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Chapter 6

TheMoneyMarkets

.1

Multiple Choice Questions

1.

Activityinmoneymarketsincreasedsignificantlyinthelate1970sandearly1980s
becauseof
(a) risingshortterminterestrates.
(b) regulationsthatlimitedwhatbankscouldpayfordeposits.
(c) both(a)and(b).
(d) neither(a)nor(b).
Answer: C

2.

Moneymarketsecuritieshaveallthefollowingcharacteristicsexcepttheyarenot
(a) shortterm.
(b) money.
(c) lowrisk.
(d) veryliquid.
Answer: B

3.

Moneymarketinstruments
(a) areusuallysoldinlargedenominations.
(b) havelowdefaultrisk.
(c) matureinoneyearorless.
(d) arecharacterizedbyalloftheabove.

(e) arecharacterizedbyonly(a)and(b)oftheabove.
Answer: D
4.

Thebankingindustry
(a) shouldhaveanefficiencyadvantageingatheringinformationthatwouldeliminate
theneedforthemoneymarkets.
(b) existsprimarilytomediatetheasymmetricinformationproblembetweensaver
lendersandborrowerspenders.
(c) issubjecttomoreregulationsandgovernmentalcoststhanarethemoneymarkets.
(d) alloftheabovearetrue.
(e) only(a)and(b)oftheabovearetrue.
Answer: D

5.

Insituationswhereasymmetricinformationproblemsarenotsevere,
(a) themoneymarketshaveadistinctcostadvantageoverbanksinprovidingshort
termfunds.
(b) themoneymarketshaveadistinctcostadvantageoverbanksinprovidinglong
termfunds.
(c) bankshaveadistinctcostadvantageoverthemoneymarketsinprovidingshort
termfunds.
(d) themoneymarketscannotallocateshorttermfundsasefficientlyasbankscan.
Answer: A

6.

Brokeragefirmsthatofferedmoneymarketsecurityaccountsinthe1970shadacost
advantageoverbanksinattractingfundsbecausethebrokeragefirms
(a) werenotsubjecttodepositreserverequirements.
(b) werenotsubjecttothedepositinterestrateceilings.
(c) werenotlimitedinhowmuchtheycouldborrowfromdepositors.
(d) hadtheadvantageofalltheabove.
(e) hadtheadvantageofonly(a)and(b)oftheabove.
Answer: E

7.

Whichofthefollowingstatementsaboutthemoneymarketaretrue?
(a) Notallcommercialbanksdealfortheircustomersinthesecondarymarket.
(b) Moneymarketsareusedextensivelybybusinessesbothtowarehousesurplusfunds
andtoraiseshorttermfunds.
(c) ThesinglemostinfluentialparticipantintheU.S.moneymarketistheU.S.
TreasuryDepartment.
(d) Alloftheabovearetrue.
(e) Only(a)and(b)oftheabovearetrue.
Answer: E

8.

Whichofthefollowingstatementsaboutthemoneymarketsaretrue?

(a) Mostmoneymarketsecuritiesdonotpayinterest.Insteadtheinvestorpayslessfor
thesecuritythanitwillbeworthwhenitmatures.
(b) Pensionfundsinvestaportionoftheirassetsinthemoneymarkettohavesufficient
liquiditytomeettheirobligations.
(c) Unlikemostparticipantsinthemoneymarket,theU.S.TreasuryDepartmentis
alwaysademanderofmoneymarketfundsandneverasupplier.
(d) Alloftheabovearetrue.
(e) Only(a)and(b)oftheabovearetrue.
Answer: D
9.

Whichofthefollowingaretruestatementsaboutparticipantsinthemoneymarkets?
(a) LargebanksparticipateinthemoneymarketsbysellinglargenegotiableCDs.
(b) TheU.S.governmentandcorporationsborrowinthemoneymarketsbecausecash
inflowsandoutflowsarerarelysynchronized.
(c) TheFederalReserveisthesinglemostinfluentialparticipantintheU.S.money
market.
(d) Alloftheabovearetrue.
(e) Only(a)and(b)oftheabovearetrue.
Answer: D

10. Themostinfluentialparticipant(s)intheU.S.moneymarket
(a) istheFederalReserve.
(b) istheU.S.TreasuryDepartment.
(c) arethelargemoneycenterbanks.
(d) aretheinvestmentbanksthatunderwritesecurities.
Answer: A
11.

TheFedisanactiveparticipantinmoneymarketsmainlybecauseofitsresponsibility
to

(a) lowerborrowingcoststoencouragecapitalinvestment.
(b) controlthemoneysupply.
(c) increasetheinterestincomeofretireesholdingmoneymarketinstruments.
(d) assisttheSecuritiesandExchangeCommissioninregulatingthebehaviorother
moneymarketparticipants.
Answer: B
12.

Commercialbanksarelargeholdersof_________andarethemajorissuerof
_________.
(a) negotiablecertificatesofdeposit;U.S.governmentsecurities
(b) U.S.governmentsecurities;negotiablecertificatesofdeposit
(c) commercialpaper;Eurodollars
(d) Eurodollars;commercialpaper
Answer: B

13.

Theprimaryfunctionoflargediversifiedbrokeragefirmsinthemoneymarketisto
(a) sellmoneymarketsecuritiestotheFederalReserveforitsopenmarketoperations.
(b) makeamarketformoneymarketsecuritiesbymaintaininganinventoryfrom
whichtobuy
orsell.
(c) buymoneymarketsecuritiesfromcorporationsthatneedliquidity.
(d) buyTbillsfromtheU.S.TreasuryDepartment.
Answer: B

14.

Financecompaniesraisefundsinthemoneymarketbyselling
(a) commercialpaper.
(b) federalfunds.
(c) negotiablecertificatesofdeposit.

(d) Eurodollars.
Answer: A
15.

Financecompaniesplayauniqueroleinmoneymarketsby
(a) givingconsumersindirectaccesstomoneymarkets.
(b) combiningconsumersinvestmentstopurchasemoneymarketsecuritiesontheir
behalf.
(c) borrowingincapitalmarketstofinancepurchasesofmoneymarketsecurities.
(d) assistingthegovernmentinitssalesofU.S.Treasurysecurities.
Answer: A

16. Wheninflationroseinthelate1970s,
(a) consumersmovedmoneyoutofmoneymarketmutualfundsbecausetheirreturns
didnotkeeppacewithinflation.
(b) bankssolidifiedtheiradvantageovermoneymarketsbyofferinghigherdeposit
rates.
(c) brokeragehousesintroducedhighlypopularmoneymarketmutualfunds,which
drewsignificantamountsofmoneyoutofbankdeposits.
(d) consumerswereunabletotakeadvantageofhigherratesinmoneymarketsbecause
oftherequirementoflargetransactionsizes.
Answer: C
17.

Whichofthefollowingisthelargestborrowerinthemoneymarkets?
(a) commercialbanks
(b) largecorporations
(c) theU.S.Treasury
(d) U.S.firmsengagedinforeigntrade
Answer: C

18.

MoneymarketinstrumentsissuedbytheU.S.Treasuryarecalled
(a) Treasurybills.
(b) Treasurynotes.
(c) Treasurybonds.
(d) Treasurystrips.
Answer: A

19.

TheTreasuryauctions91dayand182dayTreasurybillsonceaweek.Itauctions52
weekbills
(a) onceamonth.
(b) onceevery13weeks.
(c) onceayear.
(d) everytwoweeks.
Answer: A

20.

WhichofthefollowingstatementsaretrueofTreasurybills?
(a) ThemarketforTreasurybillsisextremelydeepandliquid.
(b) Occasionally,investorsfindthatearningsonTbillsdonotcompensatethemfor
changesinpurchasingpowerduetoinflation.
(c) Byvolume,mostTreasurybillsaresoldtoindividualswhosubmitnoncompetitive
bids.
(d) Alloftheabovearetrue.
(e) Only(a)and(b)oftheabovearetrue.
Answer: E

21.

Supposethatyoupurchasea91dayTreasurybillfor$9,850thatisworth$10,000
whenitmatures.Thesecuritysannualizedyieldifheldtomaturityisabout
(a) 4percent.

(b) 5percent.
(c) 6percent.
(d) 7percent.
Answer: C
22. Supposethatyoupurchasea182dayTreasurybillfor$9,850thatisworth$10,000
whenitmatures.Thesecuritysannualizedyieldifheldtomaturityisabout
(a) 1.5%
(b) 2%
(c) 3%
(d) 6%
Answer: C
23.

Treasurybillsdonot
(a) payinterest.
(b) haveamaturitydate.
(c) haveafaceamount.
(d) haveanactivesecondarymarket.
Answer: A

24.

IfyourcompetitivebidforaTreasurybillissuccessful,thenyouwill
(a) certainlypaylessthanifyouhadsubmittedanoncompetitivebid.
(b) probablypaymorethanifyouhadsubmittedanoncompetitivebid.
(c) paytheaverageofpricesofferedinothersuccessfulcompetitivebids.

(d) paythesameasothersuccessfulcompetitivebidders.
Answer: B
25.

IfyournoncompetitivebidforaTreasurybillissuccessful,thenyouwill
(a) certainlypaylessthanifyouhadsubmittedacompetitivebid.
(b) certainlypaymorethanifyouhadsubmittedacompetitivebid.
(c) paytheaverageofpricesofferedinothernoncompetitivebids.
(d) paythesameasothersuccessfulnoncompetitivebidders.
Answer: D

26.

Federalfunds
(a) areshorttermfundstransferredbetweenfinancialinstitutions,usuallyforaperiod
ofoneday.
(b) actuallyhavenothingtodowiththefederalgovernment.
(c) providebankswithanimmediateinfusionofreserves.
(d) arealloftheabove.
(e) areonly(a)and(b)oftheabove.
Answer: D

27.

Federalfundsare
(a) usuallyovernightinvestments.
(b) borrowedbybanksthathaveadeficitofreserves.
(c) lentbybanksthathaveanexcessofreserves.
(d) alloftheabove.
(e) only(a)and(b)oftheabove.

Answer: D
28. TheFedcaninfluencethefederalfundsinterestratebyadjustingthelevelofreserves
availabletobanks.TheFedcan
(a) lowerthefederalfundsinterestratebyaddingreserves.
(b) raisethefederalfundsinterestratebyremovingreserves.
(c) removereservesbysellingsecurities.
(d) doalloftheabove.
(e) doonly(a)and(b)oftheabove.
Answer: D
29.

TheFederalReservecaninfluencethefederalfundsinterestratebybuyingsecurities,
which_________reserves,thereby_________thefederalfundsrate.
(a) adds;raising
(b) removes;lowering
(c) adds;lowering
(d) removes;raising
Answer: C

30.

TheFedcanlowerthefederalfundsinterestrateby_________securities,thereby
_________reserves.
(a) selling;adding
(b) selling;lowering
(c) buying;adding
(d) buying;lowering
Answer: C

31.

IftheFedwantstolowerthefederalfundsinterestrate,itwill_________thebanking
systemby_________securities.
(a) addreservesto;selling
(b) addreservesto;buying
(c) removereservesfrom;selling
(d) removereservesfrom;buying
Answer: B

32.

IftheFedwantstoraisethefederalfundsinterestrate,itwill_________securitiesto
_________thebankingsystem.
(a) sell;addreservesto
(b) sell;removereservesfrom
(c) buy;addreservesto
(d) buy;removereservesfrom
Answer: B

33.

Governmentsecuritiesdealersfrequentlyengageinreposto
(a) manageliquidity.
(b) takeadvantageofanticipatedchangesininterestrates.
(c) lendorborrowforadayortwowithwhatisessentiallyacollateralizedloan.
(d) doalloftheabove.
(e) doonly(a)and(b)oftheabove.
Answer: D

34.

Reposare
(a) usuallylowriskloans.
(b) usuallycollateralizedwithTreasurysecurities.
(c) lowinterestrateloans.
(d) alloftheabove.
(e) only(a)and(b)oftheabove.
Answer: D

35.

Anegotiablecertificateofdeposit
(a) isatermsecuritybecauseithasaspecifiedmaturitydate.
(b) isabearerinstrument,meaningwhoeverholdsthecertificateatmaturityreceives
theprincipalandinterest.
(c) canbeboughtandsolduntilmaturity.
(d) alloftheabove.
(e) only(a)and(b)oftheabove.
Answer: D

36.

Negotiablecertificatesofdeposit
(a) arebearerinstrumentsbecausetheirholdersearntheinterestandprincipalat
maturity.
(b) typicallyhaveamaturityofonetofourmonths.
(c) areusuallydenominatedat$100,000.
(d) arealloftheabove.
(e) areonly(a)and(b)oftheabove.
Answer: E

37.

Commercialpapersecurities
(a) areissuedonlybythelargestandmostcreditworthycorporations,astheyare
unsecured.
(b) carryaninterestratethatvariesaccordingtothefirmslevelofrisk.
(c) neverhaveatermtomaturitythatexceeds270days.
(d) alloftheabove.
(e) only(a)and(b)oftheabove.
Answer: D

38.

Unlikemostmoneymarketsecurities,commercialpaper
(a) isnotgenerallytradedinasecondarymarket.
(b) usuallyhasatermtomaturitythatislongerthanayear.
(c) isnotpopularwithmostmoneymarketinvestorsbecauseofthehighdefaultrisk.
(d) alloftheabove.
(e) only(a)and(b)oftheabove.
Answer: A

39. Abankersacceptanceis
(a) usedtofinancegoodsthathavenotyetbeentransferredfromthesellertothe
buyer.
(b) anordertopayaspecifiedamountofmoneytothebeareronagivendate.
(c) arelativelynewmoneymarketsecuritythataroseinthe1960sasinternational
tradeexpanded.
(d) alloftheabove.
(e) only(a)and(b)oftheabove.

Answer: E
40.

Bankersacceptances
(a) canbeboughtandsolduntiltheymature.
(b) areissuedonlybylargemoneycenterbanks.
(c) carrylowinterestratesbecauseoftheverylowdefaultrisk.
(d) arealloftheabove.
(e) areonly(a)and(b)oftheabove.
Answer: D

41.

Eurodollars
(a) aretimedepositswithfixedmaturitiesandare,therefore,somewhatilliquid.
(b) mayoffertheborroweralowerinterestratethancanbereceivedinthedomestic
market.
(c) arelimitedtoLondonbanks.
(d) arealloftheabove.
(e) areonly(a)and(b)oftheabove.
Answer: E

42.

Whichofthefollowingstatementsaboutmoneymarketsecuritiesaretrue?
(a) Theinterestratesonallmoneymarketinstrumentsmoveverycloselytogetherover
time.
(b) ThesecondarymarketforTreasurybillsisextensiveandwelldeveloped.
(c) Thereisnowelldevelopedsecondarymarketforcommercialpaper.
(d) Alloftheabovearetrue.
(e) Only(a)and(b)oftheabovearetrue.
Answer: D

.2

True/False

1.

Moneymarketsecuritiesareshortterminstrumentswithanoriginalmaturityofless
thanoneyear.
Answer:

2.

MoneymarketsecuritiesincludeTreasurybills,commercialpaper,federalfunds,
repurchaseagreements,negotiablecertificatesofdeposit,bankersacceptances,and
Eurodollars.
Answer:

3.

TRUE

ThemarketforU.S.Treasurybillsisashallowmarketbecausesofewindividual
investorsbuy
Tbills.
Answer:

10.

FALSE

Moneymarketsareusedextensivelybybusinessesbothtowarehousesurplusfundsand
toraiseshorttermfunds.
Answer:

9.

TRUE

Banksareunusualparticipantsinthemoneymarketbecausetheybuy,butdonotsell,
moneymarketinstruments.
Answer:

8.

FALSE

TheU.S.TreasuryDepartmentisthesinglelargestborrowerintheU.S.moneymarket.
Answer:

7.

FALSE

TheU.S.TreasuryDepartmentisthesinglemostinfluentialparticipantintheU.S.
moneymarket.
Answer:

6.

TRUE

Moneymarketsarereferredtoasretailmarketsbecausesmallindividualinvestorsare
theprimarybuyersofmoneymarketsecurities.
Answer:

5.

TRUE

Thetermmoneymarketisactuallyamisnomer,becauseliquidsecuritiesaretradedin
thesemarketsratherthanmoney.
Answer:

4.

TRUE

FALSE

TheTbillisnotaninvestmenttobeusedforanythingbuttemporarystorageofexcess
fundsbecauseitbarelykeepsupwithinflation.
Answer:

TRUE

11.

Themainpurposeforfederalfundsistoprovidebankswithanimmediateinfusionof
reservesshouldtheybeshort.
Answer:

TRUE

12. TheFedcaninfluencethefederalfundsratebyadjustingthelevelofreservesinthe
bankingsystem.
Answer:
13.

Commercialpapersecuritiesareunsecuredpromissorynotes,issuedbycorporations,
thatmatureinnomorethan270days.
Answer:

14.

TRUE

Interestratesonbankersacceptancesarelowbecausetheriskofdefaultisverylow.
Answer:

16.

TRUE

Abankersacceptanceisanordertopayaspecifiedamountofmoneytothebeareron
agivendate.Bankersacceptanceshavebeenusedsincethetwelfthcentury.
Answer:

15.

TRUE

TRUE

Ingeneral,moneymarketinstrumentsarelowrisk,highyieldsecurities.
Answer:

FALSE

.3

Essay

1.

Explainwhybanks,whichwouldseemtohaveacomparativeadvantageingathering
information,havenoteliminatedtheneedforthemoneymarkets.

2.

ExplainhowtheFederalReservecaninfluencethefederalfundsinterestrate.

3.

Explainwhythemoneymarketsarereferredtoaswholesalemarkets.

4.

Explainwhymoneymarketinterestratesmovesocloselytogetherovertime.

5.

HowareTreasurybillssold?Howdocompetitiveandnoncompetitivebidsdiffer?

6.

Whatarethemaincharacteristicsofmoneymarketsecurities?

7. Whatarethemajortypesofsecuritiesandwhoarethemajorparticipantsinthemoney
markets?