Deck 11: Exploring the Reserve Accounting System, Money Markets, and Financial Instruments

Question 1

According to the Primary Dealers Act the Federal Reserve must deny primary dealer designation to any U.S. securities house which refuses to deal with a foreign company and discriminates in favor of domestic customers over foreign customers.

Answer 1

False

Question 2

Continuing-contract RP agreements require the consent of all parties to the agreement before they can be terminated.

Answer 2

False

Question 3

Unlike government bonds Treasury bills normally do not carry term premiums.

Answer 3

False

Question 4

The English or first-price sealed-bid auction method is currently used by the U.S. Treasury to market new Treasury bills.

Question 5

The current auction method used by the U.S. Treasury encourages competitive bidders to bid low.

Question 6

The commercial paper market is very resistant to risk.

Question 7

One-year T-bills are usually auctioned on a different schedule than 13-week and 26-week bills.

Question 8

Canada, like the U.S., auctions Canadian government bills each week.

Question 9

Provincial bills are issued by local governments in Great Britain.

Question 10

Treasury bills are one of the oldest financial instruments issued by the government of Japan, dating back to the 19th century.

Question 11

A first-price sealed bid auction minimizes the winners' curse phenomenon.

Question 12

Enforcement of rules in the U.S. Government securities market is the responsibility of the Federal Trade Commission.

Question 13

Term agreements are used by the U.S. Treasury and the Federal Reserve to auction off longer-term U.S. government notes and bonds.

Question 14

In a market of rising interest rates and positively sloped yield curves a dealer's carry income and long position are both likely to be profitable.

Question 15

The most important financial institution operating in the money market is the commercial bank.

Question 16

Federal funds are the principal means of making payments in the money market.

Question 17

Federal funds consist exclusively of those reserve balances held at the Federal Reserve banks.

Question 18

Correspondent deposits at large banks are part of the federal funds market.

Question 19

Non-bank thrift institutions that offer transaction accounts must keep reserve balances at the Federal Reserve banks.

Question 20

Only vault cash and reserve balances kept with the Federal Reserve banks count in meeting legal reserve requirements.

Question 21

The target account used by a bank's money manager to keep legal reserves at the level required by law is the vault-cash account.

Question 22

The majority of federal funds transactions are overnight loans.

Question 23

A commercial bank under Federal Reserve rules is not permitted to borrow more than half of its legal reserve requirements in the federal funds market.

Question 24

Nonmember banks actually account for a larger volume of federal funds sold and purchased than member banks of the Federal Reserve System.

Question 25

Federal funds interest rates appear to change independent of other money market interest rates.

Question 26

The federal funds interest rate tends to fall around holiday periods.

Question 27

Due to the essentially risk less nature of federal funds loans, the federal funds interest rate is usually lower than the Fed's discount rate.

Question 28

Money market CDs must be negotiable instruments with minimum denominations of $100,000.

Question 29

The round-lot trading unit for CDs bought and sold in the money market is $100,000.

Question 30

According to your text, the negotiable CD is one of the oldest of all American money market instruments.

Question 31

Negotiable CDs, by attracting funds out of expensive checking accounts, help to lower the average cost of bank funds.

Question 32

Most money market CDs have maturities of six months of less.

Question 33

CD yields as quoted in the American money market are computed by the bank discount method.

Question 34

There is no active secondary market for Eurodollar CDs.

Question 35

Under lagged reserve accounting the reserve computation period lasts two weeks.

Question 36

CDs, when introduced, were considered a wonderful financial innovation that allowed banks to smooth their in-flow and out-flow of funds.

Question 37

Under the lagged reserve accounting system currently employed by the Federal Reserve System to calculate transaction deposit reserve requirements, the reserve computation and reserve maintenance periods overlap completely.

Question 38

The amount of reserves needed is based on a daily average over a one month period.

Question 39

With the lagged reserve accounting system there is a 16-day lag between the reserve computation and reserve maintenance periods for non personal time deposits and other non transaction liabilities.

Question 40

The period of time over which a bank must hold its required amount of legal reserves is known as the reserve computation period.

Question 41

The period of time over which a bank determines what its legal reserve requirement must be is known as the reserve maintenance period.

Question 42

The most prominent example of non personal time deposits are business CDs.

Question 43

A check drawn on a bank's reserve account at the Federal Reserve Bank in its district is payable immediately.

Question 44

One advantage of CDs issued in registered form, as opposed to bearer CDs, is that registered CDs are more convenient for resale in the secondary market.

Question 45

The market for negotiable CDs is segmented into two segments - prime and nonprime.

Question 46

Most buyers of negotiable CDs hold them until they mature.

Question 47

Yankee CDs are issued by U.S. banks in other countries.

Question 48

Shortage of information on the condition of banks can adversely affect the volume of trading and interest rates prevailing in the interbank market for reserves.

Question 49

The secondary market for Japanese bank CDs is very large and active and today stretches around the world.

Question 50

Asian CDs normally trade in $10,000 units like U.S. T-bills.

Question 51

All Eurodollar CDs carry fixed interest rates.

Question 52

A banker borrowing in the money market must consider not only current money-market interest rates, but expected future interest rates as well.

Question 53

Contemporaneous reserve accounting has replaced lagged reserve accounting as a means of calculating deposit reserves nowadays in most large U.S. banks.

Question 54

A buyer in the secondary CD market redeems the CD (at maturity) with the seller, irrespective of which financial institution is the issuer.

Question 55

For clues as to which direction Federal Reserve monetary policy may be moving, toward tighter credit conditions or toward looser credit conditions, is watched by money market investors.

Question 56

The Federal Reserve's monetary policy, can he be viewed it as either loose, a higher federal funds rate or tight, a lower federal funds rate.

Question 57

There has recently been a lot of criticism over the operation of the U.S. mortgage market.

Question 58

The commercial paper market represents a way for small, relatively new firms to raise short term funds, before they have had the opportunity to build a good relationship with a bank.

Question 59

Commercial paper rates are highly volatile and fluctuate between extreme highs and lows.

Question 60

The high quality of commercial paper results in comparatively high investment yields.

Question 61

The commercial paper market all but dried up during the recent credit crisis of 2007-2009.

Question 62

Bankers acceptances generally carry maturities ranging from 90 to 360 days.

Question 63

Acceptance financing shifts the exposure of the importer's default risk from the lender to the bank.

Question 64

A bankers acceptance is a draft drawn on a bank by an exporter or an importer to help pay for merchandise or to purchase foreign currencies.

Question 65

A primary uses of the bankers acceptances to finance the purchase of internationally traded goods while those goods are in transit.

Question 66

Adjustable-rate CDs may extend up to 36 months in maturity and allow the investor to renegotiate the interest rate once during the life of the CD.

Question 67

With the lagged reserve accounting system there is a 60-day lag between the reserve computation and reserve maintenance periods for non personal time deposits and other non transaction liabilities.

Question 68

Which of the following best describes a major concern with the government's bailout of failing industries?

A) Unknown effect on market efficiency
B) Increases the likelihood of abnormal profits
C) Reduces the incentive for price manipulation
D) Encouraging participation by primary dealers
E) There is no concern

Question 69

Which of the following is not a commercial paper rating agency?

A) Moody's Investors Service
B) Standard & Poor's Corporation
C) McHall Rating Service
D) Fitch Ratings
E) None of the above

Question 70

If the cost of borrowing funds is less than the interest earned on securities held:

A) Dealers take a long position
B) The spread on the sale of the securities will be positive
C) Carry income is positive
D) Dealers liquidate their portfolios
E) None of the above

Question 71

By 2009, the volume of asset backed commercial paper was just over:

A) 890 billion
B) 440 billion
C) 1.2 trillion
D) 350 billion
E) 300 billion

Question 72

The form of commercial paper in which loans or credit receivables are pooled into packages and then paper is issued as claims against that pool is known as:

A) Structured settlement
B) Factoring commercial paper loan
C) Asset-backed commercial paper
D) CD
E) None of the above

Question 73

Recently some characteristics about T-bills have changed. Among them:

A) Individual investors can now buy them over the Internet
B) The minimum size is now $1,000
C) Fewer are being issued due to U.S. Government budget surpluses
D) All of the above
E) Choices B and C only

Question 74

The ratio of the total amount of bids received by the Treasury over the actual amount of securities to be sold is known as the:

A) Open interest
B) Long position
C) Cover
D) Discount yield
E) None of the above

Question 75

The following are among sources of funds for securities dealers:

A) Demand loans from banks
B) Purchases of securities at auction
C) Borrowings under Repurchase Agreements
D) All of the above
E) Choices A and C only

Question 76

The following are among uses of funds for securities dealers:

A) Loans to other dealers
B) Purchases of securities at auction
C) Payment of salaries, commissions and bonuses
D) All of the above
E) Choices A and B only

Question 77

A commercial bank that balances its short-term borrowing in the money market by holding an approximately equal volume of money market assets is following the:

A) Principle of Comparative Advantage
B) Profit-Maximization Principle
C) Hedging Principle
D) Asset Management Principle
E) Contingency Management Principle
F) None of the above

Question 78

Which of the following items are considered today a part of the federal funds market?

A) Reserve balances of member banks held at the Federal Reserve banks
B) Bank deposits held with large correspondent banks in the principal U.S. cities
C) Deposits of savings and loans, credit unions and savings banks held with commercial banks and available for immediate transfer
D) Deposits held by securities dealers
E) All of the above
F) None of the above

Question 79

A federal funds loan that has no specific maturity date and can be terminated by either borrower or lender without advance notice is known as a:

A) Continuing contract
B) Signature loan
C) Repurchase contract
D) Long-term non secured loan
E) Resale loan agreement
F) None of the above

Question 80

According to your text, the principal buyers of money market CDs include:

A) Non financial corporations
B) State and local governments
C) Foreign central banks
D) Wealthy individuals
E) All of the above
F) None of the above