Chapter 6 Money Markets

PDFaid.Com #1 Pdf Solutions Chapter 6 ~ Money Markets a) 3.10 a) 5.93 a) 12.12 percent a) competitive a) federal funds An investor initially purchased securities at a price of $9,923,418, with an agreement to sell them back at a price of $10,000,000 at the end of a 90day period. The repo rate is _______ percent. A) 3.10 B) 0.77 C) 1.00 D) none of these The Treasury bill discount is _______ percent. A) 5.93 B) 6.12 C) 6.20 D) 6.02 E) none of these A firm plans to issue 30 day commercial paper for $9,900,000. Par value is $10,000,000. What is the firm's cost of borrowing? A) 12.12 percent B) 11.11 percent C) 13.00 percent D) 14.08 percent E) 15.25 percent Large corporations typically make _______ bids for T-bills so they can purchase larger amounts. A) competitive B) noncompetitive C) very small D) none of these The rate at which depository institutions effectively lend or borrow funds from each other is the _______ rate. A) federal funds B) discount C) prime D) repo a) greater than; recessionary a) increased a) repurchase agreement a) short-term funds from each other a) their yields are highly correlated over time The yield on commercial paper is _______ the yield of Treasury bills of the same maturity. The difference between their yields would be especially large during a _______ period. A) greater than; recessionary B) greater than; boom economy C) less than; boom economy D) less than; recessionary The effective yield of a foreign money market security is _______ when the foreign currency strengthens against the dollar. A) increased B) reduced C) always negative D) unaffected Which of the following instruments has a highly active secondary market? A) banker's acceptances B) commercial paper C) federal funds D) repurchase agreements The federal funds market allows depository institutions to borrow: A) short term funds from each other. B) short term funds from the Treasury. C) long term funds from each other. D) long term funds from the Federal Reserve. E) short-term funds for the Treasury and longterm funds from the Federal Reserve. Which of the following is true of money market instruments? A) Their yields are highly correlated over time. B) They typically sell for par value when they are initi¬ally issued (especially T bills and commercial paper). C) Treasury bills have the highest yield. D) They all make periodic coupon (interest) pay¬ments. a) treasury bills a) true at a discount from par value auctions b) 5.10 _______ are sold at an auction at a discount from par value. A) Treasury bills B) Repurchase agreements C) Banker's acceptances D) Commercial paper In general, the money markets are widely perceived to be efficient in the sense that the prices reflect all available public information. A) true B) false T bills and commercial paper are sold: A) with a stated coupon rate. B) at a discount from par value. C) at a premium about par value. D) none of these. Treasury bills are sold through _______ when initially issued. A) insurance companies B) commercial paper dealers C) auctions D) finance companies An investor purchased an NCD a year ago in the secondary market for $980,000. He redeems it today and receives $1,000,000. He also receives interest of $30,000. The investor's annualized yield on this investment is _______ percent. A) 2.0 B) 5.10 C) 5.00 D) 2.04 b) 100,000 b) 270 days b) about 12.5 percent b) about 12.6 percent b) have an active secondary market The minimum denomination of commercial paper is $_______. A) 25,000 B) 100,000 C) 150,000 D) 200,000 Commercial paper with a maturity exceeding _______ must be registered with the SEC. A) 45 days B) 270 days C) 1 year D) none of these If an investor buys a T bill with a 90 day maturity and $50,000 par value for $48,500 and holds it to maturity, what is the annualized yield? A) about 13.4 percent B) about 12.5 percent C) about 11.3 percent D) about 11.6 percent E) about 10.7 percent An investor buys a T bill with 180 days to maturity and $250,000 par value for $242,000. He plans to sell it after 60 days, and forecasts a selling price of $247,000 at that time. What is the annualized yield based on this expecta¬tion? A) about 10.1 percent B) about 12.6 percent C) about 11.4 percent D) about 13.5 percent E) about 14.3 percent Treasury bills: A) have a maturity of up to five years. B) have an active secondary market. C) are commonly sold at par value. D) commonly offer coupon payments. b) It is not influenced by the supply and demand for funds in the federal funds market b) money market securities b) more than the price paid for a six-month treasury bill b) reduced b) slightly higher than Which of the following statements is incorrect with respect to the federal funds rate? A) It is the rate charged by financial institutions on loans they extend to each other. B) It is not influenced by the supply and demand for funds in the federal funds market. C) The federal funds rate is closely monitored by all types of firms. D) Many market participants view changes in the federal funds rate to be an indicator of potential changes in other money market rates. E) The Federal Reserve adjusts the amount of funds in depository institutions in order to influence the federal funds rate. Securities with maturities of one year or less are class¬ified as: A) capital market instruments. B) money market instruments. C) preferred stock. D) none of these. At a given point in time, the actual price paid for a three-month Treasury bill is: A) usually equal to the par value. B) more than the price paid for a six-month Treasury bill. C) equal to the price paid for a six-month Treasury bill. D) none of these The effective yield of a foreign money market security is _______ when the foreign currency weakens against the dollar. A) increased B) reduced C) always negative D) unaffected At any given time, the yield on commercial paper is _______ the yield on a T bill with the same maturity. A) slightly less than B) slightly higher than C) equal to D) either slightly less than or slightly higher than b) the London Interbank Offer Rate c) 6.99 c) 9,756 c) 9.14 c) 14.59 percent The rate on Eurodollar floating rate CDs is based on: A) a weighted average of European prime rates. B) the London Interbank Offer Rate. C) the U.S. prime rate. D) a weighted average of European discount rates. Bullock Corp. purchases certain securities for $4,921,349, with an agreement to sell them back at a price of $4,950,000 at the end of a 30-day period. The repo rate is _______ percent. A) 7.08 B) 6.95 C) 6.99 D) 7.04 E) none of these Assume investors require a 5 percent annualized return on a six-month T-bill with a par value of $10,000. The price investors would be willing to pay is $_______. A) 10,000 B) 9,524 C) 9,756 D) none of these A repurchase agreement calls for an investor to buy secur¬ities for $4,925,000 and sell them back in 60 days for $5,000,000. What is the yield? A) 9.43 percent B) 9.28 percent C) 9.14 percent D) 9.00 percent Robbins Corp. frequently invests excess funds in the Mexican money market. One year ago, Robbins invested in a one-year Mexican money market security that provided a yield of 25 percent. At the end of the year, when Robbins converted the Mexican pesos to dollars, the peso had depreciated from $.12 to $.11. What is the effective yield earned by Robbins? A) 25.00 percent B) 35.41 percent C) 14.59 percent D) none of these c) banker's acceptance c) commercial paper c) commercial paper c) common stock c) federal funds When a bank guarantees a future payment to a firm, the financial instrument used is called: A) a repurchase agreement. B) a negotiable CD. C) a banker's acceptance. D) commercial paper. _______ is a short-term debt instrument issued only be well-known, creditworthy firms and is normally issued to provide liquidity or finance a firm's investment in inventory and accounts receivable. A) A banker's acceptance B) A repurchase agreement C) Commercial paper D) A Treasury bill Which of the following is sometimes issued in the primary market by nonfinancial firms to borrow funds? A) NCDs B) retail CDs C) commercial paper D) federal funds Which of the following is not a money market security? A) Treasury bill B) negotiable certificate of deposit C) common stock D) federal funds Which money market transaction is most likely to represent a loan from one commercial bank to another? A) banker's acceptance B) negotiable CD C) federal funds D) commercial paper c) greater than; recessionary c) increased c) placed either directly or with the help of commercial paper dealers d) 2.80 percent The yield on NCDs is _______ the yield of Treasury bills of the same maturity. The difference between their yields would be especially large during a _______ period. A) greater than; recessionary B) greater than; boom economy C) less than; boom economy D) less than; recessionary The so-called "flight to quality" causes the risk differential between risky and risk-free securities to be: A) eliminated. B) reduced. C) increased. D) unchanged (there is no effect). Commercial paper is: A) always directly placed with investors. B) always placed with the help of commercial paper dealers. C) placed either directly or with the help of commercial paper dealers. D) always placed by bank holding companies. Jarrod King, a private investor, purchases a Treasury bill with a $10,000 par value for $9,645. One hundred days later, Jarrod sells the T-bill for $9,719. What is Jarrod's expected annualized yield from this transaction? A) 13.43 percent B) 2.78 percent C) 10.55 percent D) 2.80 percent E) none of these Bill Yates, a private investor, purchases a six-month (182day) T-bill with a $10,000 par value for $9,700. d) 6.20 If Bill Yates holds the Treasury bill to maturity, his annualized yield is _______ percent. A) 6.02 B) 1.54 C) 1.50 D) 6.20 E) none of these d) 9.14 percent d) 10.00 percent d) are not subject to reserve requirements d) commercial banks d) downward; upward An investor buys commercial paper with a 60 day maturity for $985,000. Par value is $1,000,000, and the investor holds it to maturity. What is the annualized yield? A) 8.62 percent B) 8.78 percent C) 8.90 percent D) 9.14 percent E) 9.00 percent A newly issued T bill with a $10,000 par value sells for $9,750, and has a 90 day maturity. What is the discount? A) 10.26 percent B) 0.26 percent C) $2,500 D) 10.00 percent E) 11.00 percent Eurodollar deposits: A) are U.S. dollars deposited in the U.S. by European investors. B) are subject to interest rate ceilings. C) have a relatively large spread between deposit and loan rates (compared to the spread between deposits and loans in the United States). D) are not subject to reserve requirements. _______ are the most active participants in the federal funds market. A) Savings and loan associations B) Securities firms C) Credit unions D) Commercial banks An aggregate purchase by investors of low-yield instruments in favor of high-yield instruments places _______ pressure on the yields of low-yield securities and _______ on the yields of high-yield securities. A) upward; upward B) downward; downward C) upward; downward D) downward; upward d) none of these d) none of these d) none of these e) all of these are money market instruments false When firms sell commercial paper at a _______ price than they projected, their cost of raising funds is _______ than projected. A) higher; higher B) lower; lower C) both of these D) none of these If economic conditions cause investors to sell stocks because they want to invest in safer securities with much liquidity, this should cause a _______ demand for money market securities, which placed _______ pressure on the yields of money market securities. A) weak; downward B) weak; upward C) strong; upward D) none of these At a given point in time, the yield on a T-bill is slightly higher than the yield on commercial paper with the same maturity, because commercial paper has higher: A) interest rate risk. B) maturity risk. C) default risk. D) none of these. Which of the following is not a money market instrument? A) banker's acceptance B) commercial paper C) negotiable CDs D) repurchase agreements E) All of these are money market instruments. The interest rate charged for a shortterm loan from a bank to a corporation is referred to as the London interbank offer rate (LIBOR). A) true B) false false true true Money market securities must have a maturity of three months or less. A) true B) false Money market securities are issued in the primary market through a telecommunications network by the Treasury, corporations, and financial intermediaries that wish to obtain short-term financing. A) true B) false An international interbank market facilitates the transfer of funds from banks with excess funds to those with deficient funds. A) true B) false