Deck 12: Government Debt, monetary Policy and the Payments System

Question 1

Other things being equal,an increase in the government budget deficit:

A) can increase business prospects.
B) can force interest rates down.
C) can force interest rates up.
D) may not have any effect on interest rates.

Answer 1

C

Question 2

Participants in the financial markets seek to hold government paper because:

A) Investors can sell the paper quickly to raise funds.
B) Government securities pay a steady rate of return.
C) banks are required to hold government securities as part of liquidity management.
D) all of the given answers are correct.

Answer 2

D

Question 3

When the government demand for funding reduces the available funds within a nation-state this is known as:

A) fiscal constraint.
B) illiquidity effect.
C) crowding-out effect.
D) capital expenditure effect.

Answer 3

C

Question 4

Which of the following statements in relation to the Commonwealth Government's borrowing programs is incorrect?

A) The government must issue longer term paper to fund its budget surplus
B) Treasury notes can be issued to manage intra-year liquidity
C) Debt issues are used to finance seasonal deficit/surplus patterns
D) The past few years have seen a decrease in debt issuance to fund the budget

Question 5

The advantages associated with the issue of inscribed stock for bond issues are:

A) it is less costly to maintain a register of bond holders than print and distribute physical bonds.
B) inscribed stock protects holders from risk of theft.
C) coupon payments are easily made electronically to the registered holders.
D) all of the given answers.

Question 6

If a government's budget is in surplus,it may:

A) issue more securities.
B) retire maturing securities.
C) issue more long-term securities.
D) allow the institutions to hold less government debt.

Question 7

Which of the following statements in relation to the Australian Commonwealth government's borrowing programs is incorrect?

A) The early 1990s saw an increase in debt issues to fund the budget deficits at that time.
B) The government tends to fund short-term liquidity requirements with the issue of Treasury notes.
C) When government income exceeds forecast expenditures, the resulting deficit tends to be funded by short-term debt.
D) Fiscal constraint by successive Australian governments for the second part of the 1990s brought the government budgets back into surplus until recently.

Question 8

Which of the following about the primary market issue of Treasury bonds is correct?

A) Treasury bonds are issued by a tender system.
B) Treasury bonds are issued by the 'tap' system of selling.
C) The issue of Treasury bonds is currently managed by the RBA.
D) The minimum bid for treasury bonds must be for a face value of $1000 000.

Question 9

The management of the revenues and expenditure of a government is called:

A) monetary policy.
B) fiscal policy.
C) debt management.
D) economic policy.

Question 10

Which of the following procedures for bidding for Australian Treasury bonds is NOT correct?

A) Bids must be submitted electronically by registered bidders.
B) The minimum bid must be for a face value of $1 million and multiples thereafter.
C) Bids are made in terms of prices up to three decimal places.
D) Bids are accepted in ascending order.

Question 11

When a government's budget is in _____,it is required to issue new government securities,and when the budget is in _______,it may retire maturing debt and redeem some debt prior to maturity.

A) surplus; surplus
B) deficit; surplus
C) deficit; deficit
D) surplus; deficit

Question 12

If a government's income from tax receipts exceeds its expenditure,the government is running a:

A) deficit, and is a net borrower of funds.
B) surplus, and is a net borrower of funds.
C) deficit, and is a net saver of funds.
D) surplus, and is a net saver of funds.

Question 13

Which of the following statements regarding the Treasury bond tender system is correct?

A) The timing of Treasury bond tenders is set each year in the government's budget papers.
B) Buyers of bonds effectively nominate the price at which they purchase the bond.
C) The tender system removes the need for a secondary market in Treasury bonds.
D) The maturities and quantities of bond tenders are determined by the Loan Council.

Question 14

Which of the following about the primary market issue of Treasury bonds is NOT correct?

A) The issues are currently managed by AOFM.
B) Tenders will be lodged to buy the bonds in terms of yield to maturity.
C) The minimum bid must be for a face value of $1 million.
D) Bids are accepted in descending order: that is highest-yield first.

Question 15

When the Australian government faces month-by-month mismatches between inflow of funds and cash outflows it may issue:

A) Treasury bonds.
B) Treasury bills.
C) Treasury notes.
D) Treasury paper.

Question 16

When a government undertakes a significant reduction in government recurrent expenditure this is known as:

A) fiscal recession.
B) fiscal constraint.
C) matching principle.
D) capital expenditure shortfalls.

Question 17

Which of the following is NOT a feature of types of Treasury bonds that are currently issued by the Commonwealth Government?

A) A fixed-interest security that pays half-yearly coupon payments
B) Issued with a face value which is repayable at maturity
C) Existing Treasury bond issues are exposed to price risk
D) Issued as either a bearer bond or as inscribed stock

Question 18

The crowding-out effect refers to:

A) corporate borrowing exceeding government borrowing.
B) government borrowing reducing the available funds for borrowing.
C) heavy long-term borrowing by government.
D) corporations issuing securities of long maturity.

Question 19

The inscribed stock system for selling Treasury bonds was introduced in:

A) 1979
B) 1980
C) 1982
D) 1984

Question 20

The policy where a central bank influences the level of short-term interest rates in order to affect inflation is:

A) fiscal policy.
B) economic policy.
C) monetary policy.
D) inflation rate policy.

Question 21

The low volume of on-exchange trades for the Australian government's Treasury bonds is attributed to:

A) high exchange fees.
B) lack of interest, owing to the high volume of treasury notes that are usually traded.
C) lack of parties to act as dealers.
D) lack of interest in buying Treasury bonds.

Question 22

If interest rates move lower after a Treasury note is issued,a holder selling it into the secondary markets:

A) receives a capital gain.
B) receives a capital loss.
C) receives the original price, as short-term markets are not so affected by interest rate movements.
D) receives a higher yield owing to the time elapsed.

Question 23

Which of the following is NOT an advantage associated with the issue of inscribed stock?

A) It is expensive to print and distribute the physical instrument.
B) Without a register, there is a potential for non-disclosure of income.
C) It protects the holder from the risk of capital loss.
D) It protects the holder from the risks of theft or misplacement.

Question 24

If market interest rates move upwards after an investor buys a government bond,the investor may:

A) sell the bond back to Treasury.
B) sell the bond in the secondary markets for a capital loss.
C) sell the bond in the secondary markets for a capital gain.
D) hold the bond until the market rates return to their original level and then have a capital gain.

Question 25

A Treasury bond holder who wishes to redeem a bond early may sell it:

A) back to Treasury.
B) back to the central bank.
C) in the secondary market.
D) back to the broker.

Question 26

For government securities listed on the ASX,there is a higher volume of off-exchange trades compared with on-exchange transactions because:

A) of difficulties in payment.
B) greater profits may be made.
C) of brokers that can act as an agent between two parties.
D) of the high fees involved.

Question 27

The selling of Government bonds is currently handled by:

A) APRA.
B) ARB.
C) AOFM.
D) Austraclear.

Question 28

When bonds are traded in either the primary or secondary markets in Australia,they are quoted in terms of their:

A) current yield.
B) current price.
C) redemption yield.
D) annual interest, divided by the face value.

Question 29

Which of the following about Treasury bonds is NOT correct?

A) Banks invest excess short-term funds in Treasury bonds as they are liquid.
B) A financial institution with a need for funds can quickly sell some its government securities.
C) Treasury bonds can be held to manage the maturity profile of a bond portfolio.
D) Commercial banks are required by the prudential supervisor to hold a prescribed number of Treasury bonds.

Question 30

Which of the following statements regarding the secondary market for Australian government securities is incorrect?

A) The volume of on-exchange trades of government securities is very high.
B) Treasury notes and bonds may be listed on the Australian Securities Exchange (ASX).
C) Banks buy and sell government securities to manage their operational liquidity.
D) All wholesale electronic transactions involving Commonwealth government securities are settled through Austraclear.

Question 31

Which of the following financial institutions currently has the largest holdings of Commonwealth Government securities?

A) A state government public authority
B) The Reserve Bank of Australia
C) General insurance offices
D) Life assurance offices

Question 32

Until _______,purchasers of new-issue Treasury bonds could hold them either as bearer bonds or inscribed stock.

A) 1979
B) 1984
C) 1987
D) 1992

Question 33

Which of the following procedures is NOT true for bidding for Treasury bonds under the tender system?

A) Only bids submitted electronically by registered bidders through AOFM tender system are accepted.
B) Minimum bid must be for $1 000 000 and multiples of $1 000 000 thereafter.
C) Bids are made in terms of yield to maturity up to three decimal places.
D) Bids are accepted in descending order; that is, the lowest price is allotted first.

Question 34

Government securities generally:

A) are highly liquid instruments, especially the short-term ones.
B) have an active secondary market.
C) are regarded as fault-free.
D) meet all of the given answers.

Question 35

Government securities are generally:

A) illiquid.
B) issued when a government's budget is in surplus.
C) highly negotiable.
D) coupon-paying debt securities.

Question 36

The total return of interest and capital gains received by an investor when a security is held to maturity is called:

A) current yield.
B) maturity yield.
C) historical yield.
D) redemption yield.

Question 37

With a/an ______ stock issue,ownership is registered electronically and a receipt is issued.

A) bearer
B) submitted
C) inscribed
D) tendered

Question 38

Which of the following statements is correct for the current system of bidding for government bond tenders?

A) Bids must be in terms of price.
B) Bids are accepted in terms that correspond to the highest price.
C) The minimum bid must be for a face value of $500 000.
D) The maximum limit for a total amount is $100 million.

Question 39

When an institution buys government securities,it settles the transaction by:

A) sending the seller of the security a cheque.
B) sending the funds to the broker.
C) using the clearing house Austraclear.
D) sending funds electronically to the seller via a bank.

Question 40

Financial institutions hold government securities because of:

A) liquidity requirements.
B) interest rate expectations.
C) funding requirements.
D) all of the given answers.

Question 41

The transmission channel related to changing the money supply,followed by changes in short-term rates and pressure on interest rates to change the cost of funds,and consequently to influence economic activity,is known as a:

A) credit channel.
B) monetary policy channel.
C) foreign exchange channel.
D) wealth channel.

Question 42

A bank puts in a bid for $500 000 of 182-day Treasury notes at a yield of 5.8% per annum.What price will the bank pay if the tender is successful?

A) $448 028.67
B) $485 756.54
C) $485 946.17
D) $486 101.73

Question 43

In Australia a Treasury bond differs from a Treasury note in that it:

A) is issued for a period less than a year.
B) pays interest quarterly, unlike the monthly interest payments for a Treasury note.
C) is a discount instrument.
D) is a longer term coupon security.

Question 44

A funds manager is revaluing his/her investment portfolio,which includes a $2 000 000 holding of Treasury bonds.The bonds pay a coupon of 10% per annum,payable half-yearly.A coupon payment has just been made,and the bonds have exactly five years to maturity.Similar bonds are currently yielding 12% per annum in the market.What is the value of the fund manager's Treasury bond portfolio?

A) $1 495 331.33
B) $1 620 921.33
C) $1 852 798.26
D) $2 000 000.00

Question 45

Which of the following about Treasury bonds is NOT correct?

A) The volume of over-the-counter transactions for Treasury bonds is far larger than the volume of on-exchange trades.
B) Banks hold Treasury bonds for liquidity management.
C) If fund managers expect interest rates to fall they may decrease their holdings of long-term Treasury bonds.
D) The Reserve Bank of Australia holds government securities as part of monetary policy.

Question 46

On Tuesday,the Reserve Bank announces details of a 26-week T-note tender,with competitive bids to close on Wednesday.A bank lodged a successful bid for $5 000 000 in T-notes at a yield of 6.57% per annum.Settlement is required on Thursday through RITS.What amount will the bank need to pay on settlement?

A) $4 841 395.87
B) $4 843 084.08
C) $4 988 327.31
D) $4 998 362.54

Question 47

If a bond investor wishes to guarantee the coupon interest they receive and be compensated for the effects of inflation,they may look to buy:

A) a Treasury note.
B) a corporate bond.
C) a capital-indexed bond.
D) a Treasury bond.

Question 48

The transmission channel related to changing the money supply to change the pattern of bank lending and the availability of funds,to influence economic activity,is known as a:

A) credit channel.
B) monetary policy channel.
C) foreign exchange channel.
D) wealth channel.

Question 49

Which of the following about Australian Treasury notes is incorrect?

A) Australian Treasury notes are discount securities.
B) The minimum bid must be for a face value of $1 million.
C) Bids are accepted in ascending order; that is lowest-yield.
D) Bids are made in terms of yield to maturity up to three decimal places.

Question 50

The transmission channel that affects the value of assets and liabilities within the domestic economy,and thus influences economic activity,is known as a:

A) credit channel.
B) monetary policy channel.
C) foreign exchange channel.
D) wealth channel.

Question 51

Compared with a Treasury bond,a Treasury note:

A) pays a higher interest rate.
B) is sold at a price below its face value.
C) is sold in terms of price to the highest bidder.
D) has a higher yield.

Question 52

Which of the following is NOT a feature of the tendering of Treasury notes (T-notes)in Australia?

A) T-notes are issued by tender.
B) The registered bidders of the AFOM submit their bids electronically.
C) Successful bidders settle their purchases through Austraclear.
D) Each bid must be for a minimum parcel of $100 000.

Question 53

The Commonwealth Government currently issues Treasury notes with varying terms to maturity:

A) twice a year.
B) three times a year.
C) four times a year.
D) to match the government's main revenue receipt dates.

Question 54

The Reserve Bank of Australia's monetary policy is directed to influence first:

A) money market rates.
B) Treasury notes interest rates.
C) the overnight cash rate.
D) the base bank interest rates.

Question 55

When the current market interest rates rise,the price of bonds:

A) goes up.
B) goes down.
C) is unchanged.
D) may go up or down or be unchanged, depending on conditions.

Question 56

When actions by the Australian Reserve Bank affect bank lending and consequently borrowers find it more difficult to find funding,this effect is called the:

A) monetary channel.
B) credit channel.
C) wealth channel.
D) foreign exchange channel.

Question 57

Australian government securities that are short-term are:

A) Treasury bills.
B) Treasury notes.
C) Treasury paper.
D) Treasury bonds.

Question 58

Which of the following is NOT an advantage for a state's central borrowing authority?

A) By grouping issues as a single one, lower economies of scale can be obtained.
B) Potential conflict between different debt issuers may be overcome.
C) The timing of debt issues can be controlled so they are brought to the market at the most opportune time.
D) The central borrowing authority can do a public issue more effectively than a private placement.

Question 59

A bank is considering purchasing a Treasury note with a face value of $500 000 that is currently selling for $487 324,with 180 days to maturity.What is the note currently yielding?

A) 4.90%
B) 5.14%
C) 5.27%
D) 5.41%

Question 60

Which of the following is NOT a feature or function of Treasury notes (T-notes)?

A) T-notes are issued with short-term maturities.
B) T-notes are discount securities; that is, they are sold at a price below face value.
C) Coupon payment, plus the face value, is paid at maturity.
D) T-notes are used to manage the liquidity for the government.

Question 61

The short-term interest rate that is almost immediately affected by changes in the Reserve Bank's monetary policy is the:

A) real interest rate.
B) overnight interbank rate.
C) 30-day bank bill rate.
D) intercompany lending rate.

Question 62

If the Australian Reserve Bank wants to expand the money supply,it will:

A) buy Commonwealth government securities.
B) increase the cash rate.
C) sell Commonwealth government securities.
D) sell repurchase agreements.

Question 63

Banks are required to maintain exchange settlement accounts with the Reserve Bank.Settlement of exchange settlement account transactions requires the use of same-day funds.Which of the following is NOT generally a source of same-day funds?

A) Repurchase arrangements with the Reserve Bank
B) Reserve Bank payments in its market operations
C) Commonwealth government securities held for liquidity purposes
D) Surplus balances in banks' exchange settlement accounts

Question 64

When the Australian Reserve Bank wants to ease the monetary policy,it will:

A) sell Commonwealth government securities.
B) increase the overnight cash rate.
C) buy Commonwealth government securities.
D) sell repurchase agreements.

Question 65

The Reserve Bank focuses much of its attention on the level of underlying inflation in the Australian economy.What are the important implications of a low level of underlying inflation for the markets?

A) A low level of underlying inflation restricts the potential for future economic growth and business investment.
B) The Reserve Bank needs to maintain tight monetary policy to ensure inflation remains low.
C) A low level of underlying inflation leads to increased business confidence and capital investment.
D) A low level of underlying inflation adds to expectations of significant future interest rate increases.

Question 66

The use of open-market operations as a monetary tool has the advantage that:

A) they can be implemented rapidly, without administrative delays.
B) they are flexible and precise.
C) they can be easily reversed if errors are made.
D) all of the given answers are correct.

Question 67

When the Australian Reserve Bank sells Commonwealth government securities,it:

A) injects extra cash into the financial markets.
B) loosens monetary policy.
C) puts downward pressure on interest rates.
D) tightens monetary policy.

Question 68

Which of the following is NOT true of tightening of monetary policy?

A) Banks' supplies of funds are depleted through open-market operations
B) Interest rates fall
C) The dollar may increase in value
D) Bank lending is reduced

Question 69

In relation to impacts on the Australian financial system liquidity,if payments to the official sector exceed official payments to the private sector then there will be:

A) a system down.
B) a system surplus.
C) a system deficit.
D) a system square.

Question 70

The main method the Australian Reserve Bank uses to manage the money market cash position is:

A) conducting FX transactions.
B) issuing Treasury bonds.
C) managing the amount of Commonwealth securities in the market.
D) issuing Treasury notes.

Question 71

The Reserve Bank conducts market operations in order to effect its monetary policy objectives.Which of the following best describes the Reserve Bank's market operations?

A) Market operations may be conducted to neutralise official FX transactions.
B) Reserve Bank market operations target the overnight cash rate.
C) Market operations affect day-to-day system liquidity.
D) All of the given answers are correct.

Question 72

Through its impact on cash rates,the Reserve Bank can affect rates further out on the maturity spectrum.What is usually the order of transmission?

A) Cash rates; commercial bill yields; banks' deposit rates; banks' prime lending rates
B) Cash rates; commercial bill yields; banks' prime lending rates; banks' deposit rates
C) Cash rates; banks' deposit rates; commercial bill yields; banks' prime lending rates
D) Cash rates; banks' prime lending rates; commercial bill yields; banks' deposit rates

Question 73

In relation to impacts on the Australian financial system liquidity,if payments from the official sector to the private sector exceed the flow of funds to the official sector then there will be:

A) a system down.
B) a system surplus.
C) a system deficit.
D) a system square.

Question 74

Open market operations by the Australian Reserve Bank refer to:

A) the method by which the Australian Reserve Bank allows banks to raise short-term funds up to a year.
B) the method by which the Australian Reserve Bank implements monetary policy.
C) the market for short-term securities.
D) the method by which the Australian Reserve Bank monitors the financial sector.

Question 75

The main types of Commonwealth government transactions that influence the daily cash positions are:

A) taxation receipts.
B) government receipts.
C) budget expenditures.
D) all of the given answers.

Question 76

When an easing of monetary policy is accomplished by open-market operations:

A) interest rates rise.
B) banks' supplies of funds are increased.
C) the dollar appreciates.
D) bank lending generally decreases.

Question 77

If the Australian Reserve Bank wants to decrease the money supply in the long term,it will:

A) buy repurchase agreements.
B) buy Commonwealth government securities.
C) lower the cash rate.
D) sell Commonwealth government securities.

Question 78

The transmission channel that eventually affects the demand for Australian exports and imports by affecting their relative costs,and thus influences economic activity,is known as a:

A) credit channel.
B) monetary policy channel.
C) foreign exchange channel.
D) wealth channel.

Question 79

Monetary policy in Australia is implemented by the Reserve Bank,and is currently principally directed towards:

A) affecting the level of short-term interest rates.
B) effecting a reduction in the current account deficit.
C) affecting the level of growth in the money supply.
D) affecting the value of the AUD, and the exchange rate.

Question 80

Price stability is desirable because:

A) everyone is better off when prices are stable.
B) inflation creates uncertainty about future planning.
C) it guarantees full unemployment.
D) it increases the efficiency of the Australian Reserve Bank.