Chapter 11
1. What characteristics define the money markets?
The money markets can be characterized as having securities that trade in one year
or less, are of large denomination, and are very liquid.
2. What were the purpose motivating regulators to impose interest ceilings on
bank savings accounts?
What effect did this eventually have on the money markets?
Following the Great Depression, regulators were primarily concerned with stopping
banks from failing. By removing interest-rate competition, bank risk was
substantially reduced. The problem with these regulations was that when
market interest rates rose above the established interest-rate ceiling, investors
withdrew their funds from banks.
3. Why does the U.S. government use the money markets?
The U.S. government sells large numbers of securities in the money markets to
support government spending. Over the past several decades, the government
has spent more each year than it has received in tax revenues. It makes up the
difference by borrowing. Part of what it borrows comes from the money
markets.
4. Why do businesses use the money markets?
Businesses both invest and borrow in the money markets. They borrow to meet
short-term cash flow needs, often by issuing commercial paper. They invest in all
types of money market securities as an alternative to holding idle cash balances.
5. Which of the money market securities is the most liquid and considered the
most risk-free? Why?
Treasury bills are usually viewed as the most liquid and least risky of securities
because they are backed by the strength of the U.S. government and trade in
extremely large volumes.
6. Why are banker’s acceptances so popular for international transactions?
When trading is done across borders, there is no guarantee that the counterparty to
an international financial transaction can pay in the future. So, rather than
relying on the ability and creditworthiness of the counterparty, exporters
usually require the counterparty to obtain a ‘letter of credit’ from a well-known
bank that will agree to make good the importer’s obligation. When the exporter
complies with all terms of the transaction, the bank ‘accepts’ the obligation to
make payment to complete the transaction if the importer does not. Because
the bank’s credit is good, the banker’s acceptance can be sold easily in the
money markets and when it comes due; the bank will pay, if necessary, if the
importer does not.
1) Money market securities have all the following characteristics except they
are not
A) short term.
B) money.
C) low risk.
D) very liquid.
Answer:
2?
A) Most money market securities do not pay interest. Instead, the investor pays
less for the security than it will be worth when it matures.
B) Pension funds invest a portion of their assets in the money market to have
sufficient liquidity to meet their obligations.
C) Unlike most participants in the money market, the U.S. Treasury Department is
always a demander of money market funds and never a supplier.
D) All of the above are true.
E) Only A and B of the above are true.
Answer:
3) Finance companies raise funds in the money market by selling
A) commercial paper.
B) federal funds.
C) negotiable certificates of deposit.
D) Eurodollars.
Answer:
4) Suppose that you purchase a 91-day Treasury bill for $9,850 that is worth
$10,000 when it matures. The security's annualized yield if held to maturity is
about
A) 4 percent.
B) 5 percent.
C) 6 percent.
D) 7 percent.
Answer: C
Topic: Chapter 11.4 Money Market Instruments
Question Status: Previous Edition
5) Treasury bills do not
A) pay interest.
B) have a maturity date.
C) have a face amount.
D) have an active secondary market.
Answer: A
Topic: Chapter 11.4 Money Market Instruments
Question Status: Previous Edition
6) If your noncompetitive bid for a Treasury bill is successful, then you will
A) certainly pay less than if you had submitted a competitive bid.
B) certainly pay more than if you had submitted a competitive bid.
C) pay the average of prices offered in other noncompetitive bids.
D) pay the same as other successful noncompetitive bidders.
Answer: D
Topic: Chapter 11.4 Money Market Instruments
11) Commercial paper securities
A) are issued only by the largest and most creditworthy corporations, as they are
unsecured.
B) carry an interest rate that varies according to the firm's level of risk.
C) never have a term to maturity that exceeds 270 days.
D) all of the above.
E) only A and B of the above.
Answer: D
12) A banker's acceptance is
A) used to finance goods that have not yet been transferred from the seller to the
buyer.
B) an order to pay a specified amount of money to the bearer on a given date.
C) a relatively new money market security that arose in the 1960s as international
trade expanded.
D) all of the above.
E) only A and B of the above.
Answer: E
14) In a direct placement
A) the issuer bypasses the dealer and sells indirectly to the end investor.
B) the dealer sells directly to the end investor.
C) the issuer bypasses the dealer and sells directly to the end investor.
D) none of the above.
Answer: A
Topic: Chapter 11.4 Money Market Instruments
Question Status: Previous Edition
15) The usual maturity range for commercial paper is ________.
A) 1 to 270 days
B) 1 to 15 days
C) 4, 13, and 26 weeks
D) 1 to 7 days
Answer: A
Topic: Chapter 11.5 Comparing Money Market Securities
Question Status: New Question
1. What would be your annualized discount rate % and our annualized investment
rate % on the purchase of a 182-day Treasury bill for $4,925 that pays $5,000
at maturity?
Solution: Discount Rate
$5,000 $4,925 360
0.02967 2.967%
$5,000 182
$5,000 $4,925 365
0.03054 3.054%
Investment Rate $4,925 182
2. What would be the annualized discount rate % and the annualized investment
rate % if a Treasury bill was purchased for $9,360 maturing in 270 days for
$10,000?
Solution:
F−P 360
Discount rate= ×
F n
10,000−9,360 360
Discount rate= ×
10,000 270
Discount rate=0.0853 ≈ 8.53 %
F−P 365
Investment Rate= ×
P n
10,000−9,360 365
Investment Rate= ×
9,360 270
Investment Rate=0.0924 ≈ 9.24 % Investment Rate=0.0924 ≈ 9.24 %Investment Rate=0.0924 ≈ 9.24 %
4. What is the annualized discount rate % and investment rate % on a Treasury
bill that you purchase for $9,900 that will mature in 91 days for $10,000?
Solution: Discount Rate
$10,000 $9,900 360
0.03956 3.956%
$10,000 91
$10,000 $9,900 365
0.04052 4.052%
$9,900 91
Investment Rate
5. The price of 182-day commercial paper is $7,840. If the annualized investment
rate is 4.093%, what will the paper pay at maturity?
Solution: Let B what will be paid at maturity
[( B $7,840) / ($7,840)] (365 / 182) 0.04093
[( B $7,840) / ($7,840)] 2.0055 0.04093
( B $7,840) 2.0055 320.89
B $7,840 160
B $8,000
6. How much would you pay for a Treasury bill that matures in 182 days and
pays $10,000 if you
require a 1.8% discount rate?
Solution: Let C what you would pay
11. In a Treasury auction of $2.1 billion par value 91-day T-bills, the
following bids were submitted:
Bidder Bid Price
Amount
1 $500 million $0.9940
2 $750 million $0.9901
3 $1.5 billion $0.9925
4 $1 billion $0.9936
5 $600 million $0.9939
If only these competitive bids are received, who will receive T-bills, in what
quantity, and at what price?
Bidders 1, 4, and 5 will receive T-bills in the amount requested all at .9936.
12. If the Treasury also received $750 million in non-competitive bids, who will
receive T-bills, in what quantity, and at what price?
Solution: All competitive bids are accepted at the highest yield paid to
competitive bids. Thus, all $750 million will be accepted at .9936.
[($10,000 C ) /($10,000)] (360 /182) 0.018
[($10,000 C ) /($10,000)] 1.978 0.018
[($10,000 C )] 0.018 $10,000 1.978
$10,000 C 91
C $9,909
