All the following statements concerning the money market are correct, EXCEPT:
(RM 285)
A. Money market securities mature in a year or less.
B. It is the market for short-term funds.
C. All the same securities are traded in the money and the capital markets.
D. It is the mechanism to bring together those with temporary cash surpluses and those with temporary cash deficits.
C. All the same securities are traded in the money and the capital markets.
Money market securities are short-term instruments such as T-bills, commercial paper, and repurchase agreements. Capital market securities are long-term instruments such as bonds and stocks.
Money market securities are short-term instruments such as T-bills, commercial paper, and repurchase agreements. Capital market securities are long-term instruments such as bonds and stocks.
Which of the following statements concerning the need for a business firm to make use of the money market is (are) correct?
(RM 286)
I A firm with a surplus cash position would logically be a net lender of funds, rather than a net borrower of funds.
II A firm with a cash deficit would logically be a net borrower of funds, rather than a net lender of funds.
C. Both I and II
The need for a money market arises from the needs of both short-term lenders and short-term borrowers of funds
Which of the following statements concerning reasons for money market lending is (are) correct?
(RM 286)
I The opportunity cost of holding idle funds is the difference between income that could be earned from lending and interest earned on transactions accounts.
II The loss of a day’s interest from money not invested is lost forever.
C. Both I and II
I correctly describes the concept of opportunity cost. II correctly describes the result of having idle cash.
Which of the following statements concerning borrowers and lenders in the money market is correct?
(RM 286-288)
A. The same institutions are often both lenders and borrowers in the same week.
The Fed operates as both a borrower and a lender in the money market, sometimes selling securities and sometimes buying them. The U.S. Treasury is almost always a borrower, so C is incorrect. State and local governments borrow in the money market and occasionally lend their short-term cash surpluses.
Which of the following statements concerning the goals of money market investors is (are) correct?
(RM 286-288)
I They are concerned mostly with long-term interest rates and are not concerned with short-term securities.
II They seek liquidity and safety as well as the opportunity to earn interest, and they are very sensitive to risk.
B. II only
I is incorrect because money market investors are concerned with short-term securities and short-term interest rates.
All the following are types of money market securities, EXCEPT:
(RM 288)
D. Corporate bonds
Corporate bonds are capital market securities, not money market securities.
All the following statements concerning investors’ risks in financial markets are correct, EXCEPT:
(RM 289)
C. Currency risk is the risk of losing money because a borrower cannot repay all that he borrowed.
Currency risk is the risk of loss to the investor due to an adverse change in foreign exchange rates. Default risk is the risk of loss to the investor because of the borrower’s inability to repay in a timely manner.
Which of the following statements concerning investors’ risks in financial markets is (are) correct?
(RM 289)
I Default risk, the risk that a borrower will fail to meet his or her promises of payments, is a capital market risk that is minimal in the short-term money market.
II Political risk is the risk that exchange rate fluctuations will alter the investor’s return on securities.
A. I only
II is incorrect because it describes currency risk, not political risk. Political risk is the possibility of loss arising from changes in government laws or regulations.
Which of the following statements concerning the maturity of money market securities is (are) correct?
(RM 291)
I Actual maturity is the difference between any given date and the date a security is actually retired.
II Original maturity for money market securities on the date of issue is always one year.
A. I only
II is incorrect because the original maturity date of money market securities can be anywhere from a few hours up to one year.
Which of the following statements concerning money market operations is correct?
(RM 291-293)
D. The Federal Reserve sees to it that there is reasonable stability of prices in orderly trading.
There is a large volume of transactions in the money market, with many buyers and sellers. Transactions are completed very quickly and occur in locations all over the world.
Which of the following statements concerning clearinghouse funds or federal funds is (are) correct?
(RM 292-293)
I Clearinghouse funds are money market securities that make funds available immediately.
II Federal funds are government funds loaned to non-banking corporations with some delay typically expected for the processing of applications.
D. Neither I nor II
Federal funds are used to settle money market transactions, not the much slower clearinghouse funds, which involve payment by check. Federal funds are defined as deposit balances of banks held at the Federal Reserve Banks or at correspondent banking institutions. Therefore, both I and II are incorrect statements.
All the following statements concerning U.S. Treasury bills are correct, EXCEPT:
(RM 294-295)
A. They are tax bills sent to taxpayers to collect revenue.
U.S. Treasury bills are short-term debt instruments of the federal government, not tax bills.
All the following are types of U.S. Treasury bills, EXCEPT:
(RM 294-295)
C. Long bills that are sold by negotiation for periods of two years or more
All U.S. Treasury bills have original maturities of one year or less. Longer-term securities are notes or bonds.
Which of the following statements concerning bids at U.S. Treasury bill auctions is (are) correct?
(RM 295)
I Competitive bids are offered by large investors who seek to gain an allotment of bills at the lowest possible price.
II Non-competitive bids are offered by investors who agree to pay the average price in an auction of bills for amounts usually less than $1 million.
C. Both I and II
Both I and II correctly describe bidding procedures at T-bill auctions.
All the following statements concerning the sale of U.S. Treasury bills are correct, EXCEPT:
(RM 295-296)
B. Only those bidding less than the stop-out price or making non-competitive bids are allocated bills at the auction.
Those whose bids are above the stop-out price receive an allocation of bills, as do non-competitive bidders, who agree to purchase at the average accepted price and who, by definition, therefore, pay more than the stop-out price.
All the following are major investors in U.S. Treasury bills, EXCEPT:
(RM 299)
B. Consumers
Federal Reserve Banks, commercial banks, and nonfinancial corporations all are much larger investors in T-bills than are consumers.
All the following statements concerning dealers in U.S. government securities are correct, EXCEPT:
(RM 299-300)
D. Foreign dealers are not permitted to trade as primary dealers.
Approximately one-half of primary dealers in U.S. government securities are foreign dealers.
Which of the following statements concerning the first-price sealed-bid method of auctioning Treasury bills is (are) correct?
(RM 300)
I The highest bidder among the successful bidders pays more for the T-bills than the lowest successful bidder.
II The probability is increased that one bidder will corner the market by obtaining virtually all of the bills sold in a given auction.
C. Both I and II
I is correct and represents the so-called "winner’s curse." II is also correct because the bids are sealed, so one bidder may submit a bid for an artificially (even fraudulently) large volume of bills, as was done in a May, 1991 auction.
All the following statements concerning demand loans by dealers in U.S. government securities are correct, EXCEPT:
(RM 301)
C. They are risky loans that demand high interest rates.
Demand loans by banks to dealers in U.S. government securities are short-term, callable, and collateralized by U.S. government securities. Therefore, they entail very little risk to the lender and carry low interest rates.
Which of the following statements concerning repurchase agreements is (are) correct?
(RM 302)
I They function as credit for dealers who use U.S. securities as collateral.
II In this type of contract, a dealer sells securities and agrees to buy them back at a fixed price and time.
C. Both I and II
Both statements accurately describe characteristics of repurchase agreements.
Which of the following statements concerning activities of government securities dealers is (are) correct?
(RM 304-305)
I Dealers make a market, buying securities at bid prices and selling them at asked prices that they announce.
II Dealers take a long position when they buy for their portfolios and take a short position when they sell non-owned securities for future delivery.
C. Both I and II
Which of the following statements concerning sources of income of government securities dealers is (are) correct?
(RM 304-305)
I Position profits are earned when dealers accurately predict interest rate changes.
II "Carry" income is earned when the interest rate on funds borrowed by the dealers exceeds the interest rate on securities that the dealers own.
A. I only
II is incorrect because "carry" income arises only when the interest rate earned on securities owned by the dealer exceeds the dealer’s cost of borrowed funds.
All the following statements concerning dealers in government securities are correct, EXCEPT:
(RM 306-307)
A. Dealers cannot trade in bonds before they are issued (when-issued securities).
Dealers may trade when-issued securities with no money down and payment due later.