Chapter 11: The Money Markets

Suppose that you purchase a 182-day Treasury bill for $9,850 that is worth $10,000 when it matures. The security's discount rate if held to maturity is about

2.97

The usual maturity range for commercial paper is A) 1 to 270 days. B) 1 to 15 days. C) 4, 13, and 26 weeks. D) 1 to 7 days.

A) 1 to 270 days.

Why do corporations and the U.S. government sometimes need to get their hands on funds quickly? A) Cash inflows and outflows are rarely synchronized. B) Poor financial planning puts many corporations and government entities in situations where they cannot pay currency bills. C) The timing of many expenses is difficult to estimate. D) Most of their funds are held in highly illiquid investment.

A) Cash inflows and outflows are rarely synchronized.

As shown in the text, the relationship between the Prime rate and the return on commercial paper can be described best by which of the following statements? A) The Prime rate is usually several percentage points higher than the return on commercial paper, and both move up/down in a similar fashion. B) The Prime rate has no relationship with the return on commercial paper. C) The Prime rate and the return on commercial paper are nearly the same, with the return on commercial paper slightly higher. D) Because commercial paper is riskier, returns on commercial paper always exceed the Prime rate, usually by 2% or so.

A) The Prime rate is usually several percentage points higher than the return on commercial paper, and both move up/down in a similar fashion.

Money market instruments issued by the U.S. Treasury are called A) Treasury bills. B) Treasury notes. C) Treasury bonds. D) Treasury strips.

A) Treasury bills.

Finance companies raise funds in the money market by selling A) commercial paper. B) federal funds. C) negotiable certificates of deposit. D) Eurodollars.

A) commercial paper.

Finance companies play a unique role in money markets by A) giving consumers indirect access to money markets. B) combining consumers' investments to purchase money market securities on their behalf. C) borrowing in capital markets to finance purchases of money market securities. D) assisting the government in its sales of U.S. Treasury securities.

A) giving consumers indirect access to money markets.

Unlike most money market securities, commercial paper A) is not generally traded in a secondary market. B) usually has a term to maturity that is longer than a year. C) is not popular with most money market investors because of the high default risk. D) all of the above. E) only A and B of the above.

A) is not generally traded in a secondary market.

The most influential participant(s) in the U.S. money market A) is the Federal Reserve. B) is the U.S. Treasury Department. C) are the large money center banks. D) are the investment banks that underwrite securities.

A) is the Federal Reserve.

Asset-backed commercial paper differs from conventional commercial paper in that A) it is backed (secured) by some bundle of assets. B) its maturity usually extends well beyond 1 year. C) both A and B of the above. D) neither A nor B of the above.

A) it is backed (secured) by some bundle of assets.

In 1976 the Treasury switched the entire marketable portion of the federal debt over to book entry securities, which means that A) ownership of Treasury securities is now only stored in a computer system. B) interest paid on Treasury securities is better tracked for tax purposes. C) engraves Treasury certificates are now stored in the Treasury's book vault. D) the accounting for Treasury securities is now handled by government accountants using standard accounting books.

A) ownership of Treasury securities is now only stored in a computer system.

Treasury bills do not A) pay interest. B) have a maturity date. C) have a face amount. D) have an active secondary market.

A) pay interest.

In a direct placement A) the issuer bypasses the dealer and sells indirectly to the end investor. B) the dealer sells directly to the end investor. C) the issuer bypasses the dealer and sells directly to the end investor. D) none of the above.

A) the issuer bypasses the dealer and sells indirectly to the end investor.

In situations where asymmetric information problems are not severe, A) the money markets have a distinct cost advantage over banks in providing short-term funds. B) the money markets have a distinct cost advantage over banks in providing long-term funds. C) banks have a distinct cost advantage over the money markets in providing short-term funds. D) the money markets cannot allocate short-term funds as efficiently as banks can.

A) the money markets have a distinct cost advantage over banks in providing short-term funds.

The main role of investment companies in the money market is to A) trade on behalf of commercial accounts. B) mediate the symmetric information problem between server-lender and borrower-spenders. C) both A and B of the above. D) neither A nor B of the above.

A) trade on behalf of commercial accounts.

Commercial banks are large holders of ________ and are the major issuer of ________. A) negotiable certificates of deposit; U.S. government securities B) U.S. government securities; negotiable certificates of deposit C) commercial paper; Eurodollars D) Eurodollars; commercial paper

B) U.S. government securities; negotiable certificates of deposit

If the Fed wants to lower the federal funds interest rate, it will ________ the banking system by ________ securities. A) add reserves to; selling B) add reserves to; buying C) remove reserves from; selling D) remove reserves from; buying

B) add reserves to; buying

Among the following money market securities, which one has the poorest secondary market? A) repurchase agreements B) commercial paper C) banker's acceptances D) Treasury bills

B) commercial paper

The Fed is an active participant in money markets mainly because of its responsibility to A) lower borrowing costs to encourage capital investment. B) control the money supply. C) increase the interest income of retirees holding money market instruments. D) assist the Securities and Exchange Commission in regulating the behavior of other money market participants.

B) control the money supply.

The advantage of mutual funds is that they A) require no cash up front. B) give investors with relatively small amounts of cash to invest access to large-denomination securities. C) always yield the highest returns. D) both A and B of the above.

B) give investors with relatively small amounts of cash to invest access to large-denomination securities.

Two important characteristics of any financial market are flexibility and A) risk. B) innovation. C) tolerance. D) capital.

B) innovation.

The primary function of large diversified brokerage firms in the money market is to A) sell money market securities to the Federal Reserve for its open market operations. B) make a market for money market securities by maintaining an inventory from which to buy or sell. C) buy money market securities from corporations that need liquidity. D) buy T-bills from the U.S. Treasury Department.

B) make a market for money market securities by maintaining an inventory from which to buy or sell.

Money market securities have all the following characteristics except they are not A) short term. B) money. C) low risk. D) very liquid.

B) money.

If your competitive bid for a Treasury bill is successful, then you will A) certainly pay less than if you had submitted a noncompetitive bid. B) probably pay more than if you had submitted a noncompetitive bid. C) pay the average of prices offered in other successful competitive bids. D) pay the same as other successful competitive bidders.

B) probably pay more than if you had submitted a noncompetitive bid.

If the Fed wants to raise the federal funds interest rate, it will ________ securities to ________ the banking system. A) sell; add reserves to B) sell; remove reserves from C) buy; add reserves to D) buy; remove reserves from

B) sell; remove reserves from

Suppose that you purchase a 182-day Treasury bill for $9,850 that is worth $10,000 when it matures. The security's annualized yield if held to maturity is about A) 1.5%. B) 2%. C) 3%. D) 6%.

C) 3%.

Which of the following money market instruments has the lowest rate? A) The prime rate B) Eurodollars C) 4-week Treasury bills D) 1-month CDs

C) 4-week Treasury bills

Suppose that you purchase a 91-day Treasury bill for $9,850 that is worth $10,000 when it matures. The security's annualized yield if held to maturity is about A) 4 percent. B) 5 percent. C) 6 percent. D) 7 percent.

C) 6 percent.

The market for Treasury bills is A) deep. B) liquid. C) A and B are correct. D) None of the above is correct.

C) A and B are correct.

As shown in the text, the relationship between T-bill interest rates and the Federal Funds rate can be described best by which of the following statements? A) The Federal Funds rate is usually several percentage points higher than T-Bills rates. B) T-bill rates have no relationship with the Federal Funds rate. C) T-bills rates and the Federal Funds rate are nearly the same, with the Federal Funds rate slightly higher. D) T-bill rates are, by definition, always higher the the Federal Funds rate.

C) T-bills rates and the Federal Funds rate are nearly the same, with the Federal Funds rate slightly higher.

As shown in the text, the relationship between T-bill interest rates and the U.S. inflation rate can be described best by which of the following statements? A) Inflation rates often exceed T-bill rates, but not always. B) T-bill rates have no relationship with the U.S. inflation rate. C) T-bills rates are typically slightly above the inflation rate, but the inflation rate sometimes is higher. D) T-bill rates are, by definition, always higher the the U.S. inflation rate.

C) T-bills rates are typically slightly above the inflation rate, but the inflation rate sometimes is higher.

Which of the following is the largest borrower in the money markets? A) Commercial banks B) Large corporations C) The U.S. Treasury D) U.S. firms engaged in foreign trade

C) The U.S. Treasury

The Federal Reserve can influence the federal funds interest rate by buying securities, which ________ reserves, thereby ________ the federal funds rate. A) adds; raising B) removes; lowering C) adds; lowering D) removes; raising

C) adds; lowering

Money market transactions A) do not take place in any one particular location or building. B) are usually arranged purchases and sales between participants over the phone by traders and completed electronically. C) are both A and B of the above. D) are none the the above.

C) are both A and B of the above.

Activity in money markets increased significantly in the late 1970s and early 1980s because of A) rising short-term interest rates. B) regulations that limited what banks could pay for deposits. C) both A and B of the above. D) neither A nor B of the above.

C) both A and B of the above.

When inflation rose in the late 1970s, A) consumers moved money out of money market mutual funds because their returns did not keep pace with inflation. B) banks solidified their advantage over money markets by offering higher deposit rates. C) brokerage houses introduced highly popular money market mutual funds, which drew significant amounts of money out of bank deposits. D) consumers were unable to take advantage of higher rates in money markets because of the requirement of large transaction sizes.

C) brokerage houses introduced highly popular money market mutual funds, which drew significant amounts of money out of bank deposits.

The Fed can lower the federal funds interest rate by ________ securities, thereby ________ reserves. A) selling; adding B) selling; lowering C) buying; adding D) buying; lowering

C) buying; adding

The volume of outstanding commercial paper peaked around 2007, just prior to the 2007-2009 Financial Crisis, with about ________ outstanding. A) $500 billion B) $1.0 trillion C) $1.5 trillion D) $2 trillion

D) $2 trillion

The usual maturity range for fed funds is A) 1 to 270 days. B) 1 to 15 days. C) 4, 13, and 26 weeks. D) 1 to 7 days.

D) 1 to 7 days.

Which of the following are true statements about participants in the money markets? A) Large banks participate in the money markets by selling large negotiable CDs. B) The U.S. government and corporations borrow in the money markets because cash inflows and outflows are rarely synchronized. C) The Federal Reserve is the single most influential participant in the U.S. money market. D) All of the above are true. E) Only A and B of the above are true.

D) All of the above are true.

Which of the following statements about money market securities are true? A) The interest rates on all money market instruments move very closely together over time. B) The secondary market for Treasury bills is extensive and well developed. C) There is no well-developed secondary market for commercial paper. D) All of the above are true. E) Only A and B of the above are true.

D) All of the above are true.

Which of the following statements about the money markets are true? A) Most money market securities do not pay interest. Instead, the investor pays less for the security than it will be worth when it matures. B) Pension funds invest a portion of their assets in the money market to have sufficient liquidity to meet their obligations. C) Unlike most participants in the money market, the U.S. Treasury Department is always a demander of money market funds and never a supplier. D) All of the above are true. E) Only A and B of the above are true.

D) All of the above are true.

What is the primary role of individuals as participants in the money market? A) Individuals do not participate in the money market. B) Many individuals issue money market instruments to lend excess cash. C) Individuals often use money market instruments to finance home and auto purchases. D) Individuals purchase money market instruments via money market mutual funds.

D) Individuals purchase money market instruments via money market mutual funds.

The banking industry A) should have an efficiency advantage in gathering information that would eliminate the need for the money markets. B) exists primarily to mediate the asymmetric information problem between saver-lenders and borrower-spenders. C) is subject to more regulations and governmental costs than the money markets. D) all of the above are true. E) only A and B of the above are true.

D) all of the above are true.

A negotiable certificate of deposit A) is a term security because it has a specified maturity date. B) is a bearer instrument, meaning whoever holds the certificate at maturity receives the principal and interest. C) can be bought and sold until maturity. D) all of the above. E) only A and B of the above.

D) all of the above.

Commercial paper securities A) are issued only by the largest and most creditworthy corporations, as they are unsecured. B) carry an interest rate that varies according to the firm's level of risk. C) never have a term to maturity that exceeds 270 days. D) all of the above. E) only A and B of the above.

D) all of the above.

Federal funds are A) usually overnight investments. B) borrowed by banks that have a deficit of reserves. C) lent by banks that have an excess of reserves. D) all of the above. E) only A and B of the above.

D) all of the above.

Repos are A) usually low-risk loans. B) usually collateralized with Treasury securities. C) low interest rate loans. D) all of the above. E) only A and B of the above.

D) all of the above.

Banker's acceptances A) can be bought and sold until they mature. B) are issued only by large money center banks. C) carry low interest rates because of the very low default risk. D) are all of the above. E) are only A and B of the above.

D) are all of the above.

Federal funds A) are short-term funds transferred between financial institutions, usually for a period of one day. B) actually have nothing to do with the federal government. C) provide banks with an immediate infusion of reserves. D) are all of the above. E) are only A and B of the above.

D) are all of the above.

Money market instruments A) are usually sold in large denominations. B) have low default risk. C) mature in one year or less. D) are characterized by all of the above. E) are characterized by only A and B of the above.

D) are characterized by all of the above.

Government securities dealers frequently engage in repos to A) manage liquidity. B) take advantage of anticipated changes in interest rates. C) lend or borrow for a day or two with what is essentially a collateralized loan. D) do all of the above. E) do only A and B of the above.

D) do all of the above.

The Fed can influence the federal funds interest rate by adjusting the level of reserves available to banks. The Fed can A) lower the federal funds interest rate by adding reserves. B) raise the federal funds interest rate by removing reserves. C) remove reserves by selling securities. D) do all of the above. E) do only A and B of the above.

D) do all of the above.

If your noncompetitive bid for a Treasury bill is successful, then you will A) certainly pay less than if you had submitted a competitive bid. B) certainly pay more than if you had submitted a competitive bid. C) pay the average of prices offered in other noncompetitive bids. D) pay the same as other successful noncompetitive bidders.

D) pay the same as other successful noncompetitive bidders.

Which of the following statements about the money markets are true? A) Not all commercial banks deal for their customers in the secondary market. B) Money markets are used extensively by businesses both to warehouse surplus funds and to raise short-term funds. C) The single most influential participant in the U.S. money market is the U.S. Treasury Department. D) All of the above are true. E) Only A and B of the above are true.

E) Only A and B of the above are true.

Which of the following statements are true of Treasury bills? A) The market for Treasury bills is extremely deep and liquid. B) Occasionally, investors find that earnings on T-bills do not compensate them for changes in purchasing power due to inflation. C) By volume, most Treasury bills are sold to individuals who submit noncompetitive bids. D) All of the above are true. E) Only A and B of the above are true.

E) Only A and B of the above are true.

Eurodollars A) are time deposits with fixed maturities and are, therefore, somewhat illiquid. B) may offer the borrower a lower interest rate than can be received in the domestic market. C) are limited to London banks. D) are all of the above. E) are only A and B of the above.

E) are only A and B of the above.

Negotiable certificates of deposit A) are bearer instruments because their holders earn the interest and principal at maturity. B) typically have a maturity of one to four months. C) are usually denominated at $100,000. D) are all of the above. E) are only A and B of the above.

E) are only A and B of the above.

Brokerage firms that offered money market security accounts in the 1970s had a cost advantage over banks in attracting funds because the brokerage firms A) were not subject to deposit reserve requirements. B) were not subject to the deposit interest rate ceilings. C) were not limited in how much they could borrow from depositors. D) had the advantage of all the above. E) had the advantage of only A and B of the above.

E) had the advantage of only A and B of the above.

A banker's acceptance is A) used to finance goods that have not yet been transferred from the seller to the buyer. B) an order to pay a specified amount of money to the bearer on a given date. C) a relatively new money market security that arose in the 1960s as international trade expanded. D) all of the above. E) only A and B of the above.

E) only A and B of the above.

In general, money market instruments are low-risk, high-yield securities

FALSE

Money markets are referred to as retail markets because small individual investors are the primary buyers of money market securities

FALSE

Interest rates on banker's acceptances are low because the risk of default is very low

TRUE

Money market securities are short-term instruments with an original maturity of less than one year

TRUE

Money market securities include Treasury bills, commercial paper, federal funds, repurchase agreements, negotiable certificates of deposit, banker's acceptances, and Eurodollars

TRUE

Money markets are used extensively by businesses both to warehouse surplus funds and to raise short-term funds

TRUE

The main purpose of federal funds is to provide banks with an immediate infusion of reserves should they be short

TRUE

The term money market is actually a misnomer, because liquid securities are traded in these markets rather than money

TRUE