Greg Engbers

Ch 7-8 HW

FINC 220

Question 7-1

Q: Are investors in the money market best characterized as having a strong appetite for risk or being
highly risk averse? What evidence would you use to support your answer?

A: Investors have strong risk aversion for default and interest rate changes, this is true seeing as
securities in the money market do not last more than a year.

Question 7-2

Q: The auction price of 91-day commercial paper having a face (par) value of $1 million is $996,000.
What is the quarterly yield on this bill (you can assume that there are 91 days in a quarter)? The annual
yield? What is the yield on a discount basis?

A: Quarterly Yield = 0.004 (0.4%)

Annual Yield = 0.016 (1.6%)

Discount Basis = 0.016 (1.6%)

Question 7-7

Q: Which type of institutional investor is the biggest investor in money market instruments?

A: Mutual Funds

Question 8-1

Q: Describe the method by which the following securities are distributed in the primary market: Treasury
bills, notes, and bonds; corporate bonds; muni bonds; GSE bonds.

A: Treasury Bills, Notes, and Bonds: distributed by the US treasury

Corporate Bonds: distributed by corporations

Muni Bonds: distributed by local governments

GSE Bonds: distributed by privately owned corporations that have a special relationship with the U.S.
government

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 Question 8-3

Q: In the Treasury market, what is: a when ‐issued security; a reopening; an on ‐the ‐run security; an of ‐
the‐run security

A: When-issued Security: Once the Treasury has announced an auction, an investor can acquire a claim
on a note or bond to be auctioned by the Treasury from a dealer in Treasury securities.

Reopening: The reopened issue will have the same maturity date and g coupon as the previously
auctioned security.

On-The-Run Security: most liquid, price will be higher and the yield lower for the on ‐the ‐run security.

Of-The-Run Security: Coupon securities that are outstanding but not the most recently auctioned.

Question 8-12

Q: Why would a muni issuer want to place a serial issue of bonds rather than a single maturity? A
callable rather than call-protected bond?

A: To lower interest costs

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