304 Chapter 6 Money Markets 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 these ANSWER B 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 ANSWER C 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 ANSWER A 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 ANSWER D 305 Chapter 6 Money Markets 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 ANSWER B 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 ANSWER B 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 these ANSWER C 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 ANSWER D 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 these ANSWER A Chapter 6 Money Markets 306 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 either slightly less than or slightly higher than ANSWER B 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 none of these ANSWER B 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 ANSWER C 13 Commercial paper with a maturity exceeding must be registered with the SEC A 45 days B 270 days C 1 year D none of these ANSWER B 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 ANSWER D 307 Chapter 6 Money Markets 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 ANSWER A 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 both of these D none of these ANSWER D 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 these are money market instruments ANSWER E 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 ANSWER C 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 short term funds for the Treasury and long term funds from the Federal Reserve ANSWER A Chapter 6 Money Markets 308 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 ANSWER C 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 ANSWER A 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 ANSWER A 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 percent A 2 0 B 5 10 C 5 00 D 2 04 ANSWER B 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 these ANSWER A 309 Chapter 6 Money Markets 25 The rate at which depository institutions effectively lend or borrow funds from each other is the rate A federal funds B discount C prime D repo ANSWER A 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 ANSWER D 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 …