Chapter 8 The Money Markets8.1 Multiple Choice1) Activity in money markets increased significantly in the late 1970s and early 1980sbecauseA) of rising short-term interest rates.B) of regulations that limited what banks could pay for deposits.C) of both (A) and (B) of the above.D) of neither (A) nor (B) of the above.Answer: C2) Money market securities areA) short-term.B) low risk.C) very liquid.D) all of the above.E) only (A) and (B) of the above.Answer: D3) Money market instrumentsA) 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.Answer: D4) The banking industryA) should have an efficiency advantage in gathering information that shouldeliminate the need for the money markets.B) exists primarily to mediate the asymmetric information problem betweensaver-lenders and borrower-spenders.C) is subject to more regulations and governmental costs than are the moneymarkets.D) all of the above are true.E) only (A) and (B) of the above are true.Answer: D1105) In situations where the asymmetric information problem is not severe,A) the money markets have a distinct cost advantage over banks in providingshort-term funds.B) banks have a distinct cost advantage over the money markets in providingshort-term funds.C) banks have a comparative advantage over the money markets in providingshort-term funds.D) banks have an absolute advantage over the money markets in providing shorttermfunds.Answer: A

6) Brokerage firms that offered money market security accounts in the 1970s had acost advantage over banks in attracting funds because the brokerage firmsA) were not subject to deposit reserve requirements.B) were not subject to the deposit interest rate ceilings.C) were not limited in how much they could borrow from depositors.D) had the advantage of all the above.E) had the advantage of only (A) and (B) of the above.Answer: E7) Which of the following statements about the money market are true?A) Not all commercial banks deal for their customers in the secondary market.B) Money markets are used extensively by businesses both to warehouse surplusfunds 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.Answer: E8) Which of the following statements about the money markets are true?A) Most money market securities do not pay interest. Instead the investor paysless 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 havesufficient liquidity to meet their obligations.C) Unlike most participants in the money market, the U.S. Treasury Department isalways 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.Answer: D1119) Which of the following are true statements about participants in the money markets?A) Large banks participate in the money markets by selling large negotiable CDs.B) The U.S. government and corporations borrow in the money markets becausecash inflows and outflows are rarely synchronized.C) The Federal Reserve is the single most influential participant in the U.S.money market.D) All of the above are true.E) Only (A) and (B) of the above are true.Answer: D10) The most influential participant(s) in the U.S. money marketA) is the Federal Reserve.B) is the U.S. Treasury Department.C) are the largest money center banks.D) are the investment banks that underwrite securities.Answer: A

11) The primary function of large diversified brokerage firms in the money market is toA) sell money market securities to the Federal Reserve for its open marketoperations.B) make a market for money market securities by maintaining an inventory fromwhich to buy or sell.C) buy money market securities from corporations that need liquidity.D) buy T-bills from the U.S. Treasury Department.Answer: B12) Finance companies raise funds in the money market by sellingA) commercial paper.B) federal funds.C) negotiable certificates of deposit.D) Eurodollars.Answer: A13) Finance companies play a unique role in money markets byA) giving consumers indirect access to money markets.B) combining consumers’ investments to purchase money market securities ontheir 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.Answer: A11214) When inflation rose in the late 1970s,A) consumers moved money out of money market mutual funds because theirreturns did not keep pace with inflation.B) banks solidified their advantage over money markets by offering higherdeposit rates.C) brokerage houses introduced highly popular money market mutual fundsdrawing significant amounts of money out of bank deposits.D) consumers were unable to take advantage of higher rates in money marketsbecause of the requirement of large transaction sizes.Answer: C15) Money market instruments issued by the U.S. Treasury are calledA) Treasury bills.B) Treasury notes.C) Treasury bonds.D) Treasury strips.Answer: A16) The Treasury auctions 91-day and 182-day Treasury bills once a week. It auctions52-week billsA) once a month.B) once every 13 weeks.C) once a year.

D) every two weeks.Answer: A17) Which of the following statements are true of Treasury bills?A) The market for Treasury bills is extremely deep and liquid.B) Occasionally, investors find that earnings on T-bills do not compensate themfor changes in purchasing power due to inflation.C) By volume, most Treasury bills are sold to individuals who submitnoncompetitive bids.D) All of the above are true.E) Only (A) and (B) of the above are true.Answer: E18) Suppose that you purchase a 91-day Treasury bill for $9,850 that is worth $10,000when it matures. The security’s annualized yield if held to maturity is aboutA) 4.5 percent.B) 5 percent.C) 6 percent.D) 7 percent.Answer: C11319) If your competitive bid for a Treasury bill is successful, thenA) you will certainly pay less than if you had submitted a noncompetitive bid.B) you will probably pay more than if you had submitted a noncompetitive bid.C) you will pay the average of prices offered in other successful competitive bids.D) you will pay the same as other successful competitive bidders.Answer: B20) If your noncompetitive bid for a Treasury bill is successful, thenA) you will certainly pay less than if you had submitted a competitive bid.B) you will certainly pay more than if you had submitted a competitive bid.C) you will pay the average of prices offered in other noncompetitive bids.D) you will pay the same as other successful noncompetitive bidders.Answer: D21) Federal fundsA) are short-term funds transferred between financial institutions, usually for aperiod of one day.B) actually have nothing to do with the federal government.C) provide banks with an immediate infusion of reserves should they be short.D) are all of the above.E) are only (A) and (B) of the above.Answer: D22) Federal funds areA) usually overnight investments.B) borrowed by banks that have a deficit of reserves.C) lent by banks that have an excess of reserves.D) all of the above.

E) only (A) and (B) of the above.Answer: D23) The Fed can influence the federal funds interest rate by adjusting the level ofreserves available to banks in the system. The Fed canA) 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.Answer: D11424) The Federal Reserve can influence the federal funds interest rate byA) buying securities which adds reserves, thereby raising the federal funds rate.B) buying securities which removes reserves, thereby lowering the federal fundsrate.C) buying securities which adds reserves, thereby lowering the federal funds rate.D) buying securities which removes reserves, thereby raising the federal fundsinterest rate.Answer: C25) The Fed can lower the federal funds interest rate byA) selling securities, thereby adding reserves.B) selling securities, thereby lowering reserves.C) buying securities, thereby adding reserves.D) buying securities, thereby lowering reserves.Answer: C26) If the Fed wants to lower the federal funds interest rate, it willA) add reserves to the banking system by selling securities.B) add reserves to the banking system by buying securities.C) remove reserves from the banking system by selling securities.D) remove reserves from the banking system by buying securities.Answer: B27) If the Fed wants to raise the federal funds interest rate, it willA) sell securities to add reserves to the banking system.B) sell securities to remove reserves from the banking system.C) buy securities to add reserves to the banking system.D) buy securities to remove reserves from the banking system.Answer: B28) Government securities dealers frequently engage in repos toA) manage liquidity.B) take advantage of anticipated changes in interest rates.C) lend or borrow for a day or two with what is essentially a collateralized loan.D) do all of the above.E) do only (A) and (B) of the above.Answer: D

29) Repos areA) 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.Answer: D11530) A negotiable certificate of depositA) is a term security because it has a specified maturity date.B) is a bearer instrument, meaning whoever holds the certificate at maturityreceives the principal and interest.C) can be bought and sold until maturity.D) is all of the above.E) is only (A) and (B) of the above.Answer: D31) Negotiable certificates of depositA) are bearer instruments because their holders earn the interest and principal atmaturity.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.Answer: E32) Commercial paper securitiesA) are issued only by the largest and most creditworthy corporations, as they areunsecured.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.Answer: D33) Unlike most money market securities, commercial paperA) is not generally traded in a secondary market.B) usually has a term to maturity that is longer than a year.C) is not popular with most money market investors because of the high defaultrisk.D) all of the above.E) only (A) and (B) of the above.Answer: A34) A banker’s acceptance isA) used to finance goods that have not yet been transferred from the seller to thebuyer.B) an order to pay a specified amount of money to the bearer on a given date.

C) a relatively new money market security that arose in the 1960s as internationaltrade expanded.D) all of the above.E) only (A) and (B) of the above.Answer: E11635) Banker’s acceptancesA) 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.Answer: D36) EurodollarsA) are time deposits with fixed maturities and are, therefore, somewhat illiquid.B) offer the borrower a lower interest rate than can be received in the domesticmarket.C) are still limited to London banks.D) are all of the above.E) are only (A) and (B) of the above.Answer: E37) Which of the following statements about money market securities are true?A) The interest rates on all money market instruments move very closely togetherover time.B) The secondary market for Treasury bills is extensive and well developed.C) There is no well-developed secondary market for commercial paper.D) All of the above are true.E) Only (A) and (B) of the above are true.Answer: D38) Money market mutual fundsA) are funds that aggregate money from a group of small investors and invest it inmoney market instruments.B) have grown enormously popular since their inception in the early 1970s.C) received a flood of funds in the early 1980s as depositors withdrew their fundsfrom banks which were restricted from paying more than 5.25percent ininterest on savings accounts.D) all of the above.E) only (A) and (B) of the above.Answer: D39) The assets of money market mutual funds have increased from under $100 billion in1980 to more thanA) $500 billion in 2000.B) $1trillion in 2000.

C) $1.5 trillion in 2000.D) $2 trillion in 2000.Answer: C11740) Which of the following statements are true of money market mutual funds?A) Commercial paper is by far the largest component of these funds.B) Although investors know that MMMFs are not insured, they regard their fundsto be very safe.C) Money market mutual funds typically pay investors a higher return than isavailable from banks.D) All of the above are true.E) Only (A) and (B) of the above are true.Answer: D8.2 True/False1) Money market securities are short-term instruments with an original maturity of lessthan one year.Answer: TRUE2) Money market securities include Treasury bills, commercial paper, federal funds,repurchase agreements, negotiable certificates of deposit, banker’s acceptances, andEurodollars.Answer: TRUE3) The term money market is actually a misnomer, because liquid securities are tradedin these markets rather than money.Answer: TRUE4) Money markets are referred to as retail markets because small individual investorsare the primary buyers of money market securities.Answer: FALSE5) The U.S. Treasury Department is the single most influential participant in the U.S. moneymarket.Answer: FALSE6) Banks are unusual participants in the money market because they buy, but do notsell, money market instruments.Answer: FALSE7) Money markets are used extensively by businesses both to warehouse surplus fundsand to raise short-term funds.Answer: TRUE8) The market for U.S. Treasury bills is a shallow market because so few individualinvestors buy T-bills.Answer: FALSE1189) The T-bill is not an investment to be used for anything but temporary storage ofexcess funds because it barely keeps up with inflation.

Answer: TRUE10) The main purpose for federal funds is to provide banks with an immediate infusionof reserves should they be short.Answer: TRUE11) The Fed can influence the federal funds rate by adjusting the level of reserves in thebanking system.Answer: TRUE12) Commercial paper securities are unsecured promissory notes, issued bycorporations, that mature in no more than 270 days.Answer: TRUE13) A banker’s acceptance is an order to pay a specified amount of money to the beareron a given date. Banker’s acceptances have been used since the twelfth century.Answer: TRUE14) Interest rates on banker’s acceptances are low because the risk of default is verylow.Answer: TRUE8.3 Essay1) Explain why banks, which would seem to have a comparative advantage ingathering information, have not eliminated the need for the money markets.2) Explain how the Federal Reserve can influence the federal funds interest rate.3) Explain why the money markets are referred to as wholesale markets.4) Which are the three most important assets of mutual funds?5) Explain why money market interest rates move so closely together over time.6) Why did money market funds grow rapidly between 1975 and 1985?119