FIN 3080 – Chapter 5
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Everything else equal, an effective annual rate will be greater than the bond equivalent yield on the same security. - True - False
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True
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Money markets exist to help reduce the opportunity cost of holding cash balances. - True - False
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True
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The majority of money market securities are low denomination, low risk investments designed to appeal to individuals with excess cash. - True - False
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False
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Most money market securities are initially sold to individual investors. - True - False
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False
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Commercial paper, negotiable certificates of deposit and banker's acceptance rates all quoted as discount yields. - True - False
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False
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Euro commercial paper is a short-term obligation of the European Central Bank. - True - False
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False
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The U.S. Treasury recently switched from a discriminating price auction to a single price auction because the latter lowered the average price paid by investors. - True - False
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False
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In the T-Bill secondary market, the ask yield will normally be less than the bid yield. - True - False
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True
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The largest secondary money market in the U.S. is the secondary market for T-Bills. - True - False
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True
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Federal funds are generally short-term unsecured loans while repos are short-term secured loans. - True - False
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True
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For the purposes for which they are used, money market securities should have which of thefollowing characteristics? I.Low trading costs II.Little price risk III.High rate of return IV.Life greater than one year A) I and III B) II and IV C) III and IV D) I and II E) I, II and III
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I and II
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Money market securities exhibit which of the following?I.Large denomination II.Maturity greater than one year III.Low default risk IV.Contractually determined cash flows A) I, II and III B) I, III and IV C) II, III and IV D) II and IV E) I, II, III and IV
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I, III, and IV
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A repo is in essence a collateralized A) Banker's acceptance B) Certificate of deposit C) Fed funds loan D) Commercial paper loan E) Eurodollar deposit
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Federal Funds Loan
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A short-term unsecured promissory note issued by a company is A) Commercial paper B) T-Bills C) Repurchase agreement D) Negotiable CD E) Banker's acceptance
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Commercial Paper
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A time draft payable to a seller of goods, with payment guaranteed by a bank is a A) Commercial paper security B) T-Bill C) Repurchase agreement D) Negotiable CD E) Banker's acceptance
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Banker's Acceptance
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In the T-Bill auction process, the competitive bidder is guaranteed a _____ and a non-competitive bidder is guaranteed a _____. A) Minimum price; maximum price B) Maximum price; minimum price C) Maximum price; given quantity D) Minimum price; maximum quantity E) None of the above
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Maximum Price; Given Quantity
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A dealer is quoting a $10,000 face 60-day T-Bill quoted at 3.22 bid, 3.14 ask. You could buy this bill at _____ or sell it at _____. A) $9,947.67 , $9,946.33 B) $9,678.00 , $9,686.00 C) $9,686.00 , $9,678.00 D) $9,946.33 , $9,947.67 E) None of the above
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$9,947.67; $9,946.33 Buy: $10,000 x [1 - (0.0314 x 60/360)] = $9,947.67 Sell: $10,000 x [1 - (0.0322 x 60/360)] = $9,946.33
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Rates on Federal Funds and Repurchase Agreements are stated A) On a bond equivalent basis with a 360 day year B) On a bond equivalent basis with a 365 day year C) As a discount yield with a 360 day year D) As an EAR E) As a discount yield with a 365 day year
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On a bond equivalent basis with a 360-day year
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The discount yield on a T-Bill differs from the T-Bill's Bond Equivalent Yield (BEY) because A) The discount yield is a percentage of face value instead of price B) A 360 day year is used on the discount yield instead of 365 days C) The discount yield is without compounding, the BEY is with compounding D) Both A and B E) A, B and C are all reasons for the difference
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Both A and B A) The discount yield is a percentage of face value instead of price. B) A 360-day year is used on the discount yield instead of 365-days.
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The typical spread on prime quality commercial paper and medium grade commercial paper has been about _____ basis points. A) 200 B) 22 C) 33 D) 86 E) 12
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22
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The rate of return on a repo is A) Determined by the rate of return on the underlying collateral B) Strongly affected by the current Fed funds rate at the time of the repo C) Determined at the time of the repo D) A and C E) B and C
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Both B and C B) Strongly affected by the current Federal Funds Rate at the time of the repo C) Determined at the time of the repo
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Which of the following statements about commercial paper is NOT true? Commercial Paper issued by the U.S. A) Is an unsecured short term promissory note B) Has a maximum maturity of 270 days C) Is virtually always rated by at least one ratings agency D) Has no secondary market E) Carries an interest rate above the prime rate
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Carries an interest rate above the prime rate
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A negotiable CD A) Is a bank issued transactions deposit B) Is a registered instrument C) Is a bank issued time deposit D) Has denominations ranging from $50,000 to $10 million E) Pays discount interest
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Is a bank issued time deposit
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A 90-day $1 million CD has a 4% annual rate quote. If you buy the CD, how much will you collect in 90 days? A) $1,040,000 B) $1,009,863 C) $1,000,000 D) $1,015,012 E) $1,010,000
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$1,010,000 $1,000,000 x [1 + (0/04 x 90/360)] = $1,010,000
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A banker's acceptance is A) A time draft drawn on the exporter's bank B) A method to help importers evaluate the creditworthiness of exporters C) A liability of the importer and the importer's bank D) An add on instrument E) For greater than 1 year maturity
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A liability of the importer and the importer's bank
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The most liquid of the money market securities are A) Commercial paper B) Banker's acceptance C) T-Bills D) Federal funds E) Repurchase agreements
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T-Bills
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In dollars outstanding in 2004, the largest money market security was A) Commercial paper B) Banker's acceptance C) T-Bills D) Federal funds & repos
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Federal Funds & Repos
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The international version of the Federal Funds Rate is called A) LIBOR B) The repo rate C) The Euro rate D) International dollar rate E) The exchange rate
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LIBOR
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LIBOR is generally _____ the Federal Funds Rate because foreign bank deposits are generally _____ than domestic bank deposits A) Greater than; less risky B) Less than; more risky C) The same as; equally risk D) Greater than; more risky E) Less than; less risky
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Greater than; more risky
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A U.S. exporter sells $50,000 of furniture to a Latin American importer. The exporter requires the importer to obtain a letter of credit. When the bank accepts the draft the exporter discounts the 90-day note at a 6% discount. What is the exporter's true effective annual financing cost? A) 6.00% B) 6.18% C) 6.32% D) 6.42% E) 6.45%
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6.32% $50,000 x [1 - (0.06 x 90/360)] = $49,250 ($50,000/$49,250) ^ (365/90) = 6.32%
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A Chinese exporter sells $75,000 of toys to a French importer. The Chinese exporter requires the French importer to obtain a letter of credit. When the bank accepts the draft, the exporter discounts the 60-day note at a 3.5% discount. What is the exporter's true effective annual financing cost? A) 3.62% B) 3.57% C) 3.35% D) 3.78% E) 3.97%
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3.62% $75,000 x [1 - (0.035 x 60/360)] = $74,562.50 1 - ($75,000/$74,562.50) ^ (365/60) = 3.62%
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If a $10,000 par T-Bill has a 4.5% discount quote and a 180-day maturity, what is the price of the T-Bill? A) $9,550 B) $9,525 C) $9,775 D) $9,675 E) None of the above
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$9,775 $10,000 x [1 - (0.045 x 180/360)] = $9,775
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A 90-day T-Bill is selling for $9,915. The par is $10,000. The effective annual return on the T-Bill is (watch your rounding) A) 4.09% B) 3.48% C) 3.47% D) 3.52% E) 3.55%
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3.52% 1 - ($10,000 / $9,915) ^ (365/90) = 3.52%
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Suppose that $10 million face value commercial paper with a 270-day maturity is selling for $9.62 million. What is the BEY on the paper? A) 3.627% B) 4.903% C) 4.836% D) 4.934% E) None of the above
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4.903% (($10,000,000 / $9,620,000) -1) x (365 / 270) = 4.903%
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A $5 million jumbo CD is paying a quoted 4.25% interest rate on 120-day maturity CDs. How much money could you withdraw at maturity if you invest in the CD? A) $5,000,000 B) $5,069,863 C) $4,929,167 D) $5,212,500 E) $5,070,833
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$5,070,833 $5,000,000 x [1 + (0.0425 x 120/360)] = $5,070,833
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From 1990 to 2004, which one of the following money market securities actually declined in terms of dollar amount outstanding? A) Commercial paper B) T-Bills C) Federal funds and repos D) Negotiable CDs E) Banker's acceptances
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Banker's Acceptance
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A 120-day maturity money market security has a Bond Equivalent Yield of 4.25%. The security's EAR is A) 4.44% B) 4.28% C) 4.93% D) 4.31% E) None of the above
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4.31% EAR = (1 + (0.0425 / (365/120))) ^ (365/120) - 1 = 4.31%
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In a Treasury auction, preferential bidding status is granted to A) Competitive bidders B) Non-competitive bidders C) Short sale committed bidders D) Commercial bank bidders E) No group of bidders
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Non-Competitive Bidders
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If your firm enters into an overnight reverse repurchase agreement, your firm is A) Borrowing fed funds temporarily B) Selling a security now while agreeing to buy it back tomorrow C) Giving an unsecured loan to the counterparts D) Procuring a banker's acceptance E) None of the above
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None of the above
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Eurodollars CDs would include A) CDs denominated in Euros B) Dollar investments by European entities in the U.S. C) Dollars deposited in Caribbean banks D) Dollars deposited in Europe E) Both C & D
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Both C and D C) Dollars deposited in Caribbean Banks D) Dollars deposited in Europe
