FNE311FinancialMarketsandInstitutions

Exercise1
1.

Activityinmoneymarketsincreasedsignificantlyinthelate1970sandearly1980sbecauseof
(a) risingshortterminterestrates.
(b) regulationsthatlimitedwhatbankscouldpayfordeposits.
(c) both(a)and(b).
(d) neither(a)nor(b).

2.

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

3.

Moneymarketinstruments
(a) areusuallysoldinlargedenominations.
(b) havelowdefaultrisk.
(c) matureinoneyearorless.
(d) arecharacterizedbyalloftheabove.
(e) arecharacterizedbyonly(a)and(b)oftheabove.

4.

Thebankingindustry

(a) shouldhaveanefficiencyadvantageingatheringinformationthatwouldeliminatetheneedfor
themoneymarkets.
(b) existsprimarilytomediatetheasymmetricinformationproblembetweensaverlendersand
borrowerspenders.
(c) issubjecttomoreregulationsandgovernmentalcoststhanarethemoneymarkets.
(d) alloftheabovearetrue.
(e) only(a)and(b)oftheabovearetrue.
5.

Insituationswhereasymmetricinformationproblemsarenotsevere,
(a) themoneymarketshaveadistinctcostadvantageoverbanksinprovidingshorttermfunds.
(b) themoneymarketshaveadistinctcostadvantageoverbanksinprovidinglongtermfunds.
(c) bankshaveadistinctcostadvantageoverthemoneymarketsinprovidingshorttermfunds.
(d) themoneymarketscannotallocateshorttermfundsasefficientlyasbankscan.

6.

Brokeragefirmsthatofferedmoneymarketsecurityaccountsinthe1970shadacostadvantage
overbanksinattractingfundsbecausethebrokeragefirms
(a) werenotsubjecttodepositreserverequirements.
(b) werenotsubjecttothedepositinterestrateceilings.
(c) werenotlimitedinhowmuchtheycouldborrowfromdepositors.
(d) hadtheadvantageofalltheabove.
(e) hadtheadvantageofonly(a)and(b)oftheabove.

7.

Whichofthefollowingstatementsaboutthemoneymarketaretrue?
(a) Notallcommercialbanksdealfortheircustomersinthesecondarymarket.
(b) Moneymarketsareusedextensivelybybusinessesbothtowarehousesurplusfundsandto
raiseshorttermfunds.
(c) ThesinglemostinfluentialparticipantintheU.S.moneymarketistheU.S.Treasury
Department.

(d) Alloftheabovearetrue.
(e) Only(a)and(b)oftheabovearetrue.
8.

Whichofthefollowingaretruestatementsaboutparticipantsinthemoneymarkets?
(a) LargebanksparticipateinthemoneymarketsbysellinglargenegotiableCDs.
(b) TheU.S.governmentandcorporationsborrowinthemoneymarketsbecausecashinflowsand
outflowsarerarelysynchronized.
(c) TheFederalReserveisthesinglemostinfluentialparticipantintheU.S.moneymarket.
(d) Alloftheabovearetrue.
(e) Only(a)and(b)oftheabovearetrue.

9.

TheFedisanactiveparticipantinmoneymarketsmainlybecauseofitsresponsibilityto
(a) lowerborrowingcoststoencouragecapitalinvestment.
(b) controlthemoneysupply.
(c) increasetheinterestincomeofretireesholdingmoneymarketinstruments.
(d) assisttheSecuritiesandExchangeCommissioninregulatingthebehaviorothermoneymarket
participants.

10.

Commercialbanksarelargeholdersof_________andarethemajorissuerof_________.
(a) negotiablecertificatesofdeposit;U.S.governmentsecurities
(b) U.S.governmentsecurities;negotiablecertificatesofdeposit
(c) commercialpaper;Eurodollars
(d) Eurodollars;commercialpaper

11.

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

12.

Financecompaniesplayauniqueroleinmoneymarketsby
(a) givingconsumersindirectaccesstomoneymarkets.
(b) combiningconsumersinvestmentstopurchasemoneymarketsecuritiesontheirbehalf.
(c) borrowingincapitalmarketstofinancepurchasesofmoneymarketsecurities.
(d) assistingthegovernmentinitssalesofU.S.Treasurysecurities.

13.

Wheninflationroseinthelate1970s,

(a) consumersmovedmoneyoutofmoneymarketmutualfundsbecausetheirreturnsdidnotkeep
pacewithinflation.
(b) bankssolidifiedtheiradvantageovermoneymarketsbyofferinghigherdepositrates.
(c) brokeragehousesintroducedhighlypopularmoneymarketmutualfunds,whichdrew
significantamountsofmoneyoutofbankdeposits.
(d) consumerswereunabletotakeadvantageofhigherratesinmoneymarketsbecauseofthe
requirementoflargetransactionsizes.
14.

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

15.IfyournoncompetitivebidforaTreasurybillissuccessful,thenyouwill
(a) certainlypaylessthanifyouhadsubmittedacompetitivebid.
(b) certainlypaymorethanifyouhadsubmittedacompetitivebid.
(c) paytheaverageofpricesofferedinothernoncompetitivebids.
(d) paythesameasothersuccessfulnoncompetitivebidders.
16.

WhichofthefollowingstatementsaretrueofTreasurybills?
(a) ThemarketforTreasurybillsisextremelydeepandliquid.
(b) Occasionally,investorsfindthatearningsonTbillsdonotcompensatethemforchangesin
purchasingpowerduetoinflation.
(c) Byvolume,mostTreasurybillsaresoldtoindividualswhosubmitnoncompetitivebids.
(d) Alloftheabovearetrue.
(e) Only(a)and(b)oftheabovearetrue.

17. Theprimaryreasonthatindividualsandfirmschoosetoborrowlongtermistoreducetheriskthat
interestrateswill_________beforetheypayofftheirdebt.
(a) rise
(b) fall
(c) becomemorevolatile
(d) becomemorestable
18.

Afirmthatchoosestofinanceanewplantbyissuingmoneymarketsecurities
(a) mustincurthecostofissuingnewsecuritiestorolloveritsdebt.
(b) runstheriskofhavingtopayhigherinterestrateswhenitrollsoveritsdebt.
(c) incursboththecostofreissuingsecuritiesandtheriskofhavingtopayhigherinterestrateson
thenewdebt.
(d) ismorelikelytoprofitifinterestratesrisewhiletheplantisbeingconstructed.

19.Tosellanoldbondwheninterestrateshave_________,theholderwillhaveto_________theprice
ofthebonduntiltheyieldtothebuyeristhesameasthemarketrate.
(a) risen;lower
(b) risen;raise
(c) fallen;lower
(d) risen;inflate
20.Typically,theinterestrateoncorporatebondswillbe_________themorerestrictionsareplacedon
managementthroughrestrictivecovenants,because_________.
(a) higher;corporateearningswillbelimitedbytherestrictions
(b) higher;thebondswillbeconsideredsaferbybondholders
(c) lower;thebondswillbeconsideredsaferbybuyers
(d) lower;corporateearningswillbehigherwithmorerestrictionsinplace
21.Supposethatyoupurchasea182dayTreasurybillfor$9,850thatisworth$10,000whenitmatures.
Whatisthesecuritysannualizedyieldifheldtomaturity?

22. ExplainhowtheFederalReservecaninfluencethefederalfundsinterestrate.