Exam 11: The Money Markets

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A) are usually sold in large denominations.
B) have low default risk.
C) mature in one year or less.
D) are characterized by all of the above.
E) are characterized by only A and B of the above.

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A) the money markets have a distinct cost advantage over banks in providing short-term funds.
B) the money markets have a distinct cost advantage over banks in providing long-term funds.
C) banks have a distinct cost advantage over the money markets in providing short-term funds.
D) the money markets cannot allocate short-term funds as efficiently as banks can.

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A) consumers moved money out of money market mutual funds because their returns did not keep pace with inflation.
B) banks solidified their advantage over money markets by offering higher deposit rates.
C) brokerage houses introduced highly popular money market mutual funds, which drew significant amounts of money out of bank deposits.
D) consumers were unable to take advantage of higher rates in money markets because of the requirement of large transaction sizes.

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A) usually low-risk loans.
B) usually collateralized with Treasury securities.
C) low interest rate loans.
D) all of the above.
E) only A and B of the above.

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A) the issuer bypasses the dealer and sells indirectly to the end investor.
B) the dealer sells directly to the end investor.
C) the issuer bypasses the dealer and sells directly to the end investor.
D) none of the above.

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A) giving consumers indirect access to money markets.
B) combining consumers' investments to purchase money market securities on their behalf.
C) borrowing in capital markets to finance purchases of money market securities.
D) assisting the government in its sales of U.S. Treasury securities.

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A) short term.
B) money.
C) low risk.
D) very liquid.

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A) it is backed (secured) by some bundle of assets.
B) its maturity usually extends well beyond 1 year.
C) both A and B of the above.
D) neither A nor B of the above.

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A) lower the federal funds interest rate by adding reserves.
B) raise the federal funds interest rate by removing reserves.
C) remove reserves by selling securities.
D) do all of the above.
E) do only A and B of the above.

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A) are bearer instruments because their holders earn the interest and principal at maturity.
B) typically have a maturity of one to four months.
C) are usually denominated at $100,000.
D) are all of the above.
E) are only A and B of the above.

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A) are short-term funds transferred between financial institutions, usually for a period of one day.
B) actually have nothing to do with the federal government.
C) provide banks with an immediate infusion of reserves.
D) are all of the above.
E) are only A and B of the above.

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A) Not all commercial banks deal for their customers in the secondary market.
B) Money markets are used extensively by businesses both to warehouse surplus funds and to raise short-term funds.
C) The single most influential participant in the U.S. money market is the U.S. Treasury Department.
D) All of the above are true.
E) Only A and B of the above are true.

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Treasury bills, often referred to as T-bills, are short-term debt securities issued by the U.S. Department of the Treasury to finance government spending. They are sold through a process called an auction, which can be conducted in two ways: competitive bidding and noncompetitive bidding. Both individuals and institutional investors can participate in these auctions. **Competitive Bidding:** In a competitive bid, an investor specifies the discount rate (the yield) that they are willing to accept for a particular T-bill. This rate is not guaranteed; it is simply what the bidder is willing to accept. The competitive bids are accepted in ascending order of yield (which corresponds to descending order of price) until the quantity of T-bills being auctioned is allocated. If your bid is too high in terms of yield (or too low in terms of price), it may not be accepted. Competitive bidders can potentially receive less than the full amount of the bill they want to buy if their bid is at the higher end of accepted yields. Competitive bids are typically made by institutional investors who have a good understanding of the market and can accurately forecast interest rate movements. There is a limit to the amount of T-bills one can purchase through competitive bidding, which is up to 35% of the offering amount. **Noncompetitive Bidding:** Noncompetitive bidding is much simpler and is often used by individual investors. In this method, the investor agrees to accept the discount rate determined by the competitive bidding process. This means that noncompetitive bidders agree to accept whatever yield is determined at the auction. They do not have to specify a desired return rate, and they are guaranteed to receive the full amount of the bill they want to purchase, up to a maximum of $5 million. The advantage of noncompetitive bidding is that it allows smaller investors to participate in the T-bill market without having to accurately predict interest rates. It also ensures that the investor will receive the T-bill, whereas competitive bidders may not have their bids accepted if they bid too high a yield. **Auction Process:** The auction process for T-bills is regularly scheduled and announced by the Treasury Department. Investors can place bids directly through the TreasuryDirect website or through a bank or broker. The results of the auction determine the discount rate (yield) for the T-bills, and this rate is applied to all noncompetitive bids as well. Once the auction is complete, the T-bills are issued to the successful bidders, and the investors pay the Treasury a price that is less than the face value of the bill. The difference between the purchase price and the face value is the interest earned by the investor. When the T-bills mature, the government pays the holder the full face value of the bills.

A) are issued only by the largest and most creditworthy corporations, as they are unsecured.
B) carry an interest rate that varies according to the firm's level of risk.
C) never have a term to maturity that exceeds 270 days.
D) all of the above.
E) only A and B of the above.

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D

A) can be bought and sold until they mature.
B) are issued only by large money center banks.
C) carry low interest rates because of the very low default risk.
D) are all of the above.
E) are only A and B of the above.

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D

A) Most money market securities do not pay interest. Instead, the investor pays less for the security than it will be worth when it matures.
B) Pension funds invest a portion of their assets in the money market to have sufficient liquidity to meet their obligations.
C) Unlike most participants in the money market, the U.S. Treasury Department is always a demander of money market funds and never a supplier.
D) All of the above are true.
E) Only A and B of the above are true.

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