Deck 11: The Money Markets

Question 1

Which of the following statements about the money markets 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.

Answer 1

Only A and B of the above are true.

Question 2

The primary function of large diversified brokerage firms in the money market is to

A)sell money market securities to the Federal Reserve for its open market operations.
B)make a market for money market securities by maintaining an inventory from which to buy or sell.
C)buy money market securities from corporations that need liquidity.
D)buy T-bills from the U.S. Treasury Department.

Answer 2

make a market for money market securities by maintaining an inventory from which to buy or sell.

Question 3

Brokerage firms that offered money market security accounts in the 1970s had a cost advantage over banks in attracting funds because the brokerage firms

A)were not subject to deposit reserve requirements.
B)were not subject to the deposit interest rate ceilings.
C)were not limited in how much they could borrow from depositors.
D)had the advantage of all the above.
E)had the advantage of only A and B of the above.

Answer 3

had the advantage of only A and B of the above.

Question 4

The most influential participant(s)in the U.S. money market

A)is the Federal Reserve.
B)is the U.S. Treasury Department.
C)are the large money center banks.
D)are the investment banks that underwrite securities.

Question 5

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

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

Question 6

Which of the following statements about the money markets 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

Suppose that you purchase a 91-day Treasury bill for $9,850 that is worth $10,000 when it matures. The security's annualized yield if held to maturity is about

A)4 percent.
B)5 percent.
C)6 percent.
D)7 percent.

Question 8

Which of the following is the largest borrower in the money markets?

A)commercial banks
B)large corporations
C)the U.S. Treasury
D)U)S. firms engaged in foreign trade

Question 9

The Fed is an active participant in money markets mainly because of its responsibility to

A)lower borrowing costs to encourage capital investment.
B)control the money supply.
C)increase the interest income of retirees holding money market instruments.
D)assist the Securities and Exchange Commission in regulating the behavior of other money market participants.

Question 10

Activity in money markets increased significantly in the late 1970s and early 1980s because of

A)rising short-term interest rates.
B)regulations that limited what banks could pay for deposits.
C)both A and B of the above.
D)neither A nor B of the above.

Question 11

When inflation rose in the late 1970s,

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 12

Finance companies raise funds in the money market by selling

A)commercial paper.
B)federal funds.
C)negotiable certificates of deposit.
D)Eurodollars.

Question 13

Commercial banks are large holders of ________ and are the major issuer of ________.

A)negotiable certificates of deposit; U.S. government securities
B)U)S. government securities; negotiable certificates of deposit
C)commercial paper; Eurodollars
D)Eurodollars; commercial paper

Question 14

In situations where asymmetric information problems are not severe,

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.

Question 15

Finance companies play a unique role in money markets by

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 16

Money market instruments issued by the U.S. Treasury are called

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

Question 17

The banking industry

A)should have an efficiency advantage in gathering information that would eliminate the need for the money markets.
B)exists primarily to mediate the asymmetric information problem between saver-lenders and borrower-spenders.
C)is subject to more regulations and governmental costs than the money markets.
D)all of the above are true.
E)only A and B of the above are true.

Question 18

Which of the following statements are true of Treasury bills?

A)The market for Treasury bills is extremely deep and liquid.
B)Occasionally, investors find that earnings on T-bills do not compensate them for changes in purchasing power due to inflation.
C)By volume, most Treasury bills are sold to individuals who submit noncompetitive bids.
D)All of the above are true.
E)Only A and B of the above are true.

Question 19

Money market instruments

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 20

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

A)Large banks participate in the money markets by selling large negotiable CDs.
B)The U.S. government and corporations borrow in the money markets because cash inflows and outflows are rarely synchronized.
C)The Federal Reserve is the single most influential participant in the U.S. money market.
D)All of the above are true.
E)Only A and B of the above are true.

Question 21

Repos are

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 22

The Federal Reserve can influence the federal funds interest rate by buying securities, which ________ reserves, thereby ________ the federal funds rate.

A)adds; raising
B)removes; lowering
C)adds; lowering
D)removes; raising

Question 23

If the Fed wants to raise the federal funds interest rate, it will ________ securities to ________ the banking system.

A)sell; add reserves to
B)sell; remove reserves from
C)buy; add reserves to
D)buy; remove reserves from

Question 24

If your competitive bid for a Treasury bill is successful, then you will

A)certainly pay less than if you had submitted a noncompetitive bid.
B)probably pay more than if you had submitted a noncompetitive bid.
C)pay the average of prices offered in other successful competitive bids.
D)pay the same as other successful competitive bidders.

Question 25

Negotiable certificates of deposit

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 26

Federal funds are

A)usually overnight investments.
B)borrowed by banks that have a deficit of reserves.
C)lent by banks that have an excess of reserves.
D)all of the above.
E)only A and B of the above.

Question 27

Suppose that you purchase a 182-day Treasury bill for $9,850 that is worth $10,000 when it matures. The security's annualized yield if held to maturity is about

A)1.5%.
B)2%.
C)3%.
D)6%.

Question 28

Unlike most money market securities, commercial paper

A)is not generally traded in a secondary market.
B)usually has a term to maturity that is longer than a year.
C)is not popular with most money market investors because of the high default risk.
D)all of the above.
E)only A and B of the above.

Question 29

If the Fed wants to lower the federal funds interest rate, it will ________ the banking system by ________ securities.

A)add reserves to; selling
B)add reserves to; buying
C)remove reserves from; selling
D)remove reserves from; buying

Question 30

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

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 31

A banker's acceptance is

A)used to finance goods that have not yet been transferred from the seller to the buyer.
B)an order to pay a specified amount of money to the bearer on a given date.
C)a relatively new money market security that arose in the 1960s as international trade expanded.
D)all of the above.
E)only A and B of the above.

Question 32

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

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

Question 33

Banker's acceptances

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.

Question 34

If your noncompetitive bid for a Treasury bill is successful, then you will

A)certainly pay less than if you had submitted a competitive bid.
B)certainly pay more than if you had submitted a competitive bid.
C)pay the average of prices offered in other noncompetitive bids.
D)pay the same as other successful noncompetitive bidders.

Question 35

Federal funds

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 36

Commercial paper securities

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.

Question 37

A negotiable certificate of deposit

A)is a term security because it has a specified maturity date.
B)is a bearer instrument, meaning whoever holds the certificate at maturity receives the principal and interest.
C)can be bought and sold until maturity.
D)all of the above.
E)only A and B of the above.

Question 38

Treasury bills do not

A)pay interest.
B)have a maturity date.
C)have a face amount.
D)have an active secondary market.

Question 39

Eurodollars

A)are time deposits with fixed maturities and are, therefore, somewhat illiquid.
B)may offer the borrower a lower interest rate than can be received in the domestic market.
C)are limited to London banks.
D)are all of the above.
E)are only A and B of the above.

Question 40

Government securities dealers frequently engage in repos to

A)manage liquidity.
B)take advantage of anticipated changes in interest rates.
C)lend or borrow for a day or two with what is essentially a collateralized loan.
D)do all of the above.
E)do only A and B of the above.

Question 41

Money markets are referred to as retail markets because small individual investors are the primary buyers of money market securities.

Question 42

Money market securities are short-term instruments with an original maturity of less than one year.

Question 43

Two important characteristics of any financial market are flexibility and

A)risk.
B)innovation.
C)tolerance.
D)capital.

Question 44

The U.S. Treasury Department is the single most influential participant in the U.S. money market.

Question 45

The U.S. Treasury Department is the single largest borrower in the U.S. money market.

Question 46

The term money market is actually a misnomer, because liquid securities are traded in these markets rather than money.

Question 47

The T-bill is not an investment to be used for anything but temporary storage of excess funds because it barely keeps up with inflation.

Question 48

The main role of investment companies in the money market is to

A)trade on behalf of commercial accounts.
B)mediate the symmetric information problem between server-lender and borrower-spenders.
C)both A and B of the above.
D)neither A nor B of the above.

Question 49

The market for U.S. Treasury bills is a shallow market because so few individual investors buy T-bills.

Question 50

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

Question 51

Money market transactions

A)do not take place in any one particular location or building.
B)are usually arranged purchases and sales between participants over the phone by traders and completed electronically.
C)are both A and B of the above.
D)are none the the above.

Question 52

The Fed can influence the federal funds rate by adjusting the level of reserves in the banking system.

Question 53

The advantage of mutual funds is that they

A)require no cash up front.
B)give investors with relatively small amounts of cash to invest access to large-denomination securities.
C)always yield the highest returns.
D)both A and B of the above.

Question 54

Banks are unusual participants in the money market because they buy, but do not sell, money market instruments.

Question 55

In a direct placement

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 56

The main purpose of federal funds is to provide banks with an immediate infusion of reserves should they be short.

Question 57

Money markets are used extensively by businesses both to warehouse surplus funds and to raise short-term funds.

Question 58

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

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 59

Commercial paper securities are unsecured promissory notes, issued by corporations, that mature in no more than 270 days.

Question 60

Which of the following statements about money market securities are true?

A)The interest rates on all money market instruments move very closely together over time.
B)The secondary market for Treasury bills is extensive and well developed.
C)There is no well-developed secondary market for commercial paper.
D)All of the above are true.
E)Only A and B of the above are true.

Question 61

What are the major types of securities and who are the major participants in the money markets?

Question 62

Explain how the Federal Reserve can influence the federal funds interest rate.

Question 63

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

Question 64

Explain how and why repurchase agreements would be used.

Question 65

In general, money market instruments are low-risk, high-yield securities.

Question 66

Explain why the money markets are referred to as wholesale markets.

Question 67

Not all commercial banks deal in the secondary money market for their customers.

Question 68

Explain why money market interest rates move so closely together over time.

Question 69

Interest rates on banker's acceptances are low because the risk of default is very low.

Question 70

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

Question 71

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

Question 72

The Treasury accepts noncompetitive bids in ascending order of yield until the accepted bids reach the offering amount.

Question 73

A banker's acceptance is an order to pay a specified amount of money to the bearer on a given date. Banker's acceptances have been used since the twelfth century.

Question 74

The size of the asset-backed commercial paper market nearly doubled between 2004 and 2007 to about $1 trillion. Discuss how the subprime meltdown and collapse of the ABCP market almost led to the collapse of the money market mutual fund market as well.

Question 75

What are the main characteristics of money market securities?

Question 76

The size of the asset-backed commercial paper market nearly doubled between 2004 and 2007 to about $1 trillion.