FI 301 Test 2 Chapter 6

The minimum denomination of commercial paper is

$100,000.

If economic conditions cause investors to sell stocks because they want to invest in safer securities with much liquidity, this should cause a ____ demand for money market securities, which would place ____ pressure on the yields of money market securities.

None of the above

Which of the following is sometimes issued in the primary market by nonfinancial firms to borrow funds?

commercial paper

Which of the following is not a money market security?

common stock

Large corporations typically make ____ bids for T-bills so they can purchase larger amounts.

competitive

Commercial paper is subject to

credit & interest rate risk

Eurodollar deposits

are not subject to reserve requirements.

Credit guarantees for commercial paper:

are only as good as the credit of the guarantor.

T-bills and commercial paper are sold

at a discount from par value

Treasury bills are sold through ____ when initially issued.

auction

hich money market transaction is most likely to represent a loan from one commercial bank to another?

federal funds

The rate at which depository institutions effectively lend or borrow funds from each other is the ____.

federal funds rate

Treasury bills

have an active secondary market.

The yield on NCDs is ____ the yield of Treasury bills of the same maturity. The difference between their yields would be especially large during a ____ period.

higher than; recessionary

The yield on commercial paper is ____ the yield of Treasury bills of the same maturity. The difference between their yields would be especially large during a ____ period.

higher than; recessionary

When a firm sells its commercial paper at a ____ price than projected, its cost of raising funds will be ____ than what it initially anticipated.

higher; higher

The effective yield of a foreign money market security is ____ when the foreign currency strengthens against the dollar.

increased

The so-called "flight to quality" causes the risk differential between risky and risk-free securities to be

increased.

Commercial paper is

placed either directly or with the help of commercial paper dealers.

The effective yield of a foreign money market security is ____ when the foreign currency weakens against the dollar.

reduced

The federal funds market allows depository institutions to borrow

short-term funds from each other.

At any given time, the yield on commercial paper is ____ the yield on a T-bill with the same maturity.

slightly higher than

The money market interest rate paid by corporations that borrow short-term funds in a particular country is typically:

slightly higher than the rate paid by that country's government

A newly issued T-bill with a $10,000 par value sells for $9,750, and has a 90-day maturity. What is the discount?

10.00 percent

A firm plans to issue 30-day commercial paper for $9,900,000. Par value is $10,000,000. What is the firm's cost of borrowing?

12.12 percent

Freeman Corp., a large corporation, plans to issue 45-day commercial paper with a par value of $3,000,000. Freeman expects to sell the commercial paper for $2,947,000. Freeman's annualized cost of borrowing is estimated to be ____ percent.

14.39

Robbins Corp. frequently invests excess funds in the Mexican money market. One year ago, Robbins invested in a one-year Mexican money market security that provided a yield of 25 percent. At the end of the year, when Robbins converted the Mexican pesos to dollars, the peso had depreciated from $.12 to $.11. What is the effective yield earned by Robbins?

14.59 percent

4. Jarrod King, a private investor, purchases a Treasury bill with a $10,000 par value for $9,645. One hundred days later, Jarrod sells the T-bill for $9,719. What is Jarrod's expected annualized yield from this transaction?

2.80 percent

Commercial paper has a maximum maturity of ____ days.

270

An investor initially purchased securities at a price of $9,923,418, with an agreement to sell them back at a price of $10,000,000 at the end of a 90-day period. The repo rate is ____ percent.

3.10

You purchase a six-month (182-day) T-bill with a $10,000 par value for $9,800. The Treasury bill discount is ____ percent.

3.96

A private investor purchases a six-month (182-day) T-bill with a $10,000 par value for $9,800. If she holds the Treasury bill to maturity, her annualized yield is ____ percent.

4.09

An investor purchased an NCD a year ago in the secondary market for $980,000. She redeems it today and receives $1,000,000. She also receives interest of $30,000. The investor's annualized yield on this investment is

5.10 percent.

When an investor purchases a six-month (182-day) T-bill with a $10,000 par value for $9,700, the Treasury bill discount is ____ percent.

5.93

An investor, purchases a six-month (182-day) T-bill with a $10,000 par value for $9,700. If the Treasury bill is held to maturity, the annualized yield is ____ percent.

6.20

Assume investors require a 5 percent annualized return on a six-month T-bill with a par value of $10,000. The price investors would be willing to pay is $____.

9,756

A repurchase agreement calls for an investor to buy securities for $4,925,000 and sell them back in 60 days for $5,000,000. What is the yield?

9.14 percent

An investor buys commercial paper with a 60-day maturity for $985,000. Par value is $1,000,000, and the investor holds it to maturity. What is the annualized yield?

9.14 percent

Which of the following is not a money market instrument?

All of the above are money market instruments.

A ____ is not a money market security.

Bond

____ are the most active participants in the federal funds market.

Commercial banks

A major drawback to investing in Treasury bills is that they cannot easily be liquidated.

False

At each T-bill auction, the prices paid for three-month T-bills are significantly lower than the prices paid for six-month bills

False

Because money market securities have a short-term maturity and typically cannot be sold easily, they provide investors with a low degree of liquidity.

False

Money market securities are must have a maturity of three months or less.

False

T-bills must offer a premium above the negotiable certificate of deposit (NCD) to compensate for less liquidity and safety.

False

There is no limit to the amount of T-bills that can be purchased by noncompetitive bidders in a T-bill auction.

False

Which of the following statements is incorrect with respect to the federal funds rate?

It is not influenced by the supply of and demand for funds in the federal funds market.

An international interbank market facilitates the transfer of funds from banks with excess funds to those with deficient funds.

TRUE

Which of the following is true of money market instruments?

Their yields are highly correlated over time.

Which of the following securities is most likely to be used in a repo transaction?

Treasury bill

____ is/are sold at an auction at a discount from par value.

Treasury bills

. Most repo transactions use government securities.

True

A line of credit provided by a commercial bank gives a company the right (but not the obligation) to borrow a specified maximum amount of funds over a specified period of time.

True

During periods of uncertainty about the economy, there is a shift from risky money market securities to Treasury securities.

True

Exporters can hold a banker's acceptance until the date at which payment is to be made, but they frequently sell the acceptance before then at a discount to obtain cash immediately

True

In general, the money markets are widely perceived to be efficient in the sense that the prices reflect all available public information

True

Junk commercial paper is commercial paper that is not rated or is rated low.

True

Money market securities are issued in the primary market through a telecommunications network by the Treasury, corporations, and financial intermediaries that wish to obtain short-term financing.

True

Money market security values are less sensitive to interest rate movements than bonds.

True

Money markets are used to facilitate the transfer of short-term funds from individuals, corporations, or governments with excess funds to those with deficient funds.True

True

T-bills do not offer coupon payments but are sold at a discount from par value.

True

The interest rate charged for a short-term loan from a bank to a corporation is referred to as the London Interbank Offer Rate (LIBOR).

True

When a bank guarantees a future payment to a firm, the financial instrument used is called

a banker's acceptance.

The LIBOR scandal in 2012 involved:

banks falsely reporting the interest rates they offered in the interbank market.

The price that competitive and noncompetitive bidders will pay at a Treasury bill auction is the

lowest price entered by a competitive bidder

Securities with maturities of one year or less are classified as

money market instruments.

At a given point in time, the actual price paid for a three-month Treasury bill is

more than the price paid for a six-month Treasury bill.

The rate on Eurodollar floating-rate CDs is based on

the London Interbank Offer Rate.

LIBOR is

the interest rate charged on international interbank loans.

Ignoring transaction costs, the cost of borrowing with commercial paper is equal to:

the yield earned by investors holding the paper until maturity.