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  1. 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.
    •  
  2. 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.
     
    A. I only   
    B. II only   
    C. Both I and II   
    D. Neither I nor II 
    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
    (this multiple choice question has been scrambled)
  3. 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.  

    A. Neither I nor II 
    B. Both I and II   
    C. I only   
    D. II only   
    B. Both I and II

    I correctly describes the concept of opportunity cost. II correctly describes the result of having idle cash.
    (this multiple choice question has been scrambled)
  4. 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.   
    B. The Federal Reserve system is always a borrower in the money market.   
    C. The U.S. Treasury is almost always a lender or investor in the money market.   
    D. State and local units of government do not borrow or lend in the money market. 
    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.
     
    (this multiple choice question has been scrambled)
  5. 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.  

    A. Both I and II   
    B. I only   
    C. II only   
    D. Neither I nor II 
    C. II only

    I is incorrect because money market investors are concerned with short-term securities and short-term interest rates.
    (this multiple choice question has been scrambled)
  6. All the following are types of money market securities, EXCEPT:
    (RM 288)  

    A. Negotiable certificates of deposit   
    B. Corporate bonds
    C. Commercial paper   
    D. Bankers’ acceptances   
    B. Corporate bonds

    Corporate bonds are capital market securities, not money market securities.
    (this multiple choice question has been scrambled)
  7. All the following statements concerning investors’ risks in financial markets are correct, EXCEPT:
    (RM 289)  

    A. Currency risk is the risk of losing money because a borrower cannot repay all that he borrowed.   
    B. Market risk is the risk of a change in securities prices or interest rates that could cause a loss on a security when the security is sold.   
    C. Reinvestment risk is the risk that an investor will have to take a lower rate of return when he or she reinvests the proceeds from a security.   
    D. Inflation risk is the risk of an investor’s loss of purchasing power in periods of rising prices. 
    A. 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.
    (this multiple choice question has been scrambled)
  8. 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. Neither I nor II 
    B. Both I and II   
    C. I only   
    D. II only   
    C. 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.
     
    (this multiple choice question has been scrambled)
  9. 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. II only   
    B. I only   
    C. Neither I nor II 
    D. Both I and II   
    B. 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.
     
    (this multiple choice question has been scrambled)
  10. Which of the following statements concerning money market operations is correct?
    (RM 291-293)   

    A. The Federal Reserve sees to it that there is reasonable stability of prices in orderly trading.   
    B. There is a central trading area where all money market sales and purchases of securities occur.   
    C. There is a small volume of transactions, and most investors have trouble finding buyers for owned securities.   
    D. Transactions are complicated and take a long time to complete. 
    A. 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.
    (this multiple choice question has been scrambled)
  11. 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.   

    A. Neither I nor II
    B. II only   
    C. I only   
    D. Both I and II   
    A. 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.
    (this multiple choice question has been scrambled)
  12. All the following statements concerning U.S. Treasury bills are correct, EXCEPT:
    (RM 294-295)  

    A. They are direct obligations of the U.S. government.   
    B. They are tax bills sent to taxpayers to collect revenue.   
    C. They mature in a year or less from the date of issue.   
    D. Their market prices adjust quickly to market conditions. 
    B. 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.
    (this multiple choice question has been scrambled)
  13. All the following are types of U.S. Treasury bills, EXCEPT:
    (RM 294-295)  

    A. Long bills that are sold by negotiation for periods of two years or more   
    B. Strip bills that required investors to bid for a package of bills of differing maturities   
    C. Regular-series bills that are sold in regularly scheduled, competitive auctions   
    D. Cash management bills that are reopened issues of bills sold earlier 
    A. 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.
     
    (this multiple choice question has been scrambled)
  14. 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.  

    A. Neither I nor II 
    B. Both I and II   
    C. I only   
    D. II only   
    B. Both I and II

    Both I and II correctly describe bidding procedures at T-bill auctions.
    (this multiple choice question has been scrambled)
  15. All the following statements concerning the sale of U.S. Treasury bills are correct, EXCEPT:
    (RM 295-296)  

    A. All bills are issued in book-entry form, as a computer record of ownership. 
    B. The Treasury tries to fill all non-competitive tenders for bills.   
    C. Only those bidding less than the stop-out price or making non-competitive bids are allocated bills at the auction.   
    D. The investor pays the full par value of the bills when the bid is made and gets any refund on the day of issue.   
    C. 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.
     
    (this multiple choice question has been scrambled)
  16. All the following are major investors in U.S. Treasury bills, EXCEPT:
    (RM 299)  

    A. Nonfinancial corporations 
    B. Commercial banks   
    C. Consumers   
    D. Federal Reserve banks   
    C. Consumers

    Federal Reserve Banks, commercial banks, and nonfinancial corporations all are much larger investors in T-bills than are consumers.
    (this multiple choice question has been scrambled)
  17. All the following statements concerning dealers in U.S. government securities are correct, EXCEPT:           
    (RM 299-300)  

    A. There are only about 20 dealers, but they are located at the points where thousands of borrowers and lenders are in contact with the money market.   
    B. Foreign dealers are not permitted to trade as primary dealers. 
    C. They trade both in new issues and in Treasury bills for resale.   
    D. They may also trade in CDs, commercial paper, and other money market securities.  
    B. Foreign dealers are not permitted to trade as primary dealers. 

    Approximately one-half of primary dealers in U.S. government securities are foreign dealers.
    (this multiple choice question has been scrambled)
  18. 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.  

    A. Both I and II   
    B. Neither I nor II 
    C. II only   
    D. I only   
    A. 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.
    (this multiple choice question has been scrambled)
  19. All the following statements concerning demand loans by dealers in U.S. government securities are correct, EXCEPT:
    (RM 301)
     
    A. They are risky loans that demand high interest rates.   
    B. They are one of the major sources of dealer financing. 
    C. They may be called in whenever banks need money quickly.   
    D. They have U.S. securities as collateral.   
    A. 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.
    (this multiple choice question has been scrambled)
  20. 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.  

    A. Both I and II   
    B. I only   
    C. Neither I nor II 
    D. II only   
    A. Both I and II

    Both statements accurately describe characteristics of repurchase agreements.
    (this multiple choice question has been scrambled)
  21. 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.  

    A. Both I and II   
    B. II only   
    C. Neither I nor II 
    D. I only   
    A. Both I and II
    (this multiple choice question has been scrambled)
  22. 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   
    B. Neither I nor II 
    C. Both I and II   
    D. II only   
    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.
    (this multiple choice question has been scrambled)
  23. 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). 
    B. Dealers borrow from commercial banks, and the dealers may be departments of very large banks.   
    C. Dealers often trade with each other, often through securities brokers.   
    D. Dealers borrow using repurchase agreements that have U.S. securities as collateral.   
    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.
     
    (this multiple choice question has been scrambled)

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