Money Market Debt

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 Commercial paper is rated by Moody's on a P-1,2,3, and NP ("Not Prime") scale. Municipal short-term notes are rated by Moody's on an MIG-1,2,3, and SG ("Speculative Grade") scale. Treasury bills and Fed Funds are not rated because they have an implied AAA rating - the safest of instruments.

The money market instrument with the shortest maturity is: A. Federal Funds B. Eurodollar Certificates of Deposit C. Commercial Paper D. Treasury Bills

A. Federal Funds Federal Funds are overnight loans of reserves from bank to bank. This is the shortest maturity for a debt obligation.

"The average daily rate charged by member banks for overnight loans of reserves" best describes the: A. Federal Funds Rate B. Broker Call Loan Rate C. Discount Rate D. Prime Rate

A. Federal Funds Rate Federal Funds are overnight loans of reserves from Fed member bank to member bank. Such loans are made at the Fed Funds Rate

All of the following may initiate repurchase agreements with government and agency securities as collateral EXCEPT: A. Federal Home Loans Banks B. Commercial Banks C. Federal Reserve Banks D. Government Securities Dealers

A. Federal Home Loans Banks Government securities dealers, Commercial banks, and the Federal Reserve through its open market trading desk, all initiate repurchase agreements. Federal Home Loan Banks sell bonds to obtain funding. With the funds, it buys mortgages from Savings and Loans, making a secondary mortgage market and injecting fresh funds into the S&L's.

Which statement is TRUE when the Federal Reserve enters into reverse repurchase agreements with U.S. Government securities dealers? A. The Federal Reserve is tightening credit B. The Federal Reserve must sell back the securities at a later date C. Banks are gaining reserves D. Banks have more money to loan out

A. The Federal Reserve is tightening credit In a reverse repurchase agreement, the Federal Reserve drains reserves from dealer banks, tightening credit. It does this by selling eligible securities to the banks, who buy them for cash. Thus the banks are drained of excess cash and credit availability is reduced. The agreement calls for the Fed to buy back the securities at a later date.

Which of the following money market instruments is eligible for Fed trading? A. a 10-year T-Note which matures within a year B. Negotiable CD C. Commercial Paper D. Banker's Acceptances

A. a 10-year T-Note which matures within a year The eligible securities are U.S. Government debt, Government Agency debt, and prime Banker's Acceptances. These are the securities that the Fed trades with the primary U.S. Government dealers (the major commercial banks and brokerage firms) to control credit availability in the economy. Thus, only the Treasury Note due to mature in 1 year is eligible for Fed trading. For the banker's acceptance listed to be eligible, it must be a "prime" BA (meaning one issued by a commercial bank that is a primary U.S. Government dealer).

Which statement is TRUE regarding overnight repurchase agreements? A. a dealer who needs cash will "sell" some of its inventory overnight to another dealer and is subject to interest rate risk B. A dealer who needs cash will "sell" some of its inventory overnight to another dealer and is not subject to interest rate risk C. A dealer who needs cash will "buy" some of its inventory overnight to another dealer and is subject to interest rate risk D. A dealer who needs cash will "buy" some of its inventory overnight to another dealer and is not subject to interest rate risk

A. a dealer who needs cash will "sell" some of its inventory overnight to another dealer and is subject to interest rate risk Overnight repurchase agreements are typically effected between government securities dealers. A dealer who needs cash will "sell" some of its inventory overnight to another dealer, with an agreement to buy the position back the next day. Repos do have interest rate risk, relating to the underlying securities. If interest rates rise, the underlying securities can decline in value. Since the maturity of the underlying securities can be of any length, long maturity values may decline more than the accrued interest to be earned on the agreement. When the borrower of the funds buys back the securities the next day at the pre-agreed price, it buys back securities at more than they are worth!

Which statement is FALSE regarding Brokered CDs? A. call features are not permitted on these instruments B. how the instrument is titled can determine whether FDIC insurance covers the investment C. there is no penalty for early withdrawal of principle D. these instruments can have maturities of up to 5 years

A. call features are not permitted on these instruments Brokered CDs, which can have lives of up to 5 years, can be callable. If interest rates drop after issuance, then the issuer can call in the CD, forcing the investor to reinvest the refunded monies at lower current market interest rates. Brokered CDs are sold by brokerage firms that are representing issuing banks. FDIC insurance of $250,000 maximum covers bank deposits - but only if the deposit is titled in the customer's name. If the CD is titled in the brokerage firm's name, then the insurance coverage would not apply! There is no penalty for early withdrawal of funds on brokered CDs - however the amount of interest earned will be pro-rated over the shorter life of the deposit. If interest rates rise after issuance, the value of the CD in the secondary market will fall (though not by much, since this is a short maturity).

Commercial Paper is a(n): A. exempt security that has a maximum maturity of 270 days B. exempt security that has a maximum maturity of 365 days C. non-exempt security that has a maximum maturity of 270 days D. non-exempt security that has a maximum maturity of 365 days

A. exempt security that has a maximum maturity of 270 days Commercial paper is an exempt security under the Securities Act of 1933. It does not have to be registered and sold with a prospectus as long as its maximum maturity is 270 days or less. This makes it much less expensive for an issuer to market the securities, since the regulatory burden is much lower

A Prime Banker's Acceptance is: A. negotiable and eligible for trading with the Federal Reserve B. negotiable but ineligible for trading with the Federal Reserve C. non-negotiable but eligible for trading with the Federal Reserve D. non-negotiable and ineligible for trading with the Federal Reserve

A. negotiable and eligible for trading with the Federal Reserve A Prime BA is of sufficient quality to be an eligible security for Fed trading. All BAs are negotiable (tradeable) and the securities trade on a yield basis (at a discount to face value).

To tighten credit, the Federal Reserve will: A. sell US government securities to bank dealers with an agreement to buy them back at a later date B. buy US government securities from bank dealers with an agreement to sell them back at a later date C. sell Foreign Government securities to bank dealers with an agreement to buy them back at a later date D. buy Foreign Government securities from bank dealers with an agreement to sell them back at a later date

A. sell US government securities to bank dealers with an agreement to buy them back at a later date To tighten credit, the Federal Reserve will sell government securities to bank dealers (draining the dealers of cash that could be lent out) with an agreement to buy them back at a later date. The sale is being "matched" to a future purchase and is used to temporarily drain cash from the credit markets. This is called a reverse repo or matched sale.

Which statement is TRUE regarding a Step-Down Certificate of Deposit? A. Initial payments are made at an interest rate that is above the prevailing prime rate but stepped down to the Treasury rate over time B. At a predetermined time, the interest rate is decreased to a rate that is at, or below, the market C. At a predetermined time, the maturity is decreased or "stepped down" D. At the issuers' discretion, the interest rate is decreased to a rate that is at, or below, the market

B. At a predetermined time, the interest rate is decreased to a rate that is at, or below, the market This question boils down to the fact that you don't get something for nothing. With a step-down CD, you start with a higher-than-market "teaser" rate. This is used as an incentive to the client to buy the CD. Then, at a predetermined date, the rate steps down to a lower rate, and this rate is usually a bit lower than the market rate at that time, so that, on average, the investor will still earn the market rate over the life of the CD.

Which of the following money market instruments trades at par plus accrued interest? A. Banker's Acceptances B. Jumbo Certificates of Deposit C. Commercial Paper D. Federal Funds

B. Jumbo Certificates of Deposit Negotiable certificates of deposit (over $100,000 face amount) are issued at par and mature at par plus accrued interest. If they are traded prior to maturity, they trade with the amount of accrued interest due. Banker's Acceptances, Commercial Paper, and Federal Funds are all original issue discount obligations.

All of the following securities can be purchased on margin EXCEPT: A. Treasury Bills B. Structured products C. Bankers' acceptances D. Commercial paper

B. Structured products Because money market instruments are "safe," they can be margined - meaning that the brokerage firm can lend money against these securities held as collateral for the loan. Government securities, agency securities, investment grade money market instruments, investment grade corporate bonds, and listed stocks are the marginable securities. As a general rule, structured products cannot be margined because they are not readily transferable

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 short term money market instrument issued by corporations is commercial paper.

All of the following statements are true regarding repurchase or reverse repurchase agreements EXCEPT: A. under a reverse repurchase agreement, the dealer is buying securities from the Federal Reserve B. if a repurchase agreement extends for longer than overnight, the agreement is known as a "Due Bill" repurchase agreement C. repurchase agreements are used by dealers to reduce the carrying cost of Government securities held in their inventory D. repurchase agreements are initiated by the Federal Reserve to loosen the money supply

B. if a repurchase agreement extends for longer than overnight, the agreement is known as a "Due Bill" repurchase agreement Under a "repurchase agreement," a government securities dealer sells some of its inventory to another dealer or to the Federal Reserve, with an agreement to buy back the securities at a later date for a pre-established price. In this manner, the dealer gets a temporary inflow of cash. Since government dealers finance their inventory, by reducing the amount of inventory on hand, they are reducing inventory finance charges when such an agreement is employed. Under a "reverse repurchase agreement," the dealer is buying securities from the Federal Reserve, draining the dealer of cash. Choice B is false. Under any repurchase agreement, the underlying government securities are the collateral. The collateral that underlies the agreement must be transferred from seller to buyer to support the transaction. In previous years, dealers could do repurchase agreements that were backed by a promise to deliver the underlying securities (a "due bill" for the securities) instead of making physical delivery. Due bill repurchase agreements are no longer permitted.

Which statement is TRUE about commercial paper? A. the most common maturity is 10 days B. the most common maturity is 30 days C. the maximum maturity is 90 days D. the maximum maturity is 365 days

B. the most common maturity is 30 days The most common maturity for commercial paper is 30 days. The maximum maturity is 270 days.

Which statement is FALSE regarding Brokered CDs? A. these instruments have a limited trading market B. there is a penalty for early withdrawal C. there can be a loss of principle upon an early withdrawal D. there is no FDIC insurance on these products

B. there is a penalty for early withdrawal If interest rates rise after issuance, the value of the CD in the secondary market will fall (though not by much, since this is a short maturity). There is no penalty for early withdrawal of funds on brokered CDs - however the amount of interest earned will be pro-rated over the shorter life of the deposit. Most of these instruments are held to maturity, so the secondary market is very limited. Brokered CDs qualify for FDIC insurance as long as the CD is titled in the customer's name.

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 Depository Receipts Money market instruments are original issue discount obligations quoted on a yield basis that are priced at a discount to par (with the exception of negotiable certificate of deposit that are priced at par plus accrued interest). The discount from par is the interest earned. American Depositary Receipts are not a money market instrument. They are essentially shares of a foreign company, traded domestically similar to equity securities. They are dollar price quoted in 1/8ths.

What money market instrument is used to finance international trade? A. T-Bill B. Repo C. BA D. CD

C. BA The money market instrument that is used to finance imports and exports, usually from 3rd world countries, is a BA - a Banker's Acceptance. It is similar to a post-dated check on a bank, that is payable when the goods arrive (usually by boat about 2-3 months after being loaded) and are inspected. It is payable from the importer to the exporter, and the exporter who receives the BA when the goods are loaded on the boat can "cash it" at a discount to face by selling it in the market. It will then trade until the payment date. Also, BAs are virtually obsolete, but they are still tested!

Which of the following securities is NOT eligible for Fed trading? A. Treasury Bonds B. Treasury Bills C. Commercial Paper D. Primer Banker's Acceptances

C. Commercial Paper Commercial paper, which is issued by corporations, is not eligible for Fed trading. The eligible securities are U.S. Government debt, Government Agency debt, and prime Banker's Acceptances. These are the securities that the Fed trades with the primary U.S. Government dealers (the major commercial banks and brokerage firms) to control credit availability in the economy.

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. US dollar deposits held in foreign branches of US banks or foreign banks Eurodollars are U.S. dollar deposits held in foreign branches of U.S. banks or foreign banks. Eurodollar deposits are used to finance international trade.

If the Federal Reserve enters into repurchase agreements with member banks, the Federal Reserve is: A. tightening credit availability and the Federal Funds rate is likely to go down B. tightening credit availability and the Federal Funds rate is likely to go up C. loosening credit availability and the Federal Funds rate is likely to go down D. loosening credit availability and the Federal Funds Rate is likely to go up

C. loosening credit availability and the Federal Funds rate is likely to go down The Federal Funds rate is the interest rate charged between Federal Reserve member banks on overnight loans. The Federal Reserve can influence this rate through open market operations. If the Fed enters into repurchase agreements with member banks, it injects cash into the banks, which tends to drive the Fed Funds rate down (because there is more cash available to lend). Conversely, if the Fed enters into reverse repurchase agreements with member banks, it drains the member banks of reserves, tending to drive up the Fed Funds rate (since there is less cash available to lend).

Banker's Acceptances are: A. money market instruments used to finance emerging growth companies B. capital market instruments used to finance emerging growth companies C. money market instruments used to finance emerging country imports and exports D. capital market instruments used to finance emerging country imports and exports

C. money market instruments used to finance emerging country imports and exports Bankers Acceptances are a money market instrument used to finance imports and exports with "Third World" countries. They are an exempt security under the Securities Act of 1933 and can be sold without a prospectus.

Which statement is TRUE regarding a "step-down" certificate of deposit? A. the interest payment is fixed B. the principle payment may be reduced C. the interest payment may be reduced D. the security may be "stepped down" to another smaller bank at the issuer's discretion

C. the interest payment may be reduced A "step-down" CD is one that starts with a high introductory "teaser" interest rate. Then the rate "steps down" to the market rate of interest at specified intervals. Regardless, at maturity, the CD is redeemed at par.

Which statement is TRUE regarding repurchase agreements effected between the public and government securities dealers? A. the public customer is the seller of the government securities B. the dealer is losing liquidity C. the public customer is the lender of monies D. the dealer is obligated to sell the securities back at a later date

C. the public customer is the lender of monies When a government dealer enters into a repurchase agreement with the public, the dealer is "getting liquid" by selling government securities to the customer, with an agreement to buy them back at a later date. Thus, the customer is lender of cash to the government dealer.

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 Because money market instruments are "safe," they can be margined - meaning that the brokerage firm can lend money against these securities held as collateral for the loan. Government securities, agency securities, investment grade money market instruments, investment grade corporate bonds, and listed stocks are the marginable securities.

Federal Funds are overnight loans of reserves from: A, Federal Reserve to broker-dealers B. broker-dealers to Federal Reserve C. Commercial bank to broker-dealer D. Commercial bank to commercial bank

D. Commercial bank to commercial bank Federal Funds are overnight loans of reserves from commercial bank to commercial bank. The "effective" rate is an average rate for selected banks across the United States. Thrifts cannot loan Federal Funds, nor can all primary dealers, since many of these firms are broker-dealers, not commercial banks.

What is the shortest term money market instrument? A. Commercial paper B. Banker's Acceptance C. Negotiable Certificate of Deposit D. Federal Funds

D. Federal Funds Loans of Fed Funds are made "overnight," so the duration of the loan is 1 day. This, along with an overnight repurchase agreement, is the shortest term money market instrument.

The interest rate charged on Eurodollar loans between major international banks is: A. Federal Funds rate B. Prime Rate C. Eurodollar Rate D. LIBOR

D. LIBOR "LIBOR" stands for the London Interbank Offered Rate which is the rate on which most Eurodollar loans are based and is the European equivalent of the U.S. "Fed Funds" rate. One of the differences between the two rates is that Fed Funds are loaned overnight - Euros can be loaned for longer periods.

Long-term negotiable certificates of deposit are subject to all of the following risks EXCEPT: A. Interest Rate Risk B. Call risk C. Reinvestment Risk D. Prepayment Risk

D. Prepayment Risk Long-term negotiable Certificates of Deposit (over 1 year maturity) are subject to interest rate risk, as is any fixed rate debt instrument. If market rates go up, the market value of the CD will decline. Long-term CDs can be callable, so they are subject to call risk in a declining interest rate environment. Interest is paid semi-annually and, again in a declining interest rate environment, if these payments are reinvested in new CDs, the rate of return on reinvested monies will decline - thus they have reinvestment risk. Finally, the secondary market for these securities is limited - so they can have marketability risk. Prepayment risk is typically associated with mortgaged-backed securities such as Ginnie-Mae pass-throughs

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 Securities that are eligible to be traded by the Federal Reserve are those backed by the guarantee of the U.S. Government as well as certain agency obligations, and Prime Banker's Acceptances. Trades in eligible securities settle through the Federal Reserve system, and therefore settle in "Fed Funds." Corporate securities such as commercial paper are not eligible for trading and settling through the Federal Reserve system; trades of these securities settle in "clearing house" funds.

The purchase price of each of the following can be negotiated EXCEPT: A. Treasury Bill B Certificate of Deposit C. Bankers' Acceptance D. US Savings Bonds

D. US Savings Bonds U.S. Savings Bonds are not negotiable. All of the other securities listed trade and thus, are all "negotiable."

In order to determine whether a Brokered CD being recommended to a customer will qualify for FDIC insurance, the registered representative must know all of the following EXCEPT: A. name of the bank issuing the CD B. ownership title of the CD C. face amount of the CD D. call dates of the CD

D. call dates of the CD Brokered CDs are sold by brokerage firms that are representing issuing banks. FDIC insurance of $250,000 maximum covers bank deposits - but only if the deposit is titled in the customer's name. If the CD is titled in the brokerage firm's name, then the insurance coverage would not apply! For example, if a customer wishes to buy a $75,000 CD, as long as the customer does not have deposits at the issuing bank in excess of $175,000 (thus not exceeding the $250,000 maximum FDIC coverage) and the CD is titled in the customer's name, then the CD would be FDIC insured. Therefore, the bank name must be known because the customer gets only one coverage at that bank. The CD must be titled in the customer's name for the FDIC coverage to apply. Since coverage is a maximum of $250,000 per customer at each bank, the amount of the CD must be aggregated with any other customer deposits held at the bank to determine if the FDIC limit is exceeded. Call features are irrelevant to FDIC coverage.

Which statement is TRUE about commercial paper? A. commercial paper has a maximum maturity of 90 days B. commercial paper can only be issued by commercial banks C. commercial paper is quoted on a dollar price basis D. commercial paper is quoted on a yield basis

D. commercial paper is quoted on a yield basis Commercial paper is a short term corporate IOU with a maximum maturity of 270 days (if it was longer, it would have to be registered with the SEC). Commercial paper is quoted on a yield basis (as is all money market debt).

Commercial paper with a maturity of 270 days or less: A. must be registered under the Securities Act of 1933 B. must be registered under the Securities Act of 1934 C. must have a trust indenture D. is an exempt security

D. is an exempt security Commercial paper is an exempt security under the Securities Act of 1933. It does not have to be registered and sold with a prospectus if its maturity is 270 days or less. This makes it much less expensive for an issuer to market the securities, since the regulatory burden is much lower.