Chapter 15 Study Guide

The money market is a market of IOUs, mostly maturing within​

12 months

Suppose you buy a 120-day T-bill with a face value of $10,000 at a price of $9,900. Your discount rate yield (DRY) would be

3.0%.

Suppose you buy a 120-day T-bill with a face value of $10,000 at price of $9,900. Your investment return yield (IRY) would be

3.0%.

In both competitive bids and noncompetitive bids, no one bidder is allowed to purchase more than _____ of any one issue.

35%

Suppose you buy a 60-day T-bill with a face value of $1,000 at a price of $990. Your investment return yield (IRY) would be

6.1%.

A computer manufacturer in the United States does a lot of business with customers in China. Thus, it probably makes sense for the computer manufacturer to open a __________ account at its local bank.​

Eurodollar

XYZ Corporation is trying to decide whether it should buy money market instruments or leave its funds on deposit at a commercial bank. Which of the following is an advantage of buying money market instruments over leaving funds on deposit at a commercial bank that XYZ should be aware of? (A) ​Money market instruments offer a higher yield than leaving funds on deposit at a commercial bank. (B) ​Money market instruments are safer than leaving funds on deposit at a commercial bank. (C) ​Money market instruments are more liquid than funds on deposit at a commercial bank. (D) ​Money market instruments involve a financial middleman.

Money market instruments offer a higher yield than leaving funds on deposit at a commercial bank.

Which of the following is NOT a supplier of financial instruments in the primary market?

The Federal Reserve

Which of the following statements about negotiable certificates of deposit (CDs) is true? (A) ​Negotiable CDs are considered a liquid bank account. (B) To open a negotiable CD, savers must have large amounts of savings, usually at least $100,000. (C) The interest rates paid on negotiable CDs are determined solely by the issuing bank. (D) ​Funds can be withdrawn from negotiable CDs at any time.

To open a negotiable CD, savers must have large amounts of savings, usually at least $100,000.

Miserly Bank finds itself ​short of reserves at the end of the day. One solution to this dilemma would be for Miserly Bank to

borrow in the federal funds market.

Trade in money markets is dominated by​

brokers, dealers, investment banks, and commercial banks.

Cameron is looking to buy $1,000 worth of T-bills. She can purchase them at all of the following places EXCEPT

directly from her bank.

In 2008, the Federal Reserve began paying interest on the bank deposits it holds. By doing this, its goal is to

establish a price floor on the interest rate in the federal funds market.

When economists refer to "money markets," they are referring to markets for

financial assets that are close substitutes for money.

Commercial banks often buy money market instruments for the purpose of

generating interest income.

Commercial paper

is essentially unsecured IOUs.

A major automobile manufacturer typically has slow sales during the winter months, creating a cash flow problem for meeting payroll. In a situation like this, the automobile manufacturer may

issue commercial paper.

When the federal government runs a budget deficit, or spends more than they take in, they

must borrow the difference.

By establishing a price floor on the federal funds rate, the Federal Reserve is trying to

prevent deflation.

A money market has a __________ market, where a given IOU is issued for the first time, and a much larger __________ market.

primary; secondary

Assume that Merrill Lynch, a government securities dealer, sells T-bills to First Central Bank with a promise to buy the T-bills back the next day. This agreement is known as a

repurchase agreement.

A money market is a segment of a financial market where __________ debt instruments with __________ are traded.

short-term; high levels of liquidity

Money market instruments have a "low level of default risk" because

they are issued by only the biggest and safest borrowers.

To raise the funds the federal government needs for its spending, the Treasury Department auctions T-bills

weekly.

Suppose you buy a 60-day T-bill with a face value of $1,000 at a price of $990. Your discount rate yield (DRY) would be

​6.0%.

The government doesn't actually pay interest on T-bills; instead, they are sold at​

​a discount.

Ethan is planning to enter a noncompetitive bid for a T-bill next Monday. In order to do so, Ethan will include in his bid

​only the amount of Treasury bills he wishes to buy.