Multiple choice question. Treasury bills. commercial paper. negotiable certificates of deposit. federal funds and repurchase agreements.

commercial paper.

Corporations raise large amounts of funds in the money markets, primary in the form of Multiple choice question. negotiable CD's. banker's acceptances. repurchase agreements. commercial paper.

commercial paper.

Bids submitted to a Treasury bill auction can be either ______ or ______ bids. Multiple choice question. competitive; noncompetitive firm; suggested high; low price; discount yield

competitive; noncompetitive

Unlike the bond equivalent yield, the effective annual return takes into account the effects of ________ interest during a less than one year investment horizon. Multiple choice question. compounding amortizing discounting taxing

compounding

Treasury bills are considered to be free of _________ because they are backed by the U.S. government. Multiple choice question. default risk exchange rate risk interest rate risk liquidity risk

default risk

As of 2019, the money market securities with the largest dollar value outstanding were Multiple choice question. Treasury bills. commercial paper. federal funds and repurchase agreements. negotiable certificates of deposit.

federal funds and repurchase agreements.

A dealer may offer the issuer _________ underwriting, by which they guarantee the sale of the entire commercial paper issue. Multiple choice question. firm commitment best efforts first attempt discount

firm commitment

Two forms of growth in the global money markets include Multiple select question. foreign money market securities. growth in the use of banker's acceptances for trade finance. U.S. securities bought and sold by foreign investors. U.S. securities bought and sold by U.S. investors.

foreign money market securities. U.S. securities bought and sold by foreign investors.

Collateral pledged in a repurchase agreement may have a ________ applied to protect the repo buyer (lender) against a change in the value of the collateral during the repo period. Multiple choice question. shave discount trim haircut

haircut

A repurchase agreement involves the sale of securities at a specified price with a promise to repurchase those securities at a(n) _______ price at a specified date in the future. Multiple choice question. higher equal similar lower

higher

Some of the ways in which the U.S. government uses Treasury bills is to Multiple select question. compensate federal government employees. pay foreign governments and corporations for imports. implement monetary policy. refinance maturing government debt. cover current government budget shortfalls.

implement monetary policy. refinance maturing government debt. cover current government budget shortfalls.

Both competitive and noncompetitive bidders in a Treasury bill auction are awarded securities at the same price, which is the Multiple choice question. lowest price of the competitive bids accepted. average price of the competitive bids accepted. median price of the competitive bids accepted. highest price of the competitive bids accepted.

lowest price of the competitive bids accepted.

EAR FORMULA

m = 365/n (number of days)

With their large face value, negotiable CD's are often too expensive for individual investors. However, ________ purchase them and sell shares to investors. Multiple choice question. corporations insurance companies money market mutual funds pension funds

money market mutual funds

Because their liability payments are relatively unpredictable, insurance companies maintain large balances of liquid assets such as Multiple choice question. Treasury notes and bonds. preferred stock. money market securities. municipal bonds.

money market securities.

The debt instruments that are traded in money markets are characterized by original maturities of Multiple choice question. 30 days or less. one year or less. more than one year. up to 30 years.

one year or less.

Holding excess cash beyond the amount needed to meet day-to-day transaction requirements incurs a(n) __________ in the form of foregone interest for the holder. Multiple choice question. capital loss transaction cost opportunity cost capital gain

opportunity cost

The bond equivalent yield equation can be described in words as the product of the ______ and the ______. Multiple choice question. coupon rate; number of periods per year numerator; denominator periodic rate; number of periods per year coupon rate; par value

periodic rate; number of periods per year

The Federal Reserve also uses ______ and ______ to temporarily smooth interest rates and the money supply. Multiple choice question. buying; selling open market operations; repos repos; reverse repos reverse repos; selling

repos; reverse repos

Federal funds

short-term funds transferred between financial institutions usually for no more than one day

Commercial paper

short-term unsecured promissory notes issued by a company to raise short-term cash

xFederal funds are _______ loans between a bank that has ________ reserves and one that is ________ reserves. Multiple choice question. short-term; short of; exactly enough long-term; excess; not required to hold long-term; excess; short of short-term; excess; short of

short-term; excess; short of

The single payment has two important characteristics that distinguishes it from other money market yields. They are that the Multiple select question. single payment yield calculates the periodic return (Pf - Po)/Po. single payment yield calculates the periodic return as (Pf - Po)/Pf. single payment yield assumes a 360-day year. single payment yield assumes as 365-day year.

single payment yield calculates the periodic return (Pf - Po)/Po. single payment yield assumes a 360-day year.

Banker's acceptances

time drafts payable to a seller of goods, with payment guaranteed by a bank.

True or false: The bond equivalent yield for a security is the rate that is used to calculate the present value of the security in time value of money equations. True false question. True False

true

When a firm issues commercial paper directly to buyers, it avoids _________ but must determine the _______ and _______ needed to place the entire issue. Multiple choice question. underwriting costs; investor demand; interest rates SEC registration; investor demand; supply

underwriting costs; investor demand; interest rates

The U.S. Treasury sells new issues of Treasury bills through a(n) Multiple choice question. weekly auction. dealer network IPO process

weekly auction.

Ignoring inflation, the rate of return earned on cash balances is Multiple choice question. zero. the average money market rate. one percent. the same as the T-bill rate.

zero