Test Bank Of Financial Markets and Institutions 11th Edition Jeff Madura
Chapter 6—Money Markets
1. Securities with maturities of one year or less are classified as
a. capital market instruments.
b. money market instruments.
c. preferred stock.
d. none of the above
ANS: B PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.06.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge
2. Which of the following is not a money market security?
a. Treasury bill
b. negotiable certificate of deposit
c. common stock
d. federal funds
ANS: C PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.06.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge
3. ____ are sold at an auction at a discount from par value.
a. Treasury bills
b. Repurchase agreements
c. Banker’s acceptances
d. Commercial paper
ANS: A PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.06.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge
4. Jarrod King, a private investor, purchases a Treasury bill with a $10,000 par value for $9,645. One hundred days later, Jarrod sells the T-bill for $9,719. What is Jarrod’s expected annualized yield from this transaction?
a. 13.43 percent
b. 2.78 percent
c. 10.55 percent
d. 2.80 percent
e. none of the above
ANS: D PTS: 1 DIF: Moderate OBJ: FMAI.MADU.15.06.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Application
5. If an investor buys a T-bill with a 90-day maturity and $50,000 par value for $48,500 and holds it to maturity, what is the annualized yield?
a. about 13.4 percent
b. about 12.5 percent
c. about 11.3 percent
d. about 11.6 percent
e. about 10.7 percent
ANS: B PTS: 1 DIF: Moderate OBJ: FMAI.MADU.15.06.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Application
6. An investor buys a T-bill with 180 days to maturity and $250,000 par value for $242,000. He plans to sell it after 60 days, and forecasts a selling price of $247,000 at that time. What is the annualized yield based on this expectation?
a. about 10.1 percent
b. about 12.6 percent
c. about 11.4 percent
d. about 13.5 percent
e. about 14.3 percent
ANS: B PTS: 1 DIF: Challenging OBJ: FMAI.MADU.15.06.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Application
7. Assume investors require a 5 percent annualized return on a six-month T-bill with a par value of $10,000. The price investors would be willing to pay is $____.
a. 10,000
b. 9,524
c. 9,756
d. none of the above
ANS: C PTS: 1 DIF: Moderate OBJ: FMAI.MADU.15.06.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Application
8. A newly issued T-bill with a $10,000 par value sells for $9,750, and has a 90-day maturity. What is the discount?
a. 10.26 percent
b. 0.26 percent
c. $2,500
d. 10.00 percent
e. 11.00 percent
ANS: D PTS: 1 DIF: Moderate OBJ: FMAI.MADU.15.06.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Application
9. Large corporations typically make ____ bids for T-bills so they can purchase larger amounts.
a. competitive
b. noncompetitive
c. very small
d. none of the above
ANS: A PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.06.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge
10. At any given time, the yield on commercial paper is ____ the yield on a T-bill with the same maturity.
a. slightly less than
b. slightly higher than
c. equal to
d. A and B both occur with about equal frequency
ANS: B PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.06.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge
11. T-bills and commercial paper are sold
a. with a stated coupon rate.
b. at a discount from par value.
c. at a premium about par value.
d. A and C
e. none of the above
ANS: B PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.06.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge
12. ____ is a short-term debt instrument issued only be well-known, creditworthy firms and is normally issued to provide liquidity or finance a firm’s investment in inventory and accounts receivable.
a. A banker’s acceptance
b. A repurchase agreement
c. Commercial paper
d. A Treasury bill
ANS: C PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.06.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge
13. Commercial paper has a maximum maturity of ____ days.
a. 45
b. 270
c. 360
d. none of the above
ANS: B PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.06.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge
14. An investor buys commercial paper with a 60-day maturity for $985,000. Par value is $1,000,000, and the investor holds it to maturity. What is the annualized yield?
a. 8.62 percent
b. 8.78 percent
c. 8.90 percent
d. 9.14 percent
e. 9.00 percent
ANS: D PTS: 1 DIF: Moderate OBJ: FMAI.MADU.15.06.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Application
15. 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?
a. 12.12 percent
b. 11.11 percent
c. 13.00 percent
d. 14.08 percent
e. 15.25 percent
ANS: A PTS: 1 DIF: Moderate OBJ: FMAI.MADU.15.06.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Application
16. When firms sell commercial paper at a ____ price than they projected, their cost of raising funds is ____ than projected.
a. higher; higher
b. lower; lower
c. A and B
d. none of the above
ANS: D PTS: 1 DIF: Moderate OBJ: FMAI.MADU.15.06.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Comprehension
17. Which of the following is not a money market instrument?
a. banker’s acceptance
b. commercial paper
c. negotiable CDs
d. repurchase agreements
e. all of the above are money market instruments
ANS: E PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.06.02
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge
18. 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?
a. 9.43 percent
b. 9.28 percent
c. 9.14 percent
d. 9.00 percent
ANS: C PTS: 1 DIF: Moderate OBJ: FMAI.MADU.15.06.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Application
19. The federal funds market allows depository institutions to borrow
a. short-term funds from each other.
b. short-term funds from the Treasury.
c. long-term funds from each other.
d. long-term funds from the Federal Reserve.
e. B and D
ANS: A PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.06.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Comprehension
20. When a bank guarantees a future payment to a firm, the financial instrument used is called
a. a repurchase agreement.
b. a negotiable CD.
c. a banker’s acceptance.
d. commercial paper.
ANS: C PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.06.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge
21. Which of the following instruments has a highly active secondary market?
a. banker’s acceptances
b. commercial paper
c. federal funds
d. repurchase agreements
ANS: A PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.06.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge
22. Which of the following is true of money market instruments?
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
ANS: A PTS: 1 DIF: Moderate OBJ: FMAI.MADU.15.06.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Comprehension
23. An investor purchased an NCD a year ago in the secondary market for $980,000. He redeems it today and receives $1,000,000. He also receives interest of $30,000. The investor’s annualized yield on this investment is
a. 2.0 percent.
b. 5.10 percent.
c. 5.00 percent.
d. 2.04 percent.
ANS: B PTS: 1 DIF: Moderate OBJ: FMAI.MADU.15.06.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Application
24. 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. 3.10
b. 0.77
c. 1.00
d. none of the above
ANS: A PTS: 1 DIF: Moderate OBJ: FMAI.MADU.15.06.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Application
25. The rate at which depository institutions effectively lend or borrow funds from each other is the ____.
a. federal funds rate
b. discount rate
c. prime rate
d. repo rate
ANS: A PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.06.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge
26. ____ are the most active participants in the federal funds market.
a. Savings and loan associations
b. Securities firms
c. Credit unions
d. Commercial banks
ANS: D PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.06.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge
27. Eurodollar deposits
a. are U.S. dollars deposited in the U.S. by European investors.
b. are subject to interest rate ceilings.
c. have a relatively large spread between deposit and loan rates (compared to the spread between deposits and loans in the United States).
d. are not subject to reserve requirements.
ANS: D PTS: 1 DIF: Moderate OBJ: FMAI.MADU.15.06.04
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Comprehension
28. Which money market transaction is most likely to represent a loan from one commercial bank to another?
a. banker’s acceptance
b. negotiable CD
c. federal funds
d. commercial paper
ANS: C PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.06.04
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge
29. The rate on Eurodollar floating rate CDs is based on
a. a weighted average of European prime rates.
b. the London Interbank Offer Rate.
c. the U.S. prime rate.
d. a weighted average of European discount rates.
ANS: B PTS: 1 DIF: Moderate OBJ: FMAI.MADU.15.06.04
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge
30. Treasury bills
a. have a maturity of up to five years.
b. have an active secondary market.
c. are commonly sold at par value.
d. commonly offer coupon payments.
ANS: B PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.06.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge
31. The yield on commercial paper is ____ the yield of Treasury bills of the same maturity. The difference between their yields would be especially large during a ____ period.
a. greater than; recessionary
b. greater than; boom economy
c. less than; boom economy
d. less than; recessionary
ANS: A PTS: 1 DIF: Moderate OBJ: FMAI.MADU.15.06.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Comprehension
32. The yield on NCDs is ____ the yield of Treasury bills of the same maturity. The difference between their yields would be especially large during a ____ period.
a. greater than; recessionary
b. greater than; boom economy
c. less than; boom economy
d. less than; recessionary
ANS: A PTS: 1 DIF: Moderate OBJ: FMAI.MADU.15.06.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Comprehension
33. Which of the following is sometimes issued in the primary market by nonfinancial firms to borrow funds?
a. NCDs
b. retail CDs
c. commercial paper
d. federal funds
ANS: C PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.06.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge
34. The so-called “flight to quality” causes the risk differential between risky and risk-free securities to be
a. eliminated.
b. reduced.
c. increased.
d. unchanged (there is no effect).
ANS: C PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.06.03
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge
35. The effective yield of a foreign money market security is ____ when the foreign currency strengthens against the dollar.
a. increased
b. reduced
c. always negative
d. unaffected
ANS: A PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.06.04
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge
36. The effective yield of a foreign money market security is ____ when the foreign currency weakens against the dollar.
a. increased
b. reduced
c. always negative
d. unaffected
ANS: B PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.06.04
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge
37. Treasury bills are sold through ____ when initially issued.
a. insurance companies
b. commercial paper dealers
c. auction
d. finance companies
ANS: C PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.06.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge
38. At a given point in time, the actual price paid for a three-month Treasury bill is
a. usually equal to the par value.
b. more than the price paid for a six-month Treasury bill.
c. equal to the price paid for a six-month Treasury bill.
d. none of the above
ANS: B PTS: 1 DIF: Moderate OBJ: FMAI.MADU.15.06.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Comprehension
39. The minimum denomination of commercial paper is
a. $25,000.
b. $100,000.
c. $150,000.
d. $200,000.
ANS: B PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.06.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge
40. Commercial paper is
a. always directly placed with investors.
b. always placed with the help of commercial paper dealers.
c. placed either directly or with the help of commercial paper dealers.
d. always placed by bank holding companies.
ANS: C PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.06.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge
41. An investor, purchases a six-month (182-day) T-bill with a $10,000 par value for $9,700. If the Treasury bill is held to maturity, the annualized yield is ____ percent.
a. 6.02
b. 1.54
c. 1.50
d. 6.20
e. none of the above
ANS: D PTS: 1 DIF: Moderate OBJ: FMAI.MADU.15.06.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Application
42. When an investor purchases a six-month (182-day) T-bill with a $10,000 par value for $9,700, the Treasury bill discount is ____ percent.
a. 5.93
b. 6.12
c. 6.20
d. 6.02
e. none of the above
ANS: A PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.06.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Application
43. Robbins Corp. frequently invests excess funds in the Mexican money market. One year ago, Robbins invested in a one-year Mexican money market security that provided a yield of 25 percent. At the end of the year, when Robbins converted the Mexican pesos to dollars, the peso had depreciated from $.12 to $.11. What is the effective yield earned by Robbins?
a. 25.00 percent
b. 35.41 percent
c. 14.59 percent
d. none of the above
ANS: C PTS: 1 DIF: Moderate OBJ: FMAI.MADU.15.06.04
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Application
44. An aggregate purchase by investors of low-yield instruments in favor of high-yield instruments places ____ pressure on the yields of low-yield securities and ____ on the yields of high-yield securities.
a. upward; upward
b. downward; downward
c. upward; downward
d. downward; upward
ANS: D PTS: 1 DIF: Moderate OBJ: FMAI.MADU.15.06.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Comprehension
45. Which of the following statements is incorrect with respect to the federal funds rate?
a. It is the rate charged by financial institutions on loans they extend to each other.
b. It is not influenced by the supply and demand for funds in the federal funds market.
c. The federal funds rate is closely monitored by all types of firms.
d. Many market participants view changes in the federal funds rate to be an indicator of potential changes in other money market rates.
e. The Federal Reserve adjusts the amount of funds in depository institutions in order to influence the federal funds rate.
ANS: B PTS: 1 DIF: Moderate OBJ: FMAI.MADU.15.06.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Comprehension
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