finance 3636 chapter 5

37. A $2 million jumbo CD is paying a quoted 3.55 percent interest rate on 180-day maturity CDs. How much money will you have at maturity if you invest in the CD? A. $2,000,000 B. $2,035,014 C. $2,035,500 D. $2,071,000 E. $2,088,400

$2,035,500 2,000,000 * [1 + (0.0355*180/360)]

26. A 180-day $3 million CD has a 4.25 percent annual rate quote. If you buy the CD, how much will you collect in 180 days? A. $3,047,439 B. $3,045.678 C. $3,062,877 D. $3,063,750 E. $3,127,500

$3,063,750 $3 million × [1 + (0.0425 × 180/360)]

19. A dealer is quoting a $10,000 face 180-day T-bill quoted at 2.75 bid, 2.65 ask. You could buy this bill at ______________ or sell it at _______________. A. $9,869.23; $9864.36 B. $9864.36; $9,869.23 C. $9,867.50; $9,862.50 D. $9,862.50; $9,867.50 E. none of the options

$9867.50; $9862.5 Buy at 10,000 × [1-(0.0265 × 180/360)]; sell at 10,000 × [1-(0.0275 × 180/360)]

34. If a $10,000 par T-bill has a 3.75 percent discount quote and a 90-day maturity, what is the price of the T-bill to the nearest dollar? A. $9,625 B. $9,906 C. $9,908 D. $9,627 E. none of the options

$9906 10,000 * [1-(0.0375 * 90/360)] = 9,906

24. Which one of the following statements about commercial paper is NOT true? Commercial paper issued in the United States A. is an unsecured short-term promissory note. B. has a maximum maturity of 270 days. C. is virtually always rated by at least one ratings agency. D. has no secondary market. E. carries an interest rate above the prime rate.

carries an interest rate above the prime rate

16. A short-term unsecured promissory note issued by a company is A. commercial paper. B. a T-bill. C. a repurchase agreement. D. a negotiable CD. E. a banker's acceptance.

commercial paper

Commercial paper is a short-term obligation of the U.S. government issued to cover government budget deficits and to refinance maturing government debt.

false

Euro commercial paper is a short-term obligation of the European Central Bank.

false

The U.S. Treasury switched from a discriminating price auction to a single price auction because the latter lowered the average price paid by investors.

false

The bond equivalent yield times 365/360 is equal to the single payment yield.

false

The majority of money market securities are low-denomination, low-risk investments designed to appeal to individual investors with excess cash.

false

15. A repo is in essence a collateralized A. banker's acceptance. B. certificate of deposit. C. Fed funds loan. D. commercial paper loan. E. Eurodollar deposit.

fed funds loan

31. LIBOR is generally _______________ the Fed funds rate because foreign bank deposits are generally ________________ domestic bank deposits. A. greater than; less risky than B. less than; riskier than C. the same as; of equal risk to D. greater than; riskier than E. less than; less risky than

greater than; riskier than

20. Rates on Federal funds and repurchase agreements are stated A. on a bond equivalent basis with a 360-day year. B. on a bond equivalent basis with a 365-day year. C. as a discount yield with a 360-day year. D. as an EAR. E. as a discount yield with a 365-day year.

on a bond equivalent basis with a 360 day year

40. In a Treasury auction, preferential bidding status is granted to A. competitive bidders. B. noncompetitive bidders. C. short sale committed bidders. D. commercial bank bidders. E. no group of bidders.

noncompetitive bidders

41. If your firm enters into an overnight reverse repurchase agreement, your firm is A. borrowing Fed funds temporarily. B. selling a security now while agreeing to buy it back tomorrow. C. giving an unsecured loan to the counterparty. D. procuring a banker's acceptance. E. none of the options

none of the options

22. The following formula is used to calculate the _____________ of a money market investment. A. EAR B. APR C. single-payment yield D. discount yield E. BEY

single payment yield

21. The discount yield on a T-bill differs from the T-bill's bond equivalent yield (BEY) because I. the discount yield is the return per dollar of face value and the BEY is a return per dollar originally invested. II. a 360-day year is used on the discount yield and the BEY uses 365 days. III. the discount yield is calculated without compounding, and the BEY is calculated with compounding. A. I only B. II only C. I and II only D. II and III only E. I, II, and III

-the discount yield is the return per dollar of face value and the BEY is a return per dollar originally invested. and a 360-day year is used on the discount yield and the BEY uses 365 days.

39. A 50-day maturity money market security has a bond equivalent yield of 3.60 percent. The security's EAR is A. 3.69 percent. B. 3.61 percent. C. 3.55 percent D. 3.87 percent. E. 3.66 percent.

3.66 percent EAR = (1 + (0.0360/(365/50)))365/50 - 1 = 3.66%

33. A Chinese exporter sells $200,000 of toys to a French importer. The Chinese exporter requires the French importer to obtain a letter of credit. When the bank accepts the draft, the exporter discounts the 90-day note at a 4 percent discount. What is the exporter's true effective annual financing cost? A. 4.00 percent B. 4.04 percent C. 4.10 percent D. 4.16 percent E. 4.22 percent

4.16 200,000 * [1-(0.04 * 90/360)] = 198,000; (200,000/198,000)365/90 -1 = 4.16%

35. A 90-day T-bill is selling for $9,900. The par is $10,000. The effective annual return on the T-bill is (watch your rounding) A. 4.00 percent. B. 4.16 percent. C. 4.10 percent. D. 4.04 percent. E. 4.21 percent.

4.16 percent (10,000/9,900)(365/90) - 1

A U.S. exporter sells $150,000 of furniture to a Latin American importer. The exporter requires the importer to obtain a letter of credit. When the bank accepts the draft, the exporter discounts the 120-day note at a 5.25 percent discount. What is the exporter's true effective annual financing cost? A. 5.52 percent B. 5.42 percent C. 5.34 percent D. 5.29 percent E. 5.25 percent

5.52 percent

36. Suppose that $10 million face value commercial paper with a 270-day maturity is selling for $9.55 million. What is the BEY on the paper? A. 4.71 percent B. 6.42 percent C. 6.37 percent D. 6.28 percent E. 4.50 percent

6.37 percent

30. You buy a $10,000 par Treasury bill at $9,575 and sell it 60 days later for $9,675. What was your EAR? A. 4.44 percent B. 6.29 percent C. 6.35 percent D. 6.52 percent E. 6.67 percent

6.52 percent (9,675/9,575)(365/60) - 1 = .06524 = 6.52%

For the purposes for which they are used, money market securities should have which of the following characteristics? I. Low trading costs II. Little price risk III. High rate of return IV. Life greater than one year A. I and III B. II and IV C. III and IV D. I and II E. I, II, and III

Low trading costs, little price risk

27. A banker's acceptance is A. a time draft drawn on the exporter's bank. B. a method to help importers evaluate the creditworthiness of exporters. C. a liability of the importer and the importer's bank. D. an add-on instrument. E. for greater than one year maturity.

a liability of the importer and the importers bank

A time draft payable to a seller of goods, with payment guaranteed by a bank is a A. commercial paper security. B. T-bill. C. repurchase agreement. D. negotiable CD. E. banker's acceptance.

bankers acceptance

38. From 1990 to 2013, which one of the following money market securities actually declined in terms of dollar amount outstanding? A. commercial paper B. treasury bills C. federal funds and repos D. negotiable CDs E. banker's acceptances

bankers acceptances

42. Eurodollar CDs would include A. CDs denominated in euros. B. dollar investments by European entities in the United States. C. dollars deposited in Caribbean banks. D. dollars deposited in Europe. E. dollars deposited in Caribbean banks and dollars deposited in Europe.

dollars deposited in Caribbean banks and dollars deposited in Europe.

25. A negotiable CD A. is a bank-issued transactions deposit. B. is a registered instrument. C. is a bank-issued time deposit. D. has denominations ranging from $50,000 to $10 million. E. pays discount interest.

is a bank issued time deposit

14. Money market securities exhibit which of the following? I. Large denomination II. Maturity greater than one year III. Low default risk IV. Contractually determined cash flows A. I, II, and III B. I, III, and IV C. II, III, and IV D. II and IV E. I, II, III, and IV

large denomination, low default risk, contractually determined cash flows

18. In the T-bill auction process, the competitive bidder is guaranteed a ______________ and a noncompetitive bidder is guaranteed a _______________. A. minimum price; maximum price B. maximum price; minimum price C. maximum price; given quantity D. minimum price; maximum quantity E. none of the options

max price;given quantity

23. The rate of return on a repo is A. determined by the rate of return on the underlying collateral. B. strongly affected by the current Fed funds rate at the time of the repo. C. determined at the time of the repo. D. determined by the rate of return on the underlying collateral and determined at the time of the repo. E. strongly affected by the current Fed funds rate at the time of the repo and determined at the time of the repo.

strongly affected by the current Fed funds rate at the time of the repo and determined at the time of the repo.

28. The most liquid of the money market securities are A. commercial paper. B. banker's acceptances. C. T-bills. D. Fed funds. E. repurchase agreements.

t bills

In dollars outstanding in 2013, the largest money market security was A. commercial paper. B. banker's acceptances. C. T-bills. D. Fed funds and repos.

t bills

360/n times the difference between the face value and the current value divided by the face value gives you the discount yield on an instrument.

true

Commercial paper, Treasury bills, and banker's acceptance rates are all quoted as discount yields.

true

Everything else equal, an effective annual rate will be greater than the bond equivalent yield on the same security.

true

Fed funds are short-term unsecured loans while repos are short-term secured loans.

true

In the T-bill secondary market the ask yield will normally be less than the bid yield.

true

Money markets exist to help reduce the opportunity cost of holding cash balances

true

The largest secondary money market in the United States is the secondary market for T-bills.

true