Question 1

The so-called "flight to quality" causes the risk differential between risky and risk-free securities to be

Accepted Answer

A)  eliminated. 
B)  reduced. 
C)  increased. 
D)  unchanged (there is no effect). 
A)  eliminated. 
B)  reduced. 
C)  increased. 
D)  unchanged (there is no effect).

Question 2

Which of the following is not a money market instrument?

Accepted Answer

A)  banker's acceptance 
B)  commercial paper 
C)  negotiable CDs 
D)  repurchase agreements 
E)  All of the above are money market instruments. 
A)  banker's acceptance 
B)  commercial paper 
C)  negotiable CDs 
D)  repurchase agreements 
E)  All of the above are money market instruments.

Question 3

An investor purchased an NCD a year ago in the secondary market for $980,000. She redeems it today and receives $1,000,000. She also receives interest of $30,000. The investor's annualized yieldon this investment is

Accepted Answer

A)  2.0 percent. 
B)  5.10 percent. 
C)  5.00 percent. 
D)  2.04 percent. 
A)  2.0 percent. 
B)  5.10 percent. 
C)  5.00 percent. 
D)  2.04 percent.

Question 4

An investor initially purchased securities at a price of $9,923,418, with an agreement to sell them back at a price of $10,000,000 at the end of a 90-day period. The repo rate is ____ percent.

Accepted Answer

A)  3.1 
B)  0.77 
C)  1 
D)  none of the above 
A)  3.1 
B)  0.77 
C)  1 
D)  none of the above

Question 5

A firm plans to issue 30-day commercial paper for $9,900,000. Par value is $10,000,000. What is the firm's cost of borrowing?

Accepted Answer

A)  12.12 percent 
B)  11.11 percent 
C)  13.00 percent 
D)  14.08 percent 
E)  15.25 percent 
A)  12.12 percent 
B)  11.11 percent 
C)  13.00 percent 
D)  14.08 percent 
E)  15.25 percent

Question 6

T-bills must offer a premium above the negotiable certificate of deposit (NCD) to compensate for less liquidity and safety.

Accepted Answer

A) True 
 B)False

Question 7

A major drawback to investing in Treasury bills is that they cannot easily be liquidated.

Accepted Answer

A) True 
 B)False

Question 8

Junk commercial paper is commercial paper that is not rated or is rated low.

Accepted Answer

A) True 
 B)False

Question 9

Most repo transactions use government securities.

Accepted Answer

A) True 
 B)False

Question 10

Treasury bills are sold through ____ when initially issued.

Accepted Answer

A)  insurance companies 
B)  commercial paper dealers 
C)  auction 
D)  finance companies 
A)  insurance companies 
B)  commercial paper dealers 
C)  auction 
D)  finance companies

Question 11

Credit guarantees for commercial paper:

Accepted Answer

A)  ensure that the issuer of commercial paper will use the funds obtained to provide credit. 
B)  are issued by the Federal Reserve Bank of New York. 
C)  are only as good as the credit of the guarantor. 
D)  A and C 
A)  ensure that the issuer of commercial paper will use the funds obtained to provide credit. 
B)  are issued by the Federal Reserve Bank of New York. 
C)  are only as good as the credit of the guarantor. 
D)  A and C

Question 12

Exporters can hold a banker's acceptance until the date at which payment is to be made, but they frequently sell the acceptance before then at a discount to obtain cash immediately.

Accepted Answer

A) True 
 B)False

Question 13

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?

Accepted Answer

A)  9.43 percent 
B)  9.28 percent 
C)  9.14 percent 
D)  9.00 percent 
A)  9.43 percent 
B)  9.28 percent 
C)  9.14 percent 
D)  9.00 percent

Question 14

Ignoring transaction costs, the cost of borrowing with commercial paper is equal to:

Accepted Answer

A)  the yield on T-bills of the same maturity 
B)  the yield earned by investors holding the paper until maturity. 
C)  the federal funds rate. 
D)  the par value of the paper. 
A)  the yield on T-bills of the same maturity 
B)  the yield earned by investors holding the paper until maturity. 
C)  the federal funds rate. 
D)  the par value of the paper.

Question 15

Which of the following securities is most likely to be used in a repo transaction?

Accepted Answer

A)  commercial paper 
B)  certificate of deposit 
C)  Treasury bill 
D)  common stock 
E)  All of the above are equally likely to be used in a repo transaction. 
A)  commercial paper 
B)  certificate of deposit 
C)  Treasury bill 
D)  common stock 
E)  All of the above are equally likely to be used in a repo transaction.

Question 16

When a bank guarantees a future payment to a firm, the financial instrument used is called

Accepted Answer

A)  a repurchase agreement. 
B)  a negotiable CD. 
C)  a banker's acceptance. 
D)  commercial paper. 
A)  a repurchase agreement. 
B)  a negotiable CD. 
C)  a banker's acceptance. 
D)  commercial paper.

Question 17

Which of the following is true of money market instruments?

Accepted Answer

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 
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

Question 18

Commercial paper has a maximum maturity of ____ days.

Accepted Answer

A)  45 
B)  270 
C)  360 
D)  none of the above 
A)  45 
B)  270 
C)  360 
D)  none of the above

Question 19

Which of the following is not a money market security?

Accepted Answer

A)  Treasury bill 
B)  negotiable certificate of deposit 
C)  common stock 
D)  federal funds 
A)  Treasury bill 
B)  negotiable certificate of deposit 
C)  common stock 
D)  federal funds

Question 20

T-bills do not offer coupon payments but are sold at a discount from par value.

Accepted Answer

A) True 
 B)False

Exam 6: Money Markets

The so-called "flight to quality" causes the risk differential between risky and risk-free securities to be

Which of the following is not a money market instrument?

An investor purchased an NCD a year ago in the secondary market for $980,000. She redeems it today and receives $1,000,000. She also receives interest of $30,000. The investor's annualized yieldon this investment is

An investor initially purchased securities at a price of $9,923,418, with an agreement to sell them back at a price of $10,000,000 at the end of a 90-day period. The repo rate is ____ percent.

A firm plans to issue 30-day commercial paper for $9,900,000. Par value is $10,000,000. What is the firm's cost of borrowing?

T-bills must offer a premium above the negotiable certificate of deposit (NCD) to compensate for less liquidity and safety.

A major drawback to investing in Treasury bills is that they cannot easily be liquidated.

Junk commercial paper is commercial paper that is not rated or is rated low.

Most repo transactions use government securities.

Treasury bills are sold through ____ when initially issued.

Credit guarantees for commercial paper:

Exporters can hold a banker's acceptance until the date at which payment is to be made, but they frequently sell the acceptance before then at a discount to obtain cash immediately.

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?

Ignoring transaction costs, the cost of borrowing with commercial paper is equal to:

Which of the following securities is most likely to be used in a repo transaction?

When a bank guarantees a future payment to a firm, the financial instrument used is called

Which of the following is true of money market instruments?

Commercial paper has a maximum maturity of ____ days.

Which of the following is not a money market security?

T-bills do not offer coupon payments but are sold at a discount from par value.

Role of Financial Markets and Institutions

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Structure of Interest Rates

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Market Microstructure and Strategies

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