TB 06

Chapter 6/Money Markets 235
Chapter 6
______________________________
Money Markets
1. Securities with maturities of one year or less are classified as
A) capital market instruments.
B) money market instruments.
C) preferred stock.
D) none of the above
ANSWER: B
2.
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 Jarrods 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 the above
ANSWER: D
3. 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
ANSWER: B
4. 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 expectation?
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
ANSWER: B
236 Chapter 6/Money Markets
5. 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
ANSWER: D
6. 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) A and B both occur with about equal frequency.
ANSWER: B
7. 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) A and C
ANSWER: B
8. 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
ANSWER: D
9. A firm plans to issue 30-day commercial paper for $9,900,000. Par value is $10,000,000. What is the
firms cost of borrowing?
A) 12.12 percent
B) 11.11 percent
C) 13.00 percent
D) 14.08 percent
E) 15.25 percent
ANSWER: A
10. 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) A and B
ANSWER: D
11. Which of the following is not a money market instrument?
A) bankers acceptance
B) commercial paper
C) negotiable CDs
D) repurchase agreements
E) All of the above are money market instruments.
ANSWER: E
12. A repurchase agreement calls for an investor to buy securities 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
ANSWER: C
13. 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) B and D.
ANSWER: A
14. 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 bankers acceptance.
D) commercial paper.
ANSWER: C
15. Which of the following instruments has a highly active secondary market?
A) bankers acceptances
B) commercial paper
C) federal funds
D) repurchase agreements
ANSWER: A
16. 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 initially issued (especially T-bills and commercial
paper).
C) Treasury bills have the highest yield.
D) They all make periodic coupon (interest) payments.
E) A and B
ANSWER: A
17. 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.
ANSWER: D
18. Which money market transaction is most likely to represent a loan from one commercial bank to
another?
A) bankers acceptance
B) negotiable CD
C) federal funds
D) commercial paper
ANSWER: C
19. 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.
ANSWER: B
20. 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.
ANSWER: B
21. 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
ANSWER: A
22. 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
ANSWER: A
23. 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
ANSWER: C
24. 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).
ANSWER: C
25. 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
ANSWER: A
26. 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.
ANSWER: B
27. Treasury bills are sold through _____ when initially issued.
A) insurance companies
B) commercial paper dealers
C) auction
D) finance companies
ANSWER: C
28. 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 the above.
ANSWER: B
29. The minimum denomination of commercial paper is
A) $25,000.
B) $100,000.
C) $150,000.
D) $200,000.
ANSWER: A
30. 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.
ANSWER: C
The following information refers to problems 31 and 32.

Bill Yates, a private investor, purchases a six-month (182-day) T-bill with a $10,000 par value for $9,700.
31. 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
ANSWER: D
32. The Treasury bill discount is ______ percent.
A) 5.93
B) 6.12
C) 6.20
D) 6.02
ANSWER: A
33. 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
ANSWER: C
34. 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
ANSWER: D
35. 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.
ANSWER: B
36. 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
ANSWER: C
37. 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.
ANSWER: D
38. In the wake of the September 11 attack, there was ________ demand for money market securities,
which placed _________ pressure on the yields of money market securities.
A) weak; downward
B) weak; upward
C) strong; upward
ANSWER: D

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Chapter 6/Money Markets 235

236 Chapter 6/Money Markets

Chapter 6/Money Markets 237

238 Chapter 6/Money Markets

Chapter 6/Money Markets 239

20. Treasury bills

240 Chapter 6/Money Markets

Chapter 6/Money Markets 241

The following information refers to problems 31 and 32.

242 Chapter 6/Money Markets

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