chapter 6 | mcq

Question 1

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 these are correct.

Answer 1

b. money market instruments

Question 2

2. Which of the following is
   a. Treasury bill
   b. negotiable certificate
   c. common stock
   d. federal funds

Answer 2

c. common stock

Question 3

3. ____ is/are sold at an auction at a discount from par value.
   a. Treasury bills
   b. Repurchase agreements
   c. Banker’s acceptances
   d. Commercial paper

Answer 3

a. Treasury bills

Question 4

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 these are correct.

Answer 4

d. 2.80 percent

Question 5

5. 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 these are correct.

Answer 5

c. 9,756

Question 6

6. 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

Answer 6

d. 10.00 percent

Question 7

7. 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

Answer 7

a. competitive

Question 8

8. 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. slightly less than AND slightly higher than

Answer 8

b. slightly higher than

Question 9

9. 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. with a stated coupon rate AND at a premium about par value e. None of these are correct.

Answer 9

b. at a discount from par value

Question 10

10. Commercial paper has a maximum maturity of ____ days.
    a. 45
    b. 270
    c. 360
    d. None of these are correct.

Answer 10

b. 270

Question 11

11. 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

Answer 11

d. 9.14 percent

Question 12

12. 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

Answer 12

a. 12.12 percent

Question 13

13. 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 these are money market instruments.

Answer 13

e. All of these are money market instruments.

Question 14

14. 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

Answer 14

c. 9.14 percent

Question 15

15. 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. short-term funds from the Treasury AND long-term funds from the Federal Reserve.

Answer 15

a. short-term funds from each other.

Question 16

16. When a bank guarantees
    a. a repurchase agreement.
    b. a negotiable CD.
    c. a banker’s acceptance.
    d. commercial paper.

Answer 16

c. a banker’s acceptance.

Question 17

17. 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. Their yields are highly correlated over time AND they typically sell for par value when they are initially issued (especially T-bills and commercial paper).

Answer 17

a. Their yields are highly correlated over time.

Question 18

18. 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 yield on this investment is:
    a. 2.0 percent
    b. 5.10 percent
    c. 5.00 percent
    d. 2.04 percent

Answer 18

b. 5.10 percent

Question 19

19. 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 these are correct.

Answer 19

a. 3.10

Question 20

20. 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

Answer 20

a. federal funds rate

Question 21

21. ____ are the most active
    a. Savings and loan associations
    b. Securities firms
    c. Credit unions
    d. Commercial banks

Answer 21

d. Commercial banks

Question 22

22. Eurodollar deposits

a. are U.S. dollars deposited in the United States 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.

Answer 22

d. are not subject to reserve requirements.

Question 23

23. 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

Answer 23

c. federal funds

Question 24

24. 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.

Answer 24

b. the London Interbank Offer Rate.

Question 25

25. 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.

Answer 25

b. have an active secondary market.

Question 26

26. 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. higher than; recessionary b. higher than; boom economy c. less than; boom economy d. less than; recessionary

Answer 26

a. higher than; recessionary

Question 27

27. 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. higher than; recessionary b. higher than; boom economy c. less than; boom economy d. less than; recessionary

Answer 27

a. higher than; recessionary

Question 28

28. 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

Answer 28

c. commercial paper

Question 29

29. 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).

Answer 29

c. increased.

Question 30

30. 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

Answer 30

a. increased

Question 31

31. 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

Answer 31

b. reduced

Question 32

32. Treasury bills are sold through ____ when initially issued. a. insurance companies b. commercial paper dealers c. auction d. finance companies

Answer 32

c. auction

Question 33

33. 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 these are correct.

Answer 33

b. more than the price paid for a six-month Treasury bill.

Question 34

34. The minimum denomination of commercial paper is: a. $25,000 b. $100,000 c. $150,000 d. $200,000

Answer 34

b. $100,000

Question 35

35. 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.

Answer 35

c. placed either directly or with the help of commercial paper dealers.

Question 36

36. 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 these are correct.

Answer 36

d. 6.20

Question 37

37. 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 these are correct.

Answer 37

a. 5.93

Question 38

38. 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 these are correct.

Answer 38

c. 14.59 percent

Question 39

39. 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 of 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 as 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.

Answer 39

b. It is not influenced by the supply of and demand for funds in the federal funds market.

Question 40

40. Commercial paper is subject to: a. interest rate risk b. credit risk c. interest rate risk AND credit risk d. None of these are correct.

Answer 40

c. interest rate risk AND credit risk

Question 41

41. If economic conditions cause investors to sell stocks because they want to invest in safer securities with much liquidity, this should cause a ____ demand for money market securities, which would place ____ pressure on the yields of money market securities. a. weak; downward b. weak; upward c. strong; upward d. None of these are correct.

Answer 41

d. None of these are correct.

Question 42

42. In general, the money markets are widely perceived to be efficient in the sense that the prices reflect all available public information. a. True b. False

Answer 42

a. True

Question 43

43. Money market securities are must have a maturity of three months or less. a. True b. False

Answer 43

b. False

Question 44

44. Money market securities are issued in the primary market through a telecommunications network by the Treasury, corporations, and financial intermediaries that wish to obtain short-term financing. a. True b. False

Answer 44

a. True

Question 45

45. An international interbank market facilitates the transfer of funds from banks with excess funds to those with deficient funds. a. True b. False

Answer 45

a. True

Question 46

46. The interest rate charged for a short-term loan from a bank to a corporation is referred to as the London Interbank Offer Rate (LIBOR). a. True b. False

Answer 46

b. False

Question 47

47. Money markets facilitate the transfer of short-term funds from individuals, corporations, or are used governments with excess funds to those with deficient funds. a. True b. False

Answer 47

a. True

Question 48

48. Because money market securities have a short-term maturity and typically cannot be sold easily, they provide investors with a low degree of liquidity. a. True b. False

Answer 48

b. False

Question 49

49. There is no limit to the amount of T-bills that can be purchased by noncompetitive bidders in a T-bill auction. a. True b. False

Answer 49

b. False

Question 50

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

Answer 50

a. True

Question 51

51. Junk commercial paper is commercial paper that is not rated or is rated low. a. True b. False

Answer 51

a. True

Question 52

52. A line of credit provided by a commercial bank gives a company the right (but not the obligation) to borrow a specified maximum amount of funds over a specified period of time. a. True b. False

Answer 52

a. True

Question 53

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

Answer 53

b. False

Question 54

54. Most repo transactions use government securities. a. True b. False

Answer 54

a. True

Question 55

55. 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. True b. False

Answer 55

a. True

Question 56

56. Money market security values are less sensitive to interest rate movements than bonds. a. True b. False

Answer 56

a. False

Question 57

57. During periods of uncertainty about the economy, there is a shift from risky money market securities to Treasury securities. a. True b. False

Answer 57

a. True

Question 58

58. The price that competitive and noncompetitive bidders will pay at a Treasury bill auction is the a. highest price entered by a competitive bidder. b. highest price entered by a noncompetitive bidder. c. lowest price entered by a competitive bidder. d. equally weighted average price paid by all competitive bidders whose bids were accepted. e. None of these are correct.

Answer 58

c. lowest price entered by a competitive bidder.

Question 59

59. A private investor purchases a six-month (182-day) T-bill with a $10,000 par value for $9,800. If she holds the Treasury bill to maturity, her annualized yield is ____ percent. a. 3.96 b. 4.54 c. 1.50 d. 4.09 e. None of these are correct.

Answer 59

d. 4.09

Question 60

60. You purchase a six-month (182-day) T-bill with a $10,000 par value for $9,800. The Treasury bill discount is ____ percent. a. 3.96 b. 4.09 c. 6.20 d. 3.56 e. None of these are correct.

Answer 60

a. 3.96

Question 61

61. A ____ is not a money market security. a. Treasury bill b. negotiable certificate of deposit c. Bond d. banker's acceptance e. All of these are money market securities.

Answer 61

c. Bond

Question 62

62. Freeman Corp., a large corporation, plans to issue 45-day commercial paper with a par value of $3,000,000. Freeman expects to sell the commercial paper for $2,947,000. Freeman's annualized cost of borrowing is estimated to be ____ percent. a. 14.39 b. 14.13 c. 14.59 d. 14.33 e. None of these are correct.

Answer 62

a. 14.39

Question 63

63. When a firm sells its commercial paper at a ____ price than projected, its cost of raising funds will be ____ than what it initially anticipated. a. higher; higher b. lower; lower c. higher; lower d. lower; higher e. higher; lower AND lower; higher

Answer 63

a. higher; higher

Question 64

64. Which of the following securities is most likely to be used in a repo transaction? a. commercial paper b. certificate of deposit c. Treasury bill d. common stock e. All of these are equally likely to be used in a repo transaction.

Answer 64

c. Treasury bill

Question 65

65. A major drawback to investing in Treasury bills is that they cannot easily be liquidated. a. True b. False

Answer 65

b. False

Question 66

66. At each T-bill auction, the prices paid for three-month T-bills are significantly lower than the prices paid for six-month bills. a. True b. False

Answer 66

b. False

Question 67

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

Answer 67

b. the yield earned by investors holding the paper until maturity.

Question 68

68. LIBOR is a. the interest rate charged on international interbank loans. b. the average rate charged on commercial loans in Europe c. the rate charged by the Federal Reserve for loans to banks. d. the rate charged by the European Central Bank for loans to banks.

Answer 68

a. the interest rate charged on international interbank loans.

Question 69

69. The LIBOR scandal in 2012 involved a. banks reporting inflated earnings from their loans. b. hackers breaking into the loan documentation files. c. banks falsely reporting the interest rates they offered in the interbank market. d. collusion among the banks when setting the commercial paper rate.

Answer 69

c. banks falsely reporting the interest rates they offered in the interbank market.

Question 70

70. Credit guarantees for commercial paper 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. ensure that the issuer of commercial paper will use the funds obtained to provide credit AND are only as good as the credit of the guarantor.

Answer 70

c. are only as good as the credit of the guarantor.

Question 71

71. The money market interest rate paid by corporations that borrow short-term funds in a particular country is typically a. equal to the rate paid by that country’s government. b. slightly higher than the rate paid by that country’s government. c. mostly influenced by the demand for and supply of long-term funds in that country. d. set by the country’s central bank.

Answer 71

b. slightly higher than the rate paid by that country’s government.