TEST BANK

CAPITAL MARKETS: INSTITUTIONS AND INSTRUMENTS

FABOZZI/MODIGLIANI

Chapter 20
MONEY MARKETS

MULTIPLE CHOICE

1. The money market is the market for:

a. Long-term bonds.
b. Common stock.
* c. Short-term financial instruments.
d. Agency securities.
e. None of the above.
[E]

2. The assets traded in the money market include:

a. Commercial paper.
b. Bankers acceptances.
c. Treasury bills.
d. Corporate bonds.
* e. a, b, and c only.
[E]

3. For entities that borrow funds using securities as collateral, the most common financial
instrument is:
a. Certificates of deposits.
b. Federal funds borrowing.
* c. Repurchase agreements.
d. Bankers acceptance.
e. None of the above.
[M]

4. Depository institutions have obligations that include:

a. Commercial paper.
b. Bankers acceptances.
c. Certificates of deposits.
* d. b and c only.
e. All of the above.
[E]

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5. Market participants perceive Treasury securities to carry no default risk because:
a. They are short-term in nature.
* b. They are backed by the full faith and credit of the U.S. government.
c. They can be bought and sold easily.
d. They are not affected by changes in interest rates.
e. None of the above.
[E]

6. Treasury bills have a:

a. Are sold on an auction basis.
b. Maturity of one year or less.
c. Are sold at a discount from par.
d. Zero coupon rate.
* e. All of the above.
[M]

7. Commercial paper is:

a. Is issued by corporations with strong credit ratings.
b. A short-term promissory note.
c. Issued on an unsecured basis.
d. B and c only.
* e. All of the above.*
[M]

8. Commercial paper provides short-term funds for:

a. Seasonal needs.
b. Working capital needs.
c. Bridge financing.
d. A and b only.
* e. All of the above.
[M]

9. The maturity of commercial paper is typically less than 270 days because:
a. It does not require registration with the SEC.
b. It avoids the costs associated with registering issues with the SEC.
c. It does not require collateral.
* d. a and b only.
e. All of the above.
[M]

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10. The risk that the issuer will be unable to sell new paper at maturity is called:
a. Default risk.
b. Credit risk.
* c. Rollover risk.
d. A and b only.
e. None of the above.
[M]

11. Investors in commercial paper include:

a. Pension funds.
b. Money market mutual funds.
c. Commercial bank trust departments.
d. State and local governments.
* e. All of the above.
[E]

12. Which of the following statements is most correct?

a. Commercial paper may be issues in either a discount form or interest-bearing
form.
b. Commercial paper is classified as either direct paper or dealer-placed paper.
c. The secondary market for commercial paper is very active.
d. Commercial paper is more liquid than Treasury bills.
* e. a and b only.
[M]

13. Eurocommerical paper:

a. Is issued and placed outside the jurisdiction of the currency of the denomination.
b. Has considerably longer maturity than domestic commercial paper.
c. Is almost always dealer placed.
d. Has an active secondary market.
* e. All of the above.
[M]

14. Certificates of deposits:

a. Are issued by commercial banks.
b. Are interest-bearing financial assets.
c. Can be issued in any denomination.
d. May be negotiable or nonnegotiable.
* e. All of the above.
[M]

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15. The yields on CDs are a function of:
a. The credit rating of the issuing bank.
b. The maturity of the CD.
c. The supply and demand for CDs.
d. The back-up line of credit.
* e. a, b, and c only.
[M]

16. In a bankers’ acceptance:

* a. The bank accepts the ultimate responsibility to repay the loan to its holder.
b. The bank has no responsibility to the parties involved.
c. The importer and the exporter share equally in the responsibility to repay the loan
to the bank.
d. The government guarantees the repayment of the loan to its holder.
e. None of the above.
[M]

17. Bankers’ acceptances are sold on a discounted basis just like:

a. Treasury bills.
b. Commercial paper.
c. CDs.
* d. a and b only.
e. All of the above.
[M]

18. The sale of a security with a commitment by the seller to buy the security back from the
purchaser at a specified price and a designated future date is referred to as:
a. A negotiable CD.
* b. A repurchase agreement.
c. A reverse repo.
d. A commercial paper.
e. None of the above.
[M]

19. There is no single repo rate; rather rates vary from transaction to transaction depending
on:
a. Quality.
b. Term of the repo.
c. Delivery requirement
d. Availability of collateral.
* e. All of the above.
[M]

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20. The federal funds rate:
a. Is determined by the supply and demand for federal funds.
b. Is the rate at which all money market interest rates are anchored.
c. Is often a target of the Fed’s monetary policy.
d. Is higher than the repo rate because federal funds are borrowed on an unsecured
basis.
* e. All of the above.
[M]

TRUE/FALSE

1. Treasury bills are quoted on a bank discount basis, not on a price basis.
* a. True.
b. False.
[E]

2. Commercial paper is rated by nationally recognized statistical rating agencies.

* a. True.
b. False.
[M]

3. Large-denomination CDs are typically issued in denominations of $1 million or more.

* a. True.
b. False.
[E]

4. Banks that create bankers’ acceptances are called accepting banks.

* a. True.
b. False.
[E]

5. Both parties to a repo transaction are exposed to credit risk.

* a. True.
b. False.
[M]

ESSAY QUESTIONS

1. What is a bankers’ acceptance and how is it created?

Key Issues:
a. Facilitates commercial trade transactions.
b. Used between importers and exporters.
c. Acceptance financing.

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2. Compare and contrast Treasury bills, commercial paper, and certificates of deposits.

Key Issues:
a. Maturity.
b. Interest-bearing.
c. Discount security.
d. Risks.
e. Collateral.
f. Ratings.

3. Why does risk occur in a repo transaction?

Key Issues:
a. Market value of security.
b. Return of collateral.
c. Margin.
d. Mark-to-market of collateral.

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