Q&A Hero

Q: Dealers bring buyers and sellers together; brokers make a market.

Q: Federal Reserve open market operations, reserve requirement changes, and discount rate policy first impact the economy in the money market.

Q: Individual investors most often have only indirect access to the money market through commercial banks.

Q: Eurodollars are euro-denominated deposits in U.S. banks.

Q: Bankers' acceptances are used primarily for financing international trade.

Q: The Federal Funds market is not available for smaller, regional banks.

Q: Commercial paper is more likely to be placed directly by large finance companies.

Q: For large corporations, commercial paper is more expensive but is a more assured alternative to bank borrowing.

Q: Commercial banks act as dealers and are major investors in Treasury securities.

Q: Treasury bills are least marketable among money market securities.

Q: Treasury bills are sold on a discount basis, with interest paid separately at maturity.

Q: All money market instruments are short-term liability securities.

Q: Many diverse institutions borrow in the money markets, while relatively few invest.

Q: On August 8, 2011, Finance Yahoo! reports a 90-day T-Bill with a face value of $10,000 that is quoted at 3.25 bid, 3.05 ask. Given the above information, what are the selling and purchasing prices of this T-bill?

Q: Describe in what ways commercial banks participate in the money markets.

Q: In the stock market crashes of 1987, 1989, and shortly after September 11th, money market yields dropped. What caused this drop in money market interest rates? Discuss.

Q: What is a banker's acceptance? Why are banker's acceptances ideally suited for foreign trade transactions?

Q: Explain why most money market interest rates tend to move together over time.

Q: Explain the economic function of money markets.

Q: What are the fundamental characteristics of money market debt instruments? Explain why these characteristics are important to money market participants who are investing and financing.

Q: If a $10,000 par T-Bill has a 2.75% discount quote and a 180 day maturity, what is the price of the T-Bill to the nearest dollar? a. $9,625 b. $9,706 c. $9,863 d. $9,927

Q: You spent $9,675 to buy a Treasury bill with a par of $10,000 and sell it 180 days later for $9,875. What is the effective annual rate? a. 4.24% b. 4.39% c. 4.45% d. 4.52%

Q: In terms of dollars outstanding, in recent years, what is the largest money market security? a. Commercial paper b. Banker's acceptances c. T-Bills d. Federal funds and repos

Q: A 90 day $3 million jumbo CD has a 5.75% annual rate quote. If you purchase the CD, how much will you collect in 90 days? a. $3,043,125 b. $3,045.678 c. $3,062,877 d. $3,063,750

Q: A dealer is quoting a 180-day T-Bill with a face value of $10,000 that is quoted at 3.75 bid, 3.60 ask. This bill can be bought at ________ or can be sold at ________. a. $9,879.23; $9,864.36 b. $9,864.36; $9,859.23 c. $9,820.00; $9,812.50 d. $9,802.50; $9,787.50

Q: Which of the following do notparticipate in the money markets? a. commercial banks b. the Federal Reserve c. U.S. Treasury dealers d. corporations e. All of the above participate in the money markets.

Q: Which of the following statements about negotiable certificates of deposits (NCDs) is true? a. NCDs usually have denominations of less than $100,000. b. NCDs usually have lower yields than regular CDs. c. NCDs have no secondary market d. Large banks are usually able to pay lower interest rates on NCDs than smaller regional banks. e. All of the above statements are true.

Q: The fed funds rate is very important to the economy because: a. it measures the return on the most liquid of all the financial assets traded b. it is closely related to the conduct of monetary policy c. it measures directly the availability of excess reserves in the banking system d. all of the above

Q: A non-competitivebid in the Treasury securities auction market is characterized by: a. the bidder specifying the quantity of bills desired b. the bid not exceeding a specific dollar amount c. the bidders paying a price equal to the weighted average price of all competitive bids accepted. d. all of the above.

Q: A competitivebid in the Treasury securities auction market has all of the following characteristics except: a. the bidder specifying the quantity of bills desired b. the price the investor wishes to pay c. large, institutional investors d. bids for a maximum of $5,000,000.

Q: A repurchase agreement calls for a. a firm to sell securities with the agreement to buy them back later at a higher price. b. a firm to buy securities with the agreement to sell them back later at a higher price. c. a firm to sell securities with the agreement to buy them back later at a lower price. d. a firm to buy securities with the agreement to sell them back later at a lower price.

Q: A reverserepurchase agreement calls for a. a firm to sell securities with the agreement to buy them back later at a higher price. b. a firm to buy securities with the agreement to sell them back later at a higher price. c. a firm to sell securities with the agreement to buy them back later at a lower price. d. a firm to buy securities with the agreement to sell them back later at a lower price.

Q: A firm buys $1,000,000 of a 30-day commercial paper issue for $995,450. The bond equivalent yield on this commercial paper is: a. 5.56% b. 5.46% c. 5.49% d. 5.54%

Q: A bank agrees to buy T-bills from a securities dealer for $997,250, and promises to sell the securities back to the dealer in 4 days for $997,575. The yield on this reverse repo for the bank is: a. 3.00% b. 2.97% c. 2.91% d. 2.86% e. 2.93%

Q: A repurchase agreement is like a secured loan because a. it involves two parties. b. it involves collateral, in this case the sale of a security under agreement to repurchase. c. it is backed by a mortgage on real property. d. it is like the secured lending in that a mortgage is effected by the lender.

Q: Yields on three-month T-bills are more similar to a. Two-year Treasury notes rates. b. Ninety-day commercial paper rates. c. federal funds rates. d. Aaa-rated corporate bond rates.

Q: Federal agency securities have higher yields than Treasury securities because a. they are less marketable than Treasury securities. b. they have higher exchange rate risk than Treasuries. c. they are more affected by interest rate risk. d. they are associated with mortgages that are riskier securities. e. Federal agency securities actually have lower yields than Treasury securities.

Q: If three-year securities are yielding 6% and two-year securities are yielding 5.5%, what is the expected one-year rate two years from now as implied by the two actual rates above? a. 4.7% b. 5.8% c. 6.5% d. 7.0% e. 7.5%

Q: If three-year securities are yielding 6% and two-year securities are yielding 5.5%, future short-term rates are expected to ______, and outstanding security prices are expected to ______. a. fall; fall. b. rise; fall. c. fall; rise. d. rise; rise

Q: A two-year interest rate is 7% and a one-year forward rate one year from now is 8%. According to the expectations theory, what is the current one-year rate? a. 6.0% b. 6.5% c. 7.0% d. 8.0% e. 9.0%

Q: According to the expectations theory, what is the one-year forward rate three years from now if three and four-year spot rates are 5.50% and 5.80%, respectively? a. The rate cannot be calculated from the information above. b. 6.2% c. 6.7% d. 5.6% e. 5.8%

Q: A one-year interest rate is 5.50% and a one-year forward rate two years from now is 6.0%. According to the expectations theory, what is the current two-year rate? a. The rate cannot be calculated from the information above. b. 5.0% c. 5.5% d. 6.0% e. 6.25%

Q: According to the expectations theory of the term structure of interest rates, if the yield curve slopes _______, the markets expect short-term interest rates to _______ in the future a. upward; increase b. downward; decrease c. upward; decrease d. both a and b e. both a and c

Q: According to the expectations theory of the term structure of interest rates, a. investors prefer holding short-term securities. b. the shape of the yield curve is determined by investors' expectations of future short-term interest rates. c. institutional investors' maturity preferences determine the shape of the yield curve. d. investors always expect short-term interest rates to increase. e. both a and b

Q: A downward sloping yield curve indicates that future short-term rates are expected to ______ and outstanding security prices will _______. a. fall; rise. b. fall; fall. c. rise; rise. d. rise; fall.

Q: An upward sloping yield curve indicates that security investors expect future interest rates to _____ and security prices to ______. a. fall; fall. b. fall; rise. c. rise; fall. d. rise; rise.

Q: An investor is more likely to exercise a put option on a bond aftera. an increase in interest rates.b. a decrease in interest rates.c. an increase in the bond's price.d. an upgrade of the bond's rating by Moody's.e.tax-free municipals become available.

Q: The source of data for a yield curve might bea.bond yield by issuers over time.b.historical Treasury security yields.c.realized Treasury security yields by time.d.outstanding Treasury security yields by maturity.

Q: The yield curve is a plot of a. maturity changes as risk changes. b. yields of securities with different levels of default risk. c. yields by maturity of securities with similar default risk. d. interest rates over time.

Q: The term structure of interest rates a. describes the relationship between maturity and yield for similar securities. b. ranks security yield according to the default risk structure. c. describes how interest rates vary over time. d. describes the pattern of interest rates over the business cycle.

Q: Which of the following statements is true? a. Interest rates always rise before recessions. b. Default risk premiums vary inversely with economic activity. c. Municipal bond yields are usually higher than similar risk corporate yields. d. Treasury bond yields are always higher than Treasury bill yields.

Q: Which of the following statements about bonds is NOT true? a. The greater the default risk, the greater the yield. b. Bonds selling at premium are especially high quality. c. The less marketable a bond, the higher the yield. d. Municipal bonds have lower yields than similar corporate bonds.

Q: The shape of the yield curve is determined by expectations of changes in future interest rates.

Q: The yield curves show the relationship between interest rates on bonds similar in terms except for maturity.

Q: Ceteris paribus, the required interest rate of a callable bond will be higher than the interest rate on a convertible bond.

Q: The expectations theory can explain why the yield curve slopes upward most of the time.

Q: According to the preferred habitat theory, investors may change their preferred maturity in response to expected yield premiums.

Q: The preferred habitat theory explains the existence of discontinuities in the yields curve.

Q: The market segmentation theory assumes that investors are risk-neutral.

Q: The market segmentation theory allows for the possibility of a discontinuous yield curve.

Q: Putable bonds offer higher yields than similar non-putable bonds

Q: Treasury and corporate security yields may be combined when plotting a yield curve.

Q: A convertible bond will generally have a higher market yield relative to similar nonconvertible bonds.

Q: A put option sets a "floor" or minimum price of a bond at the exercise price, which is generally at or above par value.

Q: An investor in the 33 percent tax bracket will buy a 6 percent municipal bond rather than a similarly rated 8.5 percent corporate bond.

Q: Investment-grade bonds are more likely to default than speculative-grade bonds.

Q: Liquidity premiums cause an observed yield curve to be less upward sloping than that predicted by the expectations theory.

Q: Everything else the same, the higher the marginal tax rate of an investor, the more likely the investor is to invest in municipal bonds as opposed to similarly rated corporate bonds.

Q: The call price of a bond is usually below the bond's par value.

Q: Callable bonds have higher market yields than otherwise similar noncallable bonds.

Q: Bonds rated BBB would have lower yields than AAA-rated bonds, and higher prices, everything else the same.

Q: Default risk premiums are usually smaller during periods of high economic growth.

Q: The less marketable a security, the higher its yield.

Q: A downward sloping yield curve is typically seen just before an economic expansion.

Q: A downward sloping yield curve forecasts higher future interest rates.

Q: The major reason that municipal bonds have lower yields than corporate bonds is that, as a class, municipal debt has less marketability than corporate debt.

Q: Expected lower rates of inflation will lead to an upward sloping yield curve.

Q: A descending yield curve forecasts higher short-term rates in the future.

Q: If interest rates are expected to increase in the future, one would expect to see an upward sloping yield curve.

Q: Explain (a.) liquidity problem in bond market, (b.) default risk, and (c.) maturity risk premiums.