Deck 21: The Markets for Bank Obligations

Question 1

Of all depository institutions, ________ are by far the largest holders of federal funds.

A) Eurodollar banks
B) S&Ls
C) commercial banks
D) thrifts

Answer 1

C

Question 2

Which of the below statements is TRUE?

A) A small amount of interest is earned on federal funds.
B) Typically, larger banks have excess reserves, while money center banks find themselves short of reserves and must make up the shortfall.
C) Most transactions involving fed funds last for only one night; that is, a bank with insufficient reserves that borrows excess reserves from another financial institution will typically do so for the period of one full day.
D) The repo, which consists of the sale of a security, will provide funds for a long period of time.

Answer 2

C

Question 3

Which of the below statements is FALSE?

A) Prime CDs (those issued by high-rated domestic banks) trade at a lower yield than nonprime CDs (those issued by lower-rated domestic banks).
B) The yields posted on CDs vary depending on three factors: (1) the credit rating of the issuing bank, (2) the maturity of the CD, and (3) the supply and demand for CDs.
C) The rate or yield offered on Eurodollar CDs is the prime rate.
D) Eurodollar CDs are dollar obligations that are payable by an entity operating under a foreign jurisdiction, exposing the holders to a risk (referred to as sovereign risk) that their claim may not be enforced by the foreign jurisdiction.

Answer 3

C

Question 4

CDs issued with a maturity greater than one year are called ________.

A) long-term CDs.
B) term CDs.
C) maturity CDs.
D) thrift CDs.

Question 5

________ are foreign banks with U.S. branches.

A) Yankee banks
B) German banks
C) Japanese banks
D) Mexican banks

Question 6

________ rely primarily on deposits for funding and make less use of the money markets to obtain funds.

A) Japanese banks
B) Regional
C) Money center banks
D) Yankee banks

Question 7

Which of the below statements is FALSE?

A) Before introduction of the negotiable CD, those with money to invest for, say, one month had no incentive to deposit it with a bank, for they would get a below-market rate unless they were prepared to tie up their capital for a much longer period of time.
B) There are now two types of negotiable CDs. One type is the large-denomination CD, usually issued in denominations of $1 million or more.
C) The largest group of CD investors is investment companies, and money market funds make up the bulk of them.
D) CDs cannot be issued by domestic banks.

Question 8

The yields on ________ play an important role in the world financial markets because they are viewed globally as the cost of bank borrowing since they are effectively the rates at which major international banks offer to pay each other to borrow money by issuing a ________ with given maturities.

A) Eurodollar CDs; floating-rate CD
B) floating-rate CD; Eurodollar (CD)
C) Eurodollar CDs; Eurodollar (CD)
D) Negotiable CDs; Negotiable CDs

Question 9

CDs can be classified into four types, according to the issuing institution. Which of the below is NOT on of these four types?

A) CDs issued by domestic banks
B) Eurodollar CDs
C) Yankee CD
D) Economy CDs

Question 10

________ is an interest rate that changes periodically in accordance with a predetermined formula that indicates the spread (or margin) above some index at which the rate will reset periodically.

A) A fixed-rate CD
B) An Eurodollar CD
C) A floating-rate CD
D) A domestic CD

Question 11

The rate determined in the ________ is the major factor that influences the rates paid on all the other money market instruments.

A) Federal Reserve market
B) Eurodollar market
C) LIBOR market
D) federal funds market

Question 12

For a ________, the initial depositor must wait until the maturity date of the CD to obtain the funds.

A) negotiable CD
B) nonnegotiable CD
C) nondepositable CD
D) depositable CD

Question 13

Through its ________ that lower or raise the level of excess reserves in the banking system, the Fed will often change the fed funds rate as part of its effort to change the rate of activity in the country's economy.

A) open market operations
B) banking market functions
C) excess reserve procedures
D) market activity operations

Question 14

The transactions in which bankers acceptances are created include the ________.

A) exporting of goods into the United State.
B) importing of goods from the United States to foreign entities.
C) storing and shipping of goods between two foreign countries where neither the importer nor the exporter is a U.S. firm.
D) None of these

Question 15

Simply put, a ________ is a vehicle created to facilitate commercial trade transactions.

A) bankers acceptance
B) repo
C) bankers receptance facilitator
D) vehicle transaction

Question 16

Certificate of deposits (CDs) ________.

A) are financial assets issued by banks or thrifts that indicate a specified sum of money has been deposited at an issuing depository institution.
B) are issued by banks but not thrifts to raise funds for financing their business activities.
C) bear a maturity date and a specified interest rate, but cannot be issued in any denomination.
D) are issued by banks that are not insured by the Federal Deposit Insurance Corporation.

Question 17

The ________ are tied together because both are a means for a bank to borrow.

A) national funds rate and the LIBOR rate
B) federal funds rate and the repo rate
C) federal borrowing rate and the repo rate
D) federal funds rate and the federal borrowing rate

Question 18

A depository institution that keeps federal funds in excess of the amount required incurs ________, which is the loss of interest income that could be earned on the excess reserves.

A) a federal funds cost
B) an interest income cost
C) an opportunity cost
D) None of these

Question 19

Banks in the United States can be classified into four groups. Which of the below is NOT one of these four classifications?

A) One group is the money center banks - banks that raise most of their funds from the domestic and international money markets and rely less on depositors for funds.
B) One group is regional banks, which rely primarily on deposits for funding and make less use of the money markets to obtain funds. Japanese banks are the third group of banks.
C) One group is German banks.
D) One group is Japanese banks.

Question 20

The Federal Reserve Bulletin defines "the daily effective rate" as ________.

A) "a weighted average of rates on trades through Chicago brokers."
B) "a weighted average of rates on trades through London brokers."
C) "a weighted average of rates on trades through Philadelphia and San Francisco brokers."
D) "a weighted average of rates on trades through New York brokers."

Question 21

Which of the below statements is TRUE?

A) Investing in bankers acceptances exposes the investor to market risk, which is the risk that neither the borrower nor the accepting bank will be able to pay the principal due at the maturity date.
B) The market interest rates that acceptances offer investors reflect credit risk because BAs have lower yields than risk-free Treasury bills.
C) The spread between bankers acceptance rates and Treasury rates represents a combined reward to investors for bearing the higher risk and relative illiquidity of the acceptance.
D) The investor in a bankers acceptance is not exposed to credit risk

Question 22

To calculate the rate to be charged the customer for issuing a bankers acceptance, the bank determines the rate for which it can sell its bankers acceptance in the open market. To this rate it adds ________.

A) a foreign tax.
B) a credit charge.
C) a commission.
D) an acceptance charge.

Question 23

CDs can be classified into four types, based on the issuing entity: domestic CD, Eurodollar CD, Yankee CD, and thrift CD.

Question 24

Some federal funds transactions require the use of a broker.

Question 25

The maturities for the Eurodollar CD range from overnight to five years.

Question 26

A negotiable CD allows the initial depositor (or any subsequent owner of the CD) to sell the CD in the open market prior to the maturity date.

Question 27

The rate determined in the federal funds market is the major factor that influences the rate paid on all other private money market instruments.

Question 28

Yankee banks are foreign banks with U.S. branches. Included in this group are non-Japanese branches of foreign banks, such as Credit Lyonnais and Deutsche Bank.

Question 29

Yankee banks rely primarily on deposits for funding and make less use of the money markets to obtain funds.

Question 30

Foreign banks are by far the largest holders of federal funds, with most transactions involving fed funds lasting for only one night.

Question 31

The fed funds rate often shows a low level of volatility over short periods of time.

Question 32

The federal funds rate is lower than the repo rate because the lending of federal funds is done on an unsecured basis.

Question 33

Borrowing in the federal funds market is an alternative to borrowing in the repo market.

Question 34

Which of the below statements is FALSE?

A) The Federal Reserve imposes no limit on the amount of eligible bankers acceptances that may be issued by a bank.
B) An accepting bank that has decided to retain a bankers acceptance in its portfolio may be able to use it as collateral for a loan at the discount window of the Federal Reserve.
C) The Federal Reserve imposes a reserve requirement on funds raised via bankers acceptances that are ineligible.
D) Investing in bankers acceptances exposes the investor to credit risk.

Question 35

The yield offered on a CD depends on the credit rating of the issuing bank and the maturity of the CD but not on the supply and demand for CDs.

Question 36

A LIBOR loan is a vehicle created to facilitate commercial trade transactions where in a bank accepts the ultimate responsibility to repay a loan to its holder.

Question 37

Money center banks are banks that raise most of their funds from the domestic and international money markets and rely less on depositors for funds.

Question 38

CD yields are lower than yields on Treasury securities of the same maturity.

Question 39

The ________ maintain their own sales forces to sell the bankers acceptances they create but will use dealers to distribute those they cannot sell.

A) smaller regional banks
B) larger city banks
C) smaller national banks
D) larger regional banks

Question 40

The effective fed funds rate is the rate least often cited for the fed funds market.

Question 41

Why might some federal funds transactions require the use of a broker?

Question 42

The yields posted on CDs vary depending on three factors. Name these three factors.

Question 43

A bank may sell its bankers acceptances directly to investors, or may sell all or part to dealers.

Question 44

Banks in the United States can be classified into four groups. Name three of these four groups.

Question 45

What are the four types of CDs, according to the issuing institution.

Question 46

Investing in bankers acceptances exposes the investor to credit risk. Describe this risk.

Question 47

Eligible bankers acceptances held in a bank's portfolio cannot used as collateral for a loan at the discount window of the Federal Reserve.

Question 48

Banks creating banker acceptances are money center banks, regional banks, Japanese banks, and Yankee banks.