DEBT: MONEY MARKET

Which of the following money market instruments is rated on a "P" scale? A. Commercial Paper B. Municipal Short Term Notes C. Treasury Bills D. Federal Funds

A. Commercial Paper

Which of the following statements are TRUE regarding repurchase agreements? I.Repurchase agreements are used by dealers to reduce the carrying cost of Government securities held in their inventory II. Repurchase agreements are initiated by the Federal Reserve to loosen the money supply III. If a repurchase agreement specifies a date and price at which time the trade will be reversed, the agreement is known as a "Reverse" repurchase agreement IV. If a repurchase agreement extends for longer than overnight, the agreement is known as a "Due Bill" repurchase agreement A. I and II only B. III and IV only C. II and IV only D. I, II, III, IV

A. I and II only

The "Effective" Federal Funds Rate is composed of rates offered by: I. Selected commercial banks across the United States II. selected thrift institutions across the United States III. the designated primary U.S. Government securities dealers A. I only B. III only C. I and II only D. I, II, III

A. I only

All of the following statements are true regarding repurchase agreements EXCEPT: A. investors in repurchase agreements have no interest rate risk B. investors in repurchase agreements have no price risk C. repurchase agreements are used by the Federal Reserve to influence money supply levels D. repurchase agreements typically mature in 1 to 90 days

A. investors in repurchase agreements have no interest rate risk

A "blue chip" corporation experiencing a short term cash flow shortage could issue: A banker's acceptances B commercial paper C money market certificates D Subordinated debentures

B commercial paper

The minimum dollar amount of a negotiable certificate of deposit is usually: A. $10,000 B. $100,000 C. $1,000,000 D. $10,000,000

B. $100,000

Which debt instrument is used to finance imports and exports? A. Eurodollar Bonds B. Banker's Acceptances C. American Depositary Receipts D. Commercial Paper

B. Banker's Acceptances

"LIBOR" is the commonly used term for the: A. Long Term Bond Offered Rate B. London Interbank Offered Rate C. Last-In, Best Offered Rate D. Lowest Interest Borrowing Offered Rate

B. London Interbank Offered Rate

All of the following securities are quoted on a yield basis EXCEPT: A. Commercial Paper B. Treasury Bills C. American Depositary Receipts D. Banker's Acceptances

C. American Depositary Receipts

Which of the following money market instruments is issued by corporations? A. Treasury Bill B. Repurchase Agreement C. Commercial Paper D. Prime Banker's Acceptances

C. Commercial Paper

Which statements are TRUE regarding the Federal Funds rate? I. the rate is computed every business day II. The rate is lower than the discount rate III. The rate is set by the Federal Reserve IV. The rate is charged from one Federal Reserve member bank to another member bank A. I and III only B. II and IV only C. I, II and IV D. I, II, III, IV

C. I, II and IV

Which of the following securities can be margined? I. Treasury bills II. Commercial paper III. Bankers' acceptances IV. Structured products A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV

C. I, II, III

Which of the following securities will trade without accrued interest (trade "flat")? I. Treasury Bills II. Banker's Acceptances III. Treasury Receipts IV. Negotiable Certificates of Deposit A. I and III only B. II and IV only C. I, II, III D. I, II, III, IV

C. I, II, III

A prime bankers acceptance is one which is: A. rated P-1 by Moody's B. quoted at the current prime rate C. eligible for trading by the Federal Open Market trading desk D. traded only between primary U.S. Government dealers

C. eligible for trading by the Federal Open Market trading desk

The maximum maturity on commercial paper is: A 14 days B 30 days C 90 days D 270 days

D 270 days

All of the following are money market instruments EXCEPT: A. BAs B. REPOs C. CDs D. ADRs

D. ADRs

To smooth out cash flow, a corporation will issue: A. TANs B. RANs C. BANs D. Commercial paper

D. Commercial paper

Which of the following securities are eligible for trading by the Federal Reserve? I. Prime Banker's Acceptances II. Treasury Bills III. Treasury Bonds IV. Federal Home Loan Bank Bonds A. I and II B. III and IV C. II, III, IV D. I, II, III, IV

D. I, II, III, IV

Which of the following statements are TRUE about commercial paper? I.Commercial paper has a maximum maturity of 90 days II. Commercial paper has a maximum maturity of 270 days III. Commercial paper is quoted on a dollar price basis IV. Commercial paper is quoted on a yield basis A. I and III B. I and IV C. II and III D. II and IV

D. II and IV

ratings: short term corporate debt

Moody's: P1 (Prime 1) P2 (Prime 2) P3 (Prime 3) NP (Not Prime) Standard and Poor's: A1 A2 A3

Overnight repo

overnight repurchase agreements -a repurchase agreement -selling party agrees to repurchase the securities the next day (most common duration)

Repurchase Agreement

"repos" -overnight agreement -allows government dealers with excess cash to earn extra interest income -government securities dealer sells part of its inventory overnight (to get cash) to another dealer -DOES HAVE market risk, -NO credit risk -NO liquidity risk -other dealer earns interest on a 1 day loan -next day, the repurchase agreement is closed-out with the return of the securities at a slightly higher price (the difference is the interest earned)

Negotiable Certificates of Deposit (Negotiable CDs)

-$100,000 minimum face amount -issued by banks -often issued in minimums of at least $1,000,000. -issued at face -accrue interest -not FDIC insured over $250,000 -both short term and long term

Discount rate

-Federal Reserve interest rate -charge member banks for making direct loans of reserves. -50 basis points (.50%) higher than the Fed Funds rate

Marginable Money Market Instruments

-Government securities -agency securities -investment grade money market instruments -investment grade corporate bonds -listed stocks -NOT structured products brokerage firm can lend money against these securities held as collateral for the loan

Securities eligible for Fed trading

-U.S. Governments -Agencies -Prime Banker's Acceptances

Commercial paper

-a short term -rated for credit risk. -unsecured/unfunded corporate debt -maximum maturity of 270 days (9 months) -common maturity is 30 days - issued at a discount -matures at face value -quoted on a yield basis -purchased by institutional investors (ex. money market funds) -sold in large blocks -exempt security under the Securities Act of 1933 -sold without a prospectus

Eurodollars

-deposits denominated in dollars held in a bank outside the U.S. Loans are made at LIBOR - the London Inter bank Offered Rate

Banker's Acceptance (BA)

-draft on a bank -payable at a future date (future 30-90 days) - "post dated" checks -used to finance imports and exports -trade at a discount to face -mature at face -interest earned -quoted on a yield basis. -automated payments processed internationally

Prime BAs

-eligible for trading with the Federal Reserve. -issued by banks that are primary U.S. Government dealers

Federal Funds rate

-interest rate charged on borrowings between Federal Reserve System member banks for overnight loans of reserves -rate changes daily -indicator of future interest rate changes -lowest interest rate in the economy -an average rate for Federal Reserve member banks from across the United States

Reverse Repurchase Agreement

-known as "Matched Sale" -tighten credit -Federal Reserve sells U.S. Government and other eligible securities to bank dealers, with an agreement to buy back the securities -next day

Brokered CDs

-long-term -issued by banks -sold through brokerage firms. -maturities up to 5 years. -market rates rise = the market value drops below par -interest rate re settable every 6 months -Initial interest rates high to attract investors -first adjustment date, interest rate "steps-down" to the current market rate. -no penalty for early withdrawal -callable

Long term negotiable CDs

-maturities over 1 year -not a money market instrument -accrue interest -pay semi-annually -subject to reinvestment risk interest -longer maturity -semi-annual payment of interest -subject to market risk -variable rate -(a step-up or step-down CD) -callable.

Federal Funds

-overnight, unsecured loans from one Federal Reserve member bank to another -shortest term money market instrument -Federal Funds Rate -rate is influenced by open market operations of the Federal Reserve

Money Market instruments

-quoted on a yield basis -CMBs (Cash Management Bills) -Treasury Bills -Commercial Paper -Banker's Acceptances -Negotiable Certificates of Deposit -Repurchase Agreements -Loan of Federal Funds -Loan of Eurodollars

Certificate of deposit (CD)

-short-term money market instrument -issued by a bank at par -repays principal and interest at maturity -minimum $100,000

step-down" CD

-starts with a high introductory "teaser" interest -rate "steps down" to market rate of interest at a specified date or at specified intervals -investor will still earn the market rate over the life of the CD

Money market instruments

-unsecured debts -Maturity 1 year or less -example: Commercial paper

Which of the following statements are TRUE regarding Federal Funds? I. federal funds are overnight loans between member institutions of the Federal Reserve System II. Federal funds are overnight loans of reserves from the Federal Reserve Bank to a member institution III. the interest rate charged on Federal Funds is the Federal Funds Rate IV. the interest rate charged on Federal Funds is the Discount Rate A. I and III B. I and IV C. II and III D. II and IV

A. I and III

The Federal Reserve would enter into a transaction involving which of the following with a primary U.S. Government securities dealer? A. Overnight repurchase agreement B. Federal Funds C. Eurodollars D. Banker's acceptance

A. Overnight repurchase agreement

The maximum maturity on commercial paper is 270 days (9 months) because: A. this is the longest maturity for the security to be exempt from the provisions of the Securities Act of 1933 B. this is the maximum maturity for the security to be defined as a money market instrument C. longer duration issues are not readily marketable to institutional investors D. longer duration issues will not be rated by a nationally recognized ratings agency

A. this is the longest maturity for the security to be exempt from the provisions of the Securities Act of 1933

Which statements are TRUE regarding Step-Down Certificates of Deposit? I. initial payments are made at an interest rate that is above the market rate II. Initial payments are made at an interest rate that is below the market rate III. At a predetermined time, the interest rate is increased to a rate that is at, or above, the market IV. At a predetermined time, the interest rate is decreased to a rate that is at, or below, the market A I and III B I and IV C II and III D II and IV

B I and IV

Which statements are TRUE about commercial paper? I. The most common maturity is 30 days II. The most common maturity is 270 days III. The maximum maturity is 30 days IV. The maximum maturity is 270 days A. I and III B. I and IV C. II and III D. II and IV

B. I and IV

A certificate of deposit that changes the rate of interest based on the prevailing market interest rate is known as a: A. Market rate CD B. Step-up / Step-down CD C. Negotiable CD D. Renewable CD

B. Step-up / Step-down CD

When the Federal Reserve enters into a repurchase agreement, it: A. tightens credit B. loosens credit C. increases the discount rate D. decreases the discount rate

B. loosens credit

All of the following statements are true regarding the Federal Funds rate EXCEPT the rate is: A. charged from one Federal Reserve member bank to another member bank B. set by the Federal Reserve C. lower than the discount rate D. computed every business day

B. set by the Federal Reserve

Which of the following actions by the Federal Reserve will tighten credit? I. Repurchase Agreement II. Reverse Repurchase Agreement III. Matched Sale A. I only B. II only C. II and III D. I, II, III

C. II and III

Which of the following are risks that should be disclosed to customers when recommending the purchase of a CD sold through a brokerage firm? I. There is a substantial penalty for early withdrawal of funds II. If interest rates have risen after issuance and the CD is sold prior to maturity, the investor may experience a loss of principal III. The secondary market is limited, so that sale prior to maturity can incur higher than normal transaction costs IV. Brokered CDs do not qualify for FDIC insurance coverage if the issuing bank should fail A. I and III B. I and IV C. II and III D. II and IV

C. II and III

Which statements are TRUE regarding repurchase agreements effected between the public and government securities dealers? I. The public customer is the seller of the government securities II. The public customer is the lender of monies III. The government dealer is the seller of the government securities IV. The government dealer is the lender of the monies A. I and III B. I and IV C. II and III D. II and IV

C. II and III

Eurodollars are: A. European currencies held on deposit in the branches of domestic banks located in the United States B. European currencies held on deposit in offshore branches of United States banks C. U.S. dollar deposits held in foreign branches of U.S. banks or foreign banks D. U.S. dollar deposits held in domestic branches of foreign banks

C. U.S. dollar deposits held in foreign branches of U.S. banks or foreign banks

A customer wishes to buy a $50,000 certificate of deposit offered by your firm. The customer wishes to know if the CD is FDIC insured. As the broker handling the account, you should tell the customer that: A. the CD is insured because the amount is less than the $100,000 maximum permitted amount that qualifies for FDIC coverage B. CDs sold through brokerage firms do not qualify for FDIC insurance regardless of the amount, but they are SIPC insured C. as long as the CD is titled in the customer's name and the customer does not have accounts at the issuing bank totaling more than $200,000, then the CD is FDIC insured D. As long as the CD is held in the custody of an FDIC member bank and the amount is $100,000 or less, then FDIC insurance covers the CD

C. as long as the CD is titled in the customer's name and the customer does not have accounts at the issuing bank totaling more than $200,000, then the CD is FDIC insured

Which money market instruments are marginable? A Bankers' acceptances B Treasury bills C Commercial paper D All of the above

D All of the above

Which of the following statements are TRUE regarding overnight repurchase agreements? I. The seller loses control of the underlying securities for the duration of the agreement II. The interest rate charged is most similar to the Federal Funds rate III.The investment has interest rate risk IV. The investment has no liquidity risk A. I and II only B. III and IV only C. I, II, IV D. I, II, III, IV

D. I, II, III, IV

Which risk is NOT associated with Long Term Negotiable Certificates of Deposit? A. Market risk B. Call risk C. Reinvestment risk D. Prepayment risk

D. Prepayment risk

Trades of all of the following will settle in Fed Funds EXCEPT: A. Prime Banker's Acceptances B. Treasury Bills C. Treasury Bonds D. Prime Commercial Paper

D. Prime Commercial Paper

FDIC Insurance Coverage

Federal Deposit Insurance Corporation -coverage up to $250,000 per customer

LIBOR

London Inter bank Offered Rate -Eurodollar loans -European equivalent of the Fed Funds rate

Federal Reserve

biggest repo market -Conducts open market operations -trading with the primary government securities dealers -loosen credit availability -buy government securities from a primary bank dealer (giving the bank dealer cash to lend out); with an agreement to sell back the securities the next day