Exam 11: Exploring the Reserve Accounting System, Money Markets, and Financial Instruments

Using the the description or the definition below, identify the key terms or concepts discussed in this chapter. a. Institutions originally government owned, but now privately owned that lend and guarantee loans in the private sector. b. Divisions of the federal government empowered to borrow and make credit availab1e to the private sector. c. A unit of the federal government that loans money through the U.S. Treasury Department. d. A method for marketing agency securities. e. A time draft against a bank.

There is no active secondary market for Eurodollar CDs.

Continuing-contract RP agreements require the consent of all parties to the agreement before they can be terminated.

The English or first-price sealed-bid auction method is currently used by the U.S. Treasury to market new Treasury bills.

Acceptance financing shifts the exposure of the importer's default risk from the lender to the bank.

Federal funds interest rates appear to change independent of other money market interest rates.

Under the lagged reserve accounting system currently employed by the Federal Reserve System to calculate transaction deposit reserve requirements, the reserve computation and reserve maintenance periods overlap completely.

A federal funds loan that has no specific maturity date and can be terminated by either borrower or lender without advance notice is known as a:

The most important financial institution operating in the money market is the commercial bank.

The round-lot trading unit for CDs bought and sold in the money market is $100,000.

Recently some characteristics about T-bills have changed. Among them:

Nonmember banks actually account for a larger volume of federal funds sold and purchased than member banks of the Federal Reserve System.

The following are among sources of funds for securities dealers:

A German manufacturer of furniture sells a large order of home furnishings to an outlet store in Houston. The Houston firm pays for the shipment by wiring funds from its local bank through Fed wire to the German firm's account at J.P. Morgan Chase Bank in New York City. Subsequently, the German manufacturer decides to invest half of the funds received in a dollar deposit offered by Barclays Bank in London, where interest rates are particularly attractive. No sooner are the funds deposited in London than a Japanese auto company, shipping cars to the U.S. and Europe, asks the London bank for a loan to purchase raw materials in the United States. Later, when the loan falls due, the Japanese firm will go into the currency market to purchase dollars in order to retire its Eurodollar loan at Barclays Bank, receiving a dollar deposit at a U.S. bank. When the loan is repaid, Barclays gains the dollar deposit in the United States and uses the deposit to pay off the German firm when its time deposit matures. The German firm chooses to deposit the funds received from Barclays in its demand deposit account at J.P. Morgan Chase Bank in New York City because it now needs to buy goods and services in the United States. Construct T accounts that reflect the foregoing transactions. In particular, show the proper entries for: (1) payment by the Houston firm to the German furniture company; (2) deposit of the funds in London; (3) the loan to the Japanese automaker; (4) repayment of the loan; and (5) return of funds to the United States. Indicate which deposit is a Eurodollar deposit and if any Eurodollars are destroyed at any particular stage.

According to the Primary Dealers Act the Federal Reserve must deny primary dealer designation to any U.S. securities house which refuses to deal with a foreign company and discriminates in favor of domestic customers over foreign customers.

____ ensures that the rates on the various money market instruments move together.

Enforcement of rules in the U.S. Government securities market is the responsibility of the Federal Trade Commission.

Due to the essentially risk less nature of federal funds loans, the federal funds interest rate is usually lower than the Fed's discount rate.

Compared to U.S. Treasury bills, money market CDs issued by the nation's largest, financially sound banks have ____ risk, ____ average yields and are ____ marketable. The three words which correctly complete the above sentence in the right order are:

Large banks tend to be net _______ in the federal funds market, while small banks tend to be net _______.