Question 1

How are Treasury bills sold? How do competitive and noncompetitive bids differ?

Accepted Answer

Treasury bills, often referred to as T-bills, are short-term debt securities issued by the U.S. Department of the Treasury to finance government spending. They are sold through a process called an auction, which can be conducted in two ways: competitive bidding and noncompetitive bidding. Both individuals and institutional investors can participate in these auctions.

**Competitive Bidding:**
In a competitive bid, an investor specifies the discount rate (the yield) that they are willing to accept for a particular T-bill. This rate is not guaranteed; it is simply what the bidder is willing to accept. The competitive bids are accepted in ascending order of yield (which corresponds to descending order of price) until the quantity of T-bills being auctioned is allocated. If your bid is too high in terms of yield (or too low in terms of price), it may not be accepted. Competitive bidders can potentially receive less than the full amount of the bill they want to buy if their bid is at the higher end of accepted yields.

Competitive bids are typically made by institutional investors who have a good understanding of the market and can accurately forecast interest rate movements. There is a limit to the amount of T-bills one can purchase through competitive bidding, which is up to 35% of the offering amount.

**Noncompetitive Bidding:**
Noncompetitive bidding is much simpler and is often used by individual investors. In this method, the investor agrees to accept the discount rate determined by the competitive bidding process. This means that noncompetitive bidders agree to accept whatever yield is determined at the auction. They do not have to specify a desired return rate, and they are guaranteed to receive the full amount of the bill they want to purchase, up to a maximum of $5 million.

The advantage of noncompetitive bidding is that it allows smaller investors to participate in the T-bill market without having to accurately predict interest rates. It also ensures that the investor will receive the T-bill, whereas competitive bidders may not have their bids accepted if they bid too high a yield.

**Auction Process:**
The auction process for T-bills is regularly scheduled and announced by the Treasury Department. Investors can place bids directly through the TreasuryDirect website or through a bank or broker. The results of the auction determine the discount rate (yield) for the T-bills, and this rate is applied to all noncompetitive bids as well.

Once the auction is complete, the T-bills are issued to the successful bidders, and the investors pay the Treasury a price that is less than the face value of the bill. The difference between the purchase price and the face value is the interest earned by the investor. When the T-bills mature, the government pays the holder the full face value of the bills.

Question 2

Commercial paper securities

Accepted Answer

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. 
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

Question 3

Banker's acceptances

Accepted Answer

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. 
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

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

Money market securities have all the following characteristics except they are not

Accepted Answer

A) short term. 
B) money. 
C) low risk. 
D) very liquid. 
A) short term. 
B) money. 
C) low risk. 
D) very liquid.

Question 6

Which of the following statements about the money markets are true?

Accepted Answer

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. 
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.

Question 7

Explain why banks, which would seem to have a comparative advantage in gathering information, have not eliminated the need for the money markets.

Accepted Answer

The answer of Explain why banks, which would seem to...

Question 8

Finance companies play a unique role in money markets by

Accepted Answer

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. 
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.

Question 9

Repos are

Accepted Answer

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. 
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.

Question 10

Federal funds

Accepted Answer

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. 
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.

Question 11

The Fed can influence the federal funds interest rate by adjusting the level of reserves available to banks. The Fed can

Accepted Answer

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. 
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.

Question 12

Negotiable certificates of deposit

Accepted Answer

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. 
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.

Question 13

Money market instruments

Accepted Answer

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. 
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.

Question 14

Which of the following statements about the money markets are true?

Accepted Answer

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. 
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.

Question 15

In a direct placement

Accepted Answer

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. 
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.

Question 16

The Fed can lower the federal funds interest rate by ________ securities, thereby ________ reserves.

Accepted Answer

A) selling; adding 
B) selling; lowering 
C) buying; adding 
D) buying; lowering 
A) selling; adding 
B) selling; lowering 
C) buying; adding 
D) buying; lowering

Question 17

Asset-backed commercial paper differs from conventional commercial paper in that

Accepted Answer

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. 
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.

Question 18

When inflation rose in the late 1970s,

Accepted Answer

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. 
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.

Question 19

Commercial paper has been used in various forms since the 1930s.

Accepted Answer

A) True 
 B)False

Question 20

In situations where asymmetric information problems are not severe,

Accepted Answer

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. 
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.

Exam 11: The Money Markets

How are Treasury bills sold? How do competitive and noncompetitive bids differ?

Commercial paper securities

Banker's acceptances

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

Money market securities have all the following characteristics except they are not

Which of the following statements about the money markets are true?

Explain why banks, which would seem to have a comparative advantage in gathering information, have not eliminated the need for the money markets.

Finance companies play a unique role in money markets by

Repos are

Federal funds

The Fed can influence the federal funds interest rate by adjusting the level of reserves available to banks. The Fed can

Negotiable certificates of deposit

Money market instruments

Which of the following statements about the money markets are true?

In a direct placement

The Fed can lower the federal funds interest rate by ________ securities, thereby ________ reserves.

Asset-backed commercial paper differs from conventional commercial paper in that

When inflation rose in the late 1970s,

Commercial paper has been used in various forms since the 1930s.

In situations where asymmetric information problems are not severe,

Why Study Financial Markets and Institutions

Overview of the Financial System

What Do Interest Rates Mean and What Is Their Role in Valuation

Why Do Interest Rates Change

How Do Risk and Term Structure Affect Interest Rates

Are Financial Markets Efficient

Why Do Financial Institutions Exist

Why Do Financial Crises Occur and Why Are They so Damaging to the Economy

Central Banks and the Federal Reserve System

Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics

The Bond Market

The Stock Market

The Mortgage Markets

The Foreign Exchange Market

The International Financial System

Banking and the Management of Financial Institutions

Financial Regulation

Banking Industry: Structure and Competition

The Mutual Fund Industry

Insurance Companies and Pension Funds

Investment Banks, Security Brokers and Dealers, and Venture Capital Firms

Risk Management in Financial Institutions

Hedging With Financial Derivatives

Savings Associations and Credit Unions

Finance Companies

Filters

The Fed can lower the federal funds interest rate by securities, thereby reserves.