Financial Markets Chapter 6 Review

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. The effective yield earned by Robbins is ________ percent.

14.59

Jarrod Johnston, a private investor, purchases a Treasury bill with a $10,000 par value for $9,645. 100 days later, Jarrod sells the T-bill for $9,719. What is Jarrod's annualized yield from this transaction?

2.80%

Bill Yates, a private 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

Bill Yates, a private investor, purchases a six-month (182-day) T-bill with a $10,000 par value for $9,700. If Bill Yates holds the Treasury bill to maturity, his annualized yield is ________ percent.

6.20

Bullock Corp. purchases certain securities for $4,921,349, with an agreement to sell them back at a price of $4,950,000 at the end of a 30-day period. The repo rate is ________ percent.

6.99

Buser Corp. purchases certain securities for $4,921,349, with an agreement to sell them back at a price of $4,950,000 at the end of a 30-day period. The repo rate is ____ percent.

6.99

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

Answers [higher; lower] and [lower; higher] are correct.

____ is a short-term debt instrument issued only by well-known, creditworthy firms and is normally issued to provide liquidity or finance a firm's investment in inventory and accounts receivable.

Commercial paper

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

It is the rate charged by the Fed on loans it extends to financial institutions.

The rate charged for a loan from one bank to another in the international interbank market is the

LIBOR

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

Treasury bill

________ are the most popular money market instrument because of their marketability, safety, and short-term maturity.

Treasury bills

If an investor buys a T-bill with a 90-day maturity and $50,000 par value for $48,500 and holds it to maturity, what is the annualized yield?

about 12.5 percent

An investor buys a T-bill with 180 days to maturity and $250,000 par value for $242,000. He plans to sell it after 60 days, and forecasts a selling price of $247,000 at that time. What is the annualized yield based on this expectation?

about 12.6 percent

Investors in fixed-rate CDs are ________ affected by rising market interest rates, while issuers of these CDs are ________ affected by decreasing rates.

adversely; adversely

Which of the following instruments has a highly active secondary market?

banker's acceptances

The LIBOR scandal in 2012 involved

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

The rate at which depository institutions borrow from each other is the ________ rate.

federal funds

When firms sell commercial paper at a ____ price than they projected, their cost of raising funds is ____ than projected.

higher; lower

Which of the following securities probably has the highest degree of default risk?

negotiable certificate of deposit

If an investor purchases a T-bill and sells it prior to maturity, his return will be based on

the difference between the price for which the bill was sold in the secondary market and the purchase price.

An increase in inflation could put _______ pressure on interest rates and _______ pressure on prices of money market securities.

upward; downward

Money market instruments are securities

with maturities of one year or less.