Commercial Paper
4th Ed
Chapter 5:
Money Markets
True/False
1. Everything else equal, an effective annual rate will be greater than the bond equivalent yield on the same security.
Answer: True
Level: Easy
2. Money markets exist to help reduce the opportunity cost of holding cash balances.
Answer: True
Level: Easy
3. The majority of money market securities are low denomination, low risk investments designed to appeal to individual investors with excess cash.
Answer: False
Level: Easy
4. Commercial paper is a short term obligation of the U.S. government issued to cover government budget deficits and to refinance maturing government debt.
Answer: False
Level: Easy
5. Commercial paper, Treasury bills and banker’s acceptance rates are all quoted as discount …show more content…
The most liquid of the money market securities are
A) Commercial paper
Ch 5 - 6
4th Ed
B)
C)
D)
E)
Banker's acceptances
T-Bills
Fed funds
Repurchase agreements
Answer: C
Level: Easy
29. In dollars outstanding in 2007 the largest money market security was
A) Commercial paper
B) Banker's acceptances
C) T-Bills
D) Fed funds & repos
Answer: D
Level: Medium
30. You buy a $10,000 par Treasury bill at $9,575 and sell it 60 days later for $9,675. What was your EAR?
A) 4.44%
B) 6.29%
C) 6.35%
D) 6.52%
E) 6.67%
Answer: D
Level: Medium
31. LIBOR is generally _____ the Fed funds rate because foreign bank deposits are generally
_____ than domestic bank deposits
A) Greater than; less risky
B) Less than; more risky
C) The same as; equally risk
D) Greater than; more risky
E) Less than; less risky
Answer: D
Level: Medium
32. A U.S. exporter sells $150,000 of furniture to a Latin American importer. The exporter requires the importer to obtain a letter of credit. When the bank accepts the draft the exporter
Ch 5 - 7
4th Ed
discounts the 120 day note at a 5.25% discount. What is the exporter’s true effective annual financing cost?
A) 5.52%
B) 5.42%
C) 5.34%
D) …show more content…
Why do most money market securities have large denominations?
Answer: The market has developed for institutional investors because institutional investors have large enough quantities of money to make it costly for them to not invest their excess funds. For most individual investors the dollars lost by not keeping fully invested in interest bearing assets is very minimal.
Level: Easy
44. Given the functions of the money markets, why is it necessary for money market securities to have a maturity of one year or less and low default risk?
Answer: Because these markets are designed to provide safe investments with little or no chance of principle loss. If you could lose principle you would be very unlikely to invest funds that are shortly needed. Low default risk implies that the promised cash flows will in all likelihood be paid in full and on time. The short maturity ensures that the value of these securities will be relatively insensitive to interest rate changes, and also there is not much time for the issuer's condition to change; this also limits the risk.
Level: Medium
45. What is the difference between a discriminating auction and a single price auction? How is the final price determined in a single price auction? Why did the Treasury switch to a
Chapter 5:
Money Markets
True/False
1. Everything else equal, an effective annual rate will be greater than the bond equivalent yield on the same security.
Answer: True
Level: Easy
2. Money markets exist to help reduce the opportunity cost of holding cash balances.
Answer: True
Level: Easy
3. The majority of money market securities are low denomination, low risk investments designed to appeal to individual investors with excess cash.
Answer: False
Level: Easy
4. Commercial paper is a short term obligation of the U.S. government issued to cover government budget deficits and to refinance maturing government debt.
Answer: False
Level: Easy
5. Commercial paper, Treasury bills and banker’s acceptance rates are all quoted as discount …show more content…
The most liquid of the money market securities are
A) Commercial paper
Ch 5 - 6
4th Ed
B)
C)
D)
E)
Banker's acceptances
T-Bills
Fed funds
Repurchase agreements
Answer: C
Level: Easy
29. In dollars outstanding in 2007 the largest money market security was
A) Commercial paper
B) Banker's acceptances
C) T-Bills
D) Fed funds & repos
Answer: D
Level: Medium
30. You buy a $10,000 par Treasury bill at $9,575 and sell it 60 days later for $9,675. What was your EAR?
A) 4.44%
B) 6.29%
C) 6.35%
D) 6.52%
E) 6.67%
Answer: D
Level: Medium
31. LIBOR is generally _____ the Fed funds rate because foreign bank deposits are generally
_____ than domestic bank deposits
A) Greater than; less risky
B) Less than; more risky
C) The same as; equally risk
D) Greater than; more risky
E) Less than; less risky
Answer: D
Level: Medium
32. A U.S. exporter sells $150,000 of furniture to a Latin American importer. The exporter requires the importer to obtain a letter of credit. When the bank accepts the draft the exporter
Ch 5 - 7
4th Ed
discounts the 120 day note at a 5.25% discount. What is the exporter’s true effective annual financing cost?
A) 5.52%
B) 5.42%
C) 5.34%
D) …show more content…
Why do most money market securities have large denominations?
Answer: The market has developed for institutional investors because institutional investors have large enough quantities of money to make it costly for them to not invest their excess funds. For most individual investors the dollars lost by not keeping fully invested in interest bearing assets is very minimal.
Level: Easy
44. Given the functions of the money markets, why is it necessary for money market securities to have a maturity of one year or less and low default risk?
Answer: Because these markets are designed to provide safe investments with little or no chance of principle loss. If you could lose principle you would be very unlikely to invest funds that are shortly needed. Low default risk implies that the promised cash flows will in all likelihood be paid in full and on time. The short maturity ensures that the value of these securities will be relatively insensitive to interest rate changes, and also there is not much time for the issuer's condition to change; this also limits the risk.
Level: Medium
45. What is the difference between a discriminating auction and a single price auction? How is the final price determined in a single price auction? Why did the Treasury switch to a