Deck 10: Factors Affecting the Volume of CDs

Question 1

Lack of perfect harmony between inflows and outflows of cash gives rise to the need for a capital market.

Answer 1

False

Question 2

Money is one of the most perishable of all commodities.

Answer 2

True

Question 3

Many of the largest participants in the money market operate on both the demand side and supply side of that market.

Answer 3

True

Question 4

The two principal objectives of money market investors are safety and liquidity.

Question 5

Money market investors are especially sensitive to risk.

Question 6

U.S. Treasury securities have zero default and market risk, but are subject, like all other securities, to inflation risk.

Question 7

Dollar bills are also subject to market risk in the domestic economy.

Question 8

All securities possess some degree of default risk.

Question 9

Lenders usually try to combat anticipated inflation by extending the term of a loan.

Question 10

Political risk refers to the possibility that changes in government laws or regulations will result in a diminished rate of return to the investor.

Question 11

The new regulatory rules that surfaced in the wake of the 07-09 credit crisis is an example of political risk.

Question 12

Money market instruments typically carry less default risk than capital-market securities but more market risk.

Question 13

Currency risk has generally been reduced in recent years due to more stable exchange rates, according to your text.

Question 14

While much lower in market and default risk than possessed by capital-market securities, money market securities are generally higher in currency risk than capital-market securities, according to your text.

Question 15

Money market securities are considered to be lower in political risk than longer-term financial instruments, according to your text.

Question 16

Money market securities normally are considered an effective hedge against inflation due to their superior liquidity.

Question 17

A government bond has an original maturity of 20 years, but with the passage of time now has actual maturity of 12 months; this security is now a money market instrument.

Question 18

A market is "broad and deep" if it can absorb a large volume of transactions with no more than a small impact on security prices and interest rates.

Question 19

The American money market is considered to be one of the most efficient markets in the world, according to your text.

Question 20

Arbitrage of funds is a common phenomenon in the capital market, but is not frequently observed in the money market.

Question 21

Clearinghouse funds are transferred from bank to bank through the Federal Reserve's wire transfer network in order to make payments in the money market.

Question 22

With a federal funds transaction, the seller of securities has funds available from the buyer the same day the trade is carried out.

Question 23

Federal funds, due to their nature, could be labeled "same-day money."

Question 24

There is no difference in risk between federal funds and clearinghouse funds.

Question 25

The money market of the U.S. is dominated by a relatively small number of large financial institutions.

Question 26

Treasury bills tend to carry the lowest rate among money market instruments because they have zero default risk and minimal market risk.

Question 27

The money market instrument with the largest dollar volume outstanding in 1995 was U.S. Treasury bills.

Question 28

The Federal Reserve's discount rate is determined by demand and supply forces in the financial marketplace.

Question 29

A high discount rate relative to other money market interest rates promotes a stable money market, according to your text.

Question 30

Money market CDs have minimum denominations of $100,000.

Question 31

Money market loans all share the same purpose for borrowing money.

Question 32

A money market participant with a surplus cash position is likely to withdraw from that market until a cash deficit arises, according to your text.

Question 33

The interest rate on money market loans defines the cost of borrowing in the money market, but there is no cost faced by a potential lender of funds in the money market.

Question 34

The risk that an investor will be forced to place earnings from a loan or security into a lower yielding investment because interest rates have subsequently fallen is known as market risk, according to your text.

Question 35

A money market lender of funds benefits when money market rates fall because reinvestment risk is then lower.

Question 36

U.S. Government securities traded in the money market are assumed by investors to carry zero reinvestment risk.

Question 37

If a money market investor has a temporary cash surplus but fails to invest that surplus for a day, the income lost can be made up by investing the funds at interest the following day.

Question 38

One of the principal uses of the money market is to finance capital investment projects, according to the text.

Question 39

The largest of all borrowers in the money market is the Bank of Japan.

Question 40

Actual maturity of a security is always less than that security's original maturity.

Question 41

The money market is a telephone market in which trades of loans and securities are usually negotiated by phone and usually confirmed by wire.

Question 42

The largest and best-known corporations generally qualify for the prime bank lending rate.

Question 43

The risk averseness of the money market can be seen when the commercial paper market dries up.

Question 44

The Federal Reserve System tries to keep its discount rate reasonably close to the discount rate quoted by the Bank of Japan, according to the textbook.

Question 45

If the Federal Reserve sets its discount rate too high relative to other money market interest rates, banks are forced to borrow more heavily in the open market, increasing the volatility of interest rates in the open market.

Question 46

The return on bankers acceptances is generally lower than the return on commercial paper.

Question 47

Bankers acceptances are backed only by the credit worthiness of the bank which guarantees the acceptance.

Question 48

The Eurodollar market is one of the most highly regulated markets in the world.

Question 49

Federal funds are loans made to banks by the Federal Reserve.

Question 50

The rate on commercial paper is typically lower than the prime rate.

Question 51

The money market generally provides loans to borrowers at higher interest rates than in the capital market.

Question 52

The U.S. Treasury is the largest of all money market borrowers worldwide.

Question 53

Money market investors are especially sensitive to risk.

Question 54

Money market securities generally protect investors against inflation risk adequately.

Question 55

Once a money market security is issued it grows shorter in actual maturity each day.

Question 56

The heart of the international money market is the Eurocurrency market.

Question 57

Increasingly domestic money markets are being integrated into the international money market.

Question 58

No nation's money market today is unaffected by movements in interest rates and security prices in the international money market.

Question 59

Canada's money market is securities dominated.

Question 60

Developing countries' money markets are usually dominated by banks.

Question 61

Commercial paper, with over $1 trillion outstanding is the largest privately issued portion of the U.S. money market.

Question 62

Federal funds, like their global counterpart Eurodollar deposits, are typically traded on a 30-60-90 day basis.

Question 63

One reason T-bills offer lower yields is that the interest earned on them is free from federal taxation.

Question 64

European money market instruments denominated in Euros will likely increase some forms of currency risk.

Question 65

The Asian financial crisis, which developed in late 1997, suggested that bank-dominated money markets could yield more easily to political pressure than securities-dominated ones.

Question 66

The mechanism through which holders of temporary cash surpluses meet holders of temporary cash deficits is the:

A) Money market
B) Capital market
C) Clearinghouse
D) Financial futures market
E) Arbitrage process
F) None of the above

Question 67

Financial instruments that have an original maturity of one year or less normally are traded in the:

A) Corporate bond market
B) Municipal bond market
C) Mortgage market
D) Money market
E) Capital market
F) None of the above

Question 68

Suppose a money market investor, a large, nonfinancial corporation, has a $10 million cash surplus expected to last for 36 days. The corporation has been approached by a government security dealer in need of funds about a collateralized $10 million loan that can be repaid at any time on 24 hours' notice, at a 10 percent annual yield. How much interest income can the corporation expect if it goes ahead and makes the loan to the dealer for 36 days?

A) $20,000
B) $50,000
C) $100,000
D) $120,000
E) $150,000
F) $180,000
G) $200,000
H) None of the above

Question 69

The risk that a security's price may fall, subjecting the investor to a capital loss is known as:

A) Market risk
B) Default risk
C) Inflation risk
D) Currency risk
E) Political risk
F) Investment risk
G) None of the above

Question 70

The risk that a borrower will fail to meet some or all of his or her promised principal and/or interest payments on a loan is called:

A) Inflation risk
B) Market risk
C) Currency risk
D) Default risk
E) Investment risk
F) Political risk
G) Money risk
H) None of the above

Question 71

The risk that increases in the average price level for all goods and services will reduce the purchasing power of the investor's return on an investment is known as:

A) Market risk
B) Inflation risk
C) Investment risk
D) Default risk
E) Currency risk
F) Political risk
G) None of the above
H) Money risk

Question 72

The risk that a U.S. investor who purchases Italian bonds will lose money in trying to convert bond interest payments made in euros into U.S. dollars is called:

A) Market risk
B) Default risk
C) Currency risk
D) Investment risk
E) Money risk
F) Government risk
G) Inflation risk
H) None of the above

Question 73

The risk that changes in government laws or regulations will reduce an investor's rate of return is known as:

A) Government risk
B) Political risk
C) Inflation risk
D) Money risk
E) Investment risk
F) Currency risk
G) Market risk
H) Default risk
I) None of the above

Question 74

Most trades in the money market are arranged via:

A) Face to face meetings between investors or lenders and individuals representing institutions in need of funds
B) Electronic wire or telegraph
C) Telephone
D) Through the exchange of checks
E) None of the above

Question 75

Deposit balances of banks held at the Federal Reserve banks and at larger correspondent banks across the nation are examples of:

A) CDs
B) Eurodollars
C) Clearinghouse funds
D) Federal funds
E) Discount window loans
F) None of the above

Question 76

All of the features or characteristics listed below are generally true of the U.S. money market except one. Which feature or characteristic below is not generally true of the nation's money market?

A) Retail market
B) Payments made with federal funds
C) Dominated by a small number large financial institutions
D) Security prices and yields not greatly influenced by size of transactions volume
E) Maturities of loans and securities traded are one year or less
F) Market and default risk are lower than is true of the capital market

Question 77

Which of the following markets is a direct competitor to the prime-rate bank loan market?

A) Certificate of deposit
B) Federal funds
C) Eurodollars
D) Commercial paper
E) Clearinghouse funds
F) Bankers Acceptance

Question 78

Which one of the following does not, in general, cause the volume of CDs to fluctuate?

A) Credit market conditions
B) Corporate earnings
C) Alternative interest rates
D) Level of federal debt

Question 79

Which security listed below best fits this definition: "Time drafts issued by large multi-national banks?"

A) Federal Agency securities
B) Treasury bills
C) Federal funds
D) Negotiable certificates of deposit
E) Eurodollar deposits
F) Bankers acceptances
G) Commercial paper
H) U.S. Government bonds
I) None of the above

Question 80

Federal agency securities are ____ marketable than Treasury bills and therefore carry yields about 1 percentage point ____ than Treasury bills.

A) Less, higher
B) Less, lower
C) More, higher
D) None of the above