Finance 301 Chapter 6

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Calittlefield
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Finance 301 Chapter 6
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2013-03-02 15:34:15
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  1. Securities with maturities of one year or less are class­ified as:
    money market instruments
  2. Which of the following is NOT a money market security?
    common stock
  3. _______ are sold at an auction at a discountfrom par value.
    Treasury bills
  4. Jarrod King, a private investor, purchases a Treasury bill with a $10,000 par value for $9,645. One hundred days later, Jarrod sells the T-bill for $9,719. What is Jarrod’s expected annualized yield from this transaction?
    2.80 percent
  5. If an investor buys a T‑bill with a 90‑day maturity and $50,000 par value for$48,500 and holds it to maturity, what is the annualized yield?
    about 12.5 percent
  6. An investor buys a T‑bill with 180 days to maturity and $250,000 par value for$242,000. He plans to sell it after 60 days, and forecasts a selling price of$247,000 at that time. What is the annualized yield based on this expecta­tion?
    about 12.6 percent
  7. Assume investors require a 5 percent annualizedreturn on a six-month T-bill with a par value of $10,000. The price investorswould be willing to pay is $_______.
    9,756
  8. A newly issued T-bill with a $10,000 par value sells for $9,740, and has a 90 day maturity. What is the discount?
    10.00 percent
  9. Large corporations typically make _______ bids for T-bills so they can purchaselarger amounts.
    competitive
  10. At any given time, the yield on commercial paper is _______ the yield on a T‑bill with the same maturity.
    slightly higher than
  11. T-bills and commercial paper are sold:
    at a discount from par value
  12. _______ is a short-term debt instrument issued only be well-known, creditworthy firms and is normally issued to provide liquidity or finance a firm’s investment in inventory and accounts receivable.
    Commercial paper
  13. Commercial paper with a maturity exceeding _______ must be registered with the SEC.
    270 days
  14. Aninvestor buys commercial paper with a 60‑day maturity for $985,000. Par valueis $1,000,000, and the investor holds it to maturity. What is the annualized yield?
    9.14 percent
  15. A firm plans to issue 30‑day commercial paperfor $9,900,000. Par value is $10,000,000. What is the firm’s cost of borrowing?
    12.12 percent
  16. When firms sell commercial paper at a _______ price than they projected, their cost of raising funds is _______ than projected.
    none of these
  17. Which of the following is NOT a money market instrument?
    • A)  banker’s acceptance
    • B)  commercial paper
    • C)  negotiable CDs
    • D)  repurchase agreements
    • E)   All of these are money market instruments. 
    • ANSWER: E
  18. A repurchase agreement calls for an investor to buy secur­ities for $4,925,000 and sell them back in 60 days for $5,000,000. What is the yield?
    9.14 percent
  19. The federal funds market allows depository institutions to borrow:
    short-term funds from each other
  20. When a bank gurantees a furture payment to a firm, the finicial instrument used is called:
    a banker's acceptance
  21. Which of the following instruments has a highly active secondary market?
    banker's acceptances
  22. Which of the following is true of money market instruments?
    Their yields are highly correlated over time
  23. An investor purchased an NCD a year ago in thesecondary market for $980,000. He redeems it today and receives $1,000,000. Healso receives interest of $30,000. The investor’s annualized yield on thisinvestment is _______ percent.
    5.10
  24. An investor initially purchased securities at a price of $9,923,418, with an agreement to sell them back at a price of $10,000,000 at the end of a 90-day period. The repo rate is _______ percent.
    3.10
  25. The rate at which depository institutionseffectively lend or borrow funds from each other is the _______ rate.
    federal funds
  26. _______ are the most active participants in the federal funds market.
    Commercial banks
  27. Eurodollar deposits:
    are not subject to reserve requirements
  28. Which money market transaction is most likely to represent a loan from onecommercial bank to another?
    federal funds
  29. The rate on Eurodollar floating rate CDs is based on:
    the London Interbank Offer Rate
  30. Treasury bills:
    have an active secondary market
  31. The yield on commercial paper is _______ theyield of Treasury bills of the same maturity. The difference between theiryields would be especially large during a _______ period.
    greater than; recessionary
  32. The yield on NCDs is _______ the yield of Treasury bills of the same maturity. The difference between their yields would be especially large during a _______ period.
    greater than; recessionary
  33. Which of the following is sometimes issued inthe primary market by nonfinancial firms to borrow funds?
    commercial paper
  34. The so-called “flight to quality” causes therisk differential between risky and risk-free securities to be:
    increased
  35. The effective yield of a foreign money market security is _______ when the foreign currency strengthens against the dollar.
    increased
  36. The effective yield of a foreign money marketsecurity is _______ when the foreign currency weakens against the dollar.
    reduced
  37. Treasury bills are sold through _______ when initially issued.
    auctions
  38. At a given point in time, the actual price paid for a three-month Treasury bill is:
    more than the price paid for a six-month Treasury bill
  39. The minimum denomination of commercial paper is $_______.
    100,000
  40. Commercial paper is:
    placed either directly or with the help of of commercial paper dealers
  41. Bill Yates, a private investor, purchases a six-month (182-day) T-bill with a $10,000 par value for $9,700.
    41. If Bill Yates holds the Treasury bill to maturity, his annualized yield is _______ percent.
    6.20
  42. Bill Yates, a private investor, purchases a six-month (182-day) T-bill with a $10,000 par value for $9,700.

    The Treasury bill discount is _______ percent.
    5.93
  43. Robbins Corp. frequently invests excess funds inthe Mexican money market. One year ago, Robbins invested in a one-year Mexicanmoney market security that provided a yield of 25 percent. At the end of theyear, when Robbins converted the Mexican pesos to dollars, the peso haddepreciated from $.12 to $.11. What is the effective yield earned by Robbins?
    14.59 percent
  44. An aggregate purchase by investors of low-yieldinstruments in favor of high-yield instruments places _______ pressure on theyields of low-yield securities and _______ on the yields of high-yield securities.
    downward; upward
  45. Which of the following statements is incorrectwith respect to the federal funds rate?
    It is not influenced by the supply and demand for funds in the federal funds market.
  46. Bullock Corp. purchases certain securities for $4,921,349, with an agreement to sell them back at a price of $4,950,000 at the end of a 30-day period. The repo rate is _______ percent.
    6.99
  47. At a given point in time, the yield on a T-bill is slightly higher than the yieldon commercial paper with the same maturity, because commercial paper has higher:
    none of these
  48. If economic conditions cause investors to sell stocks because they want to invest in safer securities with much liquidity, this should cause a _______ demand for money market securities, which placed _______ pressure on the yields of money market securities.
    none of these
  49. In general, the money markets are widely perceived to be efficient in the sense that the prices reflect all availablepublic information.
    True
  50. Money market securities must have a maturity of three months or less.
    False
  51. Money market securities are issued in theprimary market through a telecommunications network by the Treasury,corporations, and financial intermediaries that wish to obtain short-termfinancing.
    True
  52. An international interbank market facilitatesthe transfer of funds from banks with excess funds to those with deficientfunds.
    True
  53. The interest rate charged for a short-term loan from a bank to a corporation is referred to as the London interbank offer rate (LIBOR).
    False

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