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

Bankers acceptances generally carry maturities ranging from 90 to 360 days.

Please evaluate bankers' acceptances as an investment instrument. What are its principal advantages and disadvantages to savers interested in finding a secure financial asset that is readily marketable?

Acceptance financing:

The commercial paper market is very resistant to risk.

In a market of rising interest rates and positively sloped yield curves a dealer's carry income and long position are both likely to be profitable.

Canada, like the U.S., auctions Canadian government bills each week.

One of the items listed below is not a component of Federal funds. Which one is not a component of Federal funds?

A company known as Standard Quality Importing ships videocassette recorders made in Japan to retail dealers in the United States and Western Europe. It decides to place an order with its Japanese supplier for 10,000 Hi-Fi VCRs at $575 each after securing a line of credit from Guaranty Security Bank in Los Angeles. Guaranty issues a credit letter to the Japanese supplier promising payment in U.S. dollars 90 days hence. However, the Japanese firm needs the promised funds within seven days from receipt of the credit letter to make purchases of technical components from an electronics firm in Phoenix, Arizona. Explain and illustrate with T accounts and diagrams how a bankers' acceptance would arise from the foregoing transactions, how the Japanese supplier could receive the dollars she needs in timely fashion and what would happen to the acceptance at the end of the 90-day period. Use T account entries to show the movement of funds from the importer to the Japanese supplier, to the electronics firm and to money market investors.

Treasury bills are one of the oldest financial instruments issued by the government of Japan, dating back to the 19th century.

For clues as to which direction Federal Reserve monetary policy may be moving, toward tighter credit conditions or toward looser credit conditions, is watched by money market investors.

CDs issued by smaller banks or by those banks viewed by capital-market investors as less stable are known as:

Commercial paper rates are highly volatile and fluctuate between extreme highs and lows.

The new system of lagged reserve requirements and lower reserve requirements overall have had what effect on borrowing from the Federal Reserve?

The two-week period over which the Federal Reserve calculates the daily average level of transaction deposits a bank holds for purposes of determining its legal reserve requirements is known as the:

A commercial bank that balances its short-term borrowing in the money market by holding an approximately equal volume of money market assets is following the:

A CD whose maturity extends beyond one year is referred to as a:

The amount of reserves needed is based on a daily average over a one month period.

ABC Corporation receives a letter of credit for 90 days from Republic Bank of New York to guarantee payment of $1.35 million for shipment of goods from an Italian manufacturer. Republic Bank charges a fee of 0.75 percentage points on the face value of the credit letter in return for its services of issuing the letter and, if properly presented, accepting a draft for payment that will eventually be sent by the foreign manufacturer. What is the total amount of the fee that ABC must pay Republic Bank for this service?

A bankers acceptance is a draft drawn on a bank by an exporter or an importer to help pay for merchandise or to purchase foreign currencies.

If the cost of borrowing funds is less than the interest earned on securities held: