Financial Institutions Chapter 3

Commercial paper issuers with lower than a prime credit rating may back their commercial paper issues with a(n) __________ or arrange a(n) __________ to draw upon if needed to repay the debt.

letter of credit; line of credit

Because repurchase agreements are collateralized by high-quality securities, their yields are generally ______ the yields on uncollateralized ________.

lower than; federal funds loans

The bond equivalent yield equation can be described in words as the product of the ______ and the ______.

periodic rate; number of periods per year

Once issued, money market securities are actively traded in _______ markets.

secondary

The discount yield has two important characteristics that distinguishes it from other money market yields. They are

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

Treasury bills are short-term securities with a minimum allowable denomination of $100 and original issue maturities of

26 weeks. 52 weeks. 4 weeks. 13 weeks.

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

If the amount of competitive bids at the stop-out yield exceeds the amount of bills to be allocated after superior bids have been satisfied, those bidders will receive _______ of their bid.

a prorated allocation

All noncompetitive bids are satisfied in full ______ the competitive bids, using the ______ to determine the price.

before; stop-out yield

Borrowers who wish to borrow funds for more than one year will seek their funds in _______ markets.

capital

Bids submitted to a Treasury bill auction can be either ______ or ______ bids.

competitive; noncompetitive

A repurchase agreement is basically a collateralized

federal funds loan.

Money market securities have low default risk because their issuers are generally ________ borrowers.

high quality

The bond equivalent yield is the quoted ________ annual yield on a security.

nominal

The Federal Reserve also uses ______ and ______ to temporarily smooth interest rates and the money supply.

repos; reverse repos

Commercial firms with idle funds in the deposit accounts at banks will enter into a __________ with the bank to earn interest on their funds since banks generally pay _______ interest on corporate checking accounts.

reverse repo agreement; zero

True or false: The secondary market for Treasury bills is the largest of any U.S. money market security.

true

The U.S. Treasury sells new issues of Treasury bills through a(n)

weekly auction.

Ignoring inflation, the rate of return earned on cash balances is

zero

The maturity of commercial paper ranges from ______ to ______, with the most common maturities being between ______ and ______.

1 day; 270 days; 20 days; 45 days

Quoted interest rates on repurchase agreements assume a ________ year.

360-day

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 _______.

360; (Pf - Po)/Pf

In order to convert the quoted yield on a negotiable CD to a bond equivalent yield, you must multiply by _____.

365/360

To convert a single payment yield to a bond equivalent yield, you must multiply the single payment yield by _____.

365/360

The effective annual return (EAR) assumes a ______-day year and a periodic rate calculated as ______.

365; (Pf - Po)/Po

To convert a commercial paper yield to a bond equivalent yield, you must multiply the discount yield by ______ and ______.

Pf/Po; 365/360

To convert a discount yield to a bond equivalent yield, you must multiply the discount yield by ______ and ______.

Pf/Po; 365/360

The U.S. Treasury raises significant amounts of funds in the money market when it issues ______.

T-bills

A negotiable certificate of deposit (CD) has which of the following characteristics?

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

Which of the following are characteristics of commercial paper?

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

Competitive bids in a Treasury bill auction specify the ______ and the _______.

amount of par value of bills desired; discount yield

Three of the basic characteristics of money market securities are that they

are sold in large denominations. have low default risk. have a maturity of one year or less.

The price that a dealer will pay you for a Treasury bill that you want to sell is called the ________, while the (higher) price they will charge you for a Treasury bill you want to buy is the ________.

bid price; ask price

A correct measure of annual return on a single payment security is the

bond equivalent yield

In a repurchase agreement, the seller of the securities is the ______ and the buyer of the securities is the ______.

borrower; lender

The Federal Reserve ______ T-bills when it want to increase the money supply, and ______ T-bills when it wants to decrease the money supply.

buys; sells

Money market mutual funds compete with interest-bearing deposits at

commercial banks.

As of 2019, the money market securities with the smallest dollar value outstanding (excluding Banker's acceptances) were

commercial paper.

Unlike the bond equivalent yield, the effective annual return takes into account the effects of ________ interest during a less than one year investment horizon.

compounding

Because commercial paper has no active secondary market and is also unsecured, the __________ of the issuing company is of great importance to investors.

credit rating

Like Treasury bills, commercial paper is quoted on a _________ basis

discount

The Federal Reserve operates the _______ which it can use to influence the supply of bank reserves to commercial banks.

discount window

As of 2019, the money market securities with the largest dollar value outstanding were

federal funds and repurchase agreements.

The interest rate charged by banks on federal funds loans is the

federal funds rate.

Negotiable CD's are single-payment securities with rates that are negotiated rather than market-determined. Once the rate has been negotiated, the CD's _______ can be determined.

future value

Treasury bills have an active secondary market through ______ that buy and sell Treasury bills.

government securities dealers

The bond equivalent yield for a Treasury bill will always be _________ the asked discount yield for that same Treasury bill.

greater than

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.

higher

The bond equivalent yield is a correct measure of the return an investor will earn on a Treasury bill and is calculated as the product of the ______ and the ______, assuming a _______-day year.

holding period return; periods per year; 365

The relatively small price changes that short maturity money market securities experience when interest rates change indicates that they have less ________ than longer maturity securities.

interest rate risk

Commercial banks participate in money markets as both ______ of and ______ in most types of money market securities.

issuers; investors

A reverse repo is basically the _______ position on the ________ side of the repo.

lender's; opposite

Money market securities are very different in terms of their

liquidity

Because of their short maturity and active secondary market, Treasury bills are considered to have little _____ and _____.

liquidity risk interest rate risk

Both competitive and noncompetitive bidders in a Treasury bill auction are awarded securities at the same price, which is the

lowest price of the competitive bids accepted.

A secondary market in negotiable CD's is maintained by

money market brokers and dealers.

With their large face value, negotiable CD's are often too expensive for individual investors. However, ________ purchase them and sell shares to investors.

money market mutual funds

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.

opportunity cost

At the heart of the secondary market for Treasury bills are 23 financial institutions designated by the Federal Reserve Bank as _________, who make a market in Treasury bills by buying and selling for their own account and trading for their customers.

primary dealers

Money markets are efficient at eliminating the opportunity cost of holding excess cash balances by allowing investors to convert cash to securities and back again _________ and _________.

quickly; at low cost

All competitive bids above the stop-out yield (lower price) are ______, while all competitive bids below the stop-out yield (higher price) are _____.

rejected; accepted

Federal funds are _______ loans between a bank that has ________ reserves and one that is ________ reserves.

short-term; excess; short of

The single payment has two important characteristics that distinguishes it from other money market yields. They are that the

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

Noncompetitive bids allow ______ investors to participate in the Treasury bill auction market without incurring large ______.

small; risk

The discount yield bid that determines the price to be paid by both competitive and noncompetitive bidders for their allotment of Treasury bills is called the

stop-out yield.

Noncompetitive bidders always receive _______ of their bid and pay the price set by the ______.

the full amount; stop-out yield

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