16: Money Markets

1. 2. 3. Money markets can broadly be characterized as: (a) wholesale markets. (b) direct markets. (c) primary markets. (d) indirect markets. (e) secondary markets. In the money market: (a) money is traded. (b) short-term bonds are traded. (c) long-term bonds are traded. (d) stocks are traded. Money market securities sold in the secondary market do not include: (a) Treasury bills. (b) federal funds. (c) repurchase agreements. (d) negotiable certificates of deposit. (e) bankers acceptances. The money market instruments most conducive to the flow of international trade are: (a) Eurodollar deposits. (b) repurchase agreements [repos]. (c) bankers acceptances. (d) foreign exchange insurance. (e) negotiable certificates of deposit. The most widely-held liquid securities are: (a) commercial paper. (b) bankers acceptances. (c) negotiable certificates of deposit. (d) U.S. Treasury bills. (e) guaranteed mortgages. Financial instruments sold in money markets do not include: (a) negotiable CDs. (b) repos. (c) mortgages. (d) Eurodollars. (e) bankers acceptances. Financial securities are assets for the __________ and liabilities for the _________. (a) issuer, buyer. (b) buyer, issuer. (c) grantor, grantee. (d) brokerage house, client. Money market instruments do not include: (a) repos. (b) bankers acceptances. (c) commercial paper. (d) financial derivatives. (e) U.S. Treasury bills. (f) loans through the federal funds market. (g) short term negotiable certificates of deposit. The money market securities that tend to yield the lowest interest rates are: (a) U.S. Treasury bills. (b) bankers acceptances. (c) negotiable certificates of deposit. (d) U.S. Treasury bonds. (e) commercial paper. The least liquid money market instruments are: (a) repos. (b) commercial paper. (c) Treasury bonds. (d) bankers acceptances. (e) securitized mortgages. The least homogeneous and standardized, and consequently, the least liquid of the following financial assets would be: (a) futures contracts. (b) investment grade corporate bonds. (c) bankers acceptances. (d) repos. (e) thirty-year U.S. Treasury bonds. (f) commercial paper. (g) T-bills. (h) Eurodollar accounts. The relatively least standardized forms of money market securities are: (a) repos. (b) bankers acceptances. (c) commercial paper. (d) Treasury bills. (e) Eurodollar accounts.

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Money market instruments do not include: (a) Treasury bills. (b) commercial paper and repos. (c) Treasury bonds and standard certificates of deposit. (d) bankers acceptances and loans through the federal funds market. (e) Eurodllars. Money market instruments have maturity of less than: (a) 90 days. (b) six months. (c) one year. (d) ten years. Bearer instruments, meaning that anyone who physically presents the security to the issuer at maturity receives the principal and interest, include: (a) common stocks. (b) negotiable certificates of deposits. (c) commercial paper. (d) corporate debentures. (e) securitized derivatives. Money market repos are seldom if ever: (a) low risk loans. (b) collateralized with Treasury securities. (c) low interest rate loans. (d) substitutes for funds that could be secured from the FEDs discount window or through the federal funds market. (e) defaulted. Most U.S. Treasury bills are sold directly to: (a) pension funds. (b) competitive bidders. (c) the Federal Reserve System. (d) noncompetitive bidders. (e) money market mutual funds. Money market instruments tend to NOT be characterized by: (a) short terms. (b) high liquidity. (c) low default risk. (d) non-standardization. (e) high volumes. Many financial institutions warehouse surplus funds in money market instruments because: (a) money markets usually generate the highest average rates of return. (b) capital markets are less risky and tend to yield lower rates of return. (c) most financial institution are quite risk averse and thus, are reluctant to invest in capital securities. (d) the timing may not be quite right for longer-term investments in higheryield stocks, bonds, or loans. Money market securities: (a) have a relatively high default risk, making them risk averse. (b) mature in less than five years from the time of issue. (c) are usually sold in hefty denominations. (d) are primarily issued by federal and local governments. Eurodollar accounts came into existence in the late 1950s in part because: (a) during the Cold War, the Soviet Union recognized that most of the world treated U.S. dollars as a global medium of exchange, but feared the U.S. government might freeze USSR assets held in American banks. (b) Euro denominated accounts reduced the transactions cost born by U.S. investors who were buying European capital assets. (c) many Western investors used Eurodollars to hedge against the growing power of the Chinese economy. (d) American banks paid higher real rates of interest than were paid by European banks. Bearer financial instruments that pay the holder the principal and all interest earned only at or after maturity are: (a) negotiable certificates of deposit: (b) preferred bonds. (c) convertible debentures. (d) typically adjusted for the rate of inflation over the

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life of the instrument. (e) usually sold at discount rates exceeding the interest rates for other comparably risky instruments. 23. A negotiable certificate of deposit. (CD) performs as: (a) a demand deposit and a bearer instrument. (b) time deposit and a term security. (c) a liquid instrument and an ownership share. (d) a bond and a share of common stock. (e) a call option and a hedge. Transaction costs incurred by a lender who desired to sell would be highest for the lender if the money market assets to be sold were: (b) U.S. Treasury bills. (a) negotiable CDs. (c) commercial paper. (d) bankers acceptances. (e) Eurodollars. Commercial paper is unlike other money market instruments in that trading in the transactions in the secondary markets are rare. Major reasons are that individual commercial banks specialize in making short-term loans [commercial paper] to specific individual corporations because: (a) they are better able to exploit the advantages of insider information, and they gain insight into particular industry dynamics through a learning-by-doing process. (b) this facilitates customization of the loan instruments, and it also facilitates dealing with potential abuses of asymmetric information. (c) the spread is greater on commercial loans than it is with such capital market instruments as Treasury bills or corporate debentures. (d) individual corporate borrowers are more likely to keep their demand and time deposits in the banks that are willing to lend them shortterm funds. NOT among characteristics of commercial paper would be that it is usually issued: (a) with maturity of from one to seven years. (b) to finance accounts receivable and inventories. (c) by large, creditworthy corporations. (d) as an unsecured promissory note. (e) at a discount reflecting prevailing market interest rates. The __________ market is a financial market in which only short-term debt instruments. (original maturity of less than one year) are traded; the __________ market is the market in which longer-term debt. (original maturity of one year or greater) and equity instruments are traded. (a) securities, bond. (b) primary, secondary. (c) exchange, commodities. (d) money, capital. Bankers acceptances are important primarily because they facilitate: (a) increased velocity in secondary markets for money market instruments. (b) the generation of discretionary revenue for commercial banks. (c) the process of creative response. (d) international transactions between individuals or firms concerned about the credit risk associated with dealing with foreign buyers. The bankers acceptances by which banks agree to pay the holder specified amounts of money on specific dates are: (a) effectively loans in forward markets. (b) subject to significant default risk. (c) money market instruments commonly bought and sold until maturity. (d) characterized by relatively high interest rates, much like junk bonds. (e) legally required to be strictly domestic to avoid foreign exchange risk. The financial markets or instruments that are least attributable to creative responses in financial markets would be: (a) the Eurodollar market. (b) the federal funds

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market. (c) discount loans from a FRS District Bank. (d) the emergence of large saving and loan associations and credit unions in the 1930s. 31. Extremely short term loans of reserves between Federal Reserve member banks are channeled through the privately operated market called the: (a) excess capital market. (b) federal funds market. (c) grey loan market. (d) network assistance market. Neither the Federal Reserve System nor any other federal, state, or local government agency directly controls the: (a) discount rate. (b) reserve requirement ratio. (c) federal funds rate. (d) margin requirement. (e) usury ceiling that limits the amounts that lenders can charge to borrowers. The interest rate on overnight loans of reserves from one Federal Reserve member bank to another is the: (a) nominal interest rate. (b) real interest rate. (c) reserve rate. (d) federal funds rate. (e) discount rate. The legal maximum maturity for a federal fund loan is: (a) one day. (b) seven days. (c) one year. (d) one year. (e) 181 days. (f) 270 days. The federal funds market is often used to cover overnight bank borrowing and lending needs. The European version of the federal funds market entails an interest rate very closely tied to the federal funds rate, known as the. (a) SIBOR, Swiss inter-bank offer rate. (b) PIBOR, Paris inter-bank offer rate (c) EIBOR, European inter-bank offer rate (d) LIBOR, (London inter-bank offer rate). (e) euro market rate. The explicit rate of interest paid on T-bills is: (a) paid by the government who issues it. (b) zero because T-bills are sold at a discount from their face value at maturity, so interest is implicit. (c) usually higher than the rate of interest on Treasury bonds. (d) equal to the prime rate plus one or two percentage points. A bidder is certain to secure the amounts of T-Bills it wants to buy if it: (a) bids more than the average of all bids received by the Treasury. (b) makes a noncompetitive bid for T-bills. (c) structures a repo for T-bills that is lower than any other repo offered on the market. (d) bids less than the average of all bids received by the Treasury. The largest percentage of any one issue of T-Bills that any one dealer can purchase is: (a) 40%. (b) 35%. (c) 30%. (d) 25%. The Treasury announces the amount of T-Bills it will sell on ________ and interested companies must submit their bids by ____________: (a) Tuesday, \ Friday. (b) Thursday \ Wednesday. (c) Thursday \ Monday. (d) Monday \ Thursday. The United States Department of the Treasury is a unique participant in the money market because it: (a) always operates on both sides (buying and selling) of the market. (b) is always just a supplier in the market. (c) is only sometimes a supplier but always a demander. (d) is always only a demander in the market.

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The United States Department of the Treasury is a unique participant in the money market because it: (a) is never a supplier of funds in the market. (b) always buys more bonds than it sells if the federal budget is in surplus. (c) sells more bonds than it buys only when the federal budget is in deficit. (d) never deals in the market directly, instead using the Fed open market operations as a surrogate. Finance companies raise funds and thereby provide consumers indirect access to money markets by selling: (a) commercial paper. (b) shares of their common stock. (c) securitized short-term personal loans. (d) collateralized foreign exchange. (e) financial acceptances. (f) debentures. A bidder in an auction of T-bills conducted by the U.S. Department of the Treasury is certain to secure the amounts of T-Bills the bidder wants to buy if it: (a) bids more than the average of all bids received by the Treasury. (b) makes a noncompetitive bid for T-bills. (c) structures a repo for T-bills that is lower than any other repo offered on the market. (d) bids less than the average of all bids received by the Treasury.

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