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  1. The money market is a mechanism through which holders of long-term cash surpluses are matched up with those who have long-term cash deficits.The money market is a mechanism through which holders of long-term cash surpluses are matched up with those who have long-term cash deficits.

    a) True
    b) False
    b) False

    Money market instruments have original maturities of one year or less. Hence, the money market matches holders of short-term cash surpluses with those who have short-term cash deficits.
  2. Holding idle surplus cash is expensive.

    a) True
    b) False
    a) True

    The cost of holding idle cash is the forgone interest that could have been earned by investing the funds.
  3. It is rare for a financial institution such as a commercial bank to participate in the money market as both a borrower and a lender of funds.

    a) True
    b) False
    b) False

    The same institutions frequently operate on both sides of the money market, either simultaneously or within a short time period.
  4. Money market investors typically display a strong aversion to risk.

    a) True
    b) False
    a) True

    Investors (lenders) in the money market require a high degree of safety and liquidity before investing their funds.
  5. Default risk is minimal in the money market.

    a) True
    b) False
    a) True

    While the fact that only borrowers with the highest credit ratings can participate in the money market makes default minimal, it is always present.
  6. Political risk is present in money market instruments only when the instruments are issued by organizations domiciled in countries outside the United States.

    a) True
    b) False
    b) False  

    Political risk refers to the possibility that changes in government laws or regulations will reduce the return to the investor. Such laws or regulations could be issued by foreign or domestic governments.
  7. Money moves quickly from the buyer to the seller of money market instruments because settlement is usually made through federal funds.

    a) True
    b) False
    a) True

    To speed settlement, the buyer of money market instruments pays by transferring federal funds to the seller.
  8. The large size of the money market means that it is readily accessible for even small investors.

    a) True
    b) False
    b) False

    The money market is dominated by relatively few large financial institutions (less than 100), with most transactions in multiple millions of dollars.
  9. The lowest yields of all money market instruments, other things being equal, are usually provided by commercial paper.

    a) True
    b) False
    b) False  

    The lowest yields among money market instruments are typically provided by U.S. Treasury bills, all other things being equal, because of their low risk and ready marketability.
  10. Federal funds are also called immediately available funds.

    a) True
    b) False
    a) True

    They are mainly deposit balances of commercial banks and thrift institutions held at regional Federal Reserve or correspondent banks and can be transferred by wire almost instantaneously.
  11. The principal way in which U.S. Treasury bills are sold is through an auction technique.

    a) True
    b) False
    a) True

    The marketplace, using the auction technique, sets the rate on Treasury bills.
  12. Noncompetitive tenders to buy new U.S. Treasury bills are typically submitted by smaller investors who agree to accept the average price set in the bill auction.

    a) True
    b) False
    a) True

    Small investors get a chance to purchase Treasury bills by accepting the average price set in the auction.
  13. In an auction for new U.S. Treasury bills, no one bidding more than the stop-out price will receive any of the bills being sold.

    a) True
    b) False
    b) False

    The stop-out price, or market-clearing price, is the lowest price at which some bills will be sold. Those who bid above the stop-out price will receive some bills.
  14. Treasury bills carry a stated interest rate.

    a) True
    b) False
    b) False

    T-bill rates tend to fall during recessions as the demand for borrowing sags.
  15. Among the largest investors in U.S. Treasury bills are the Federal Reserve Banks.

    a) True
    b) False
    a) True

    Commercial banks, nonfinancial corporations, state and local governments, and the Federal Reserve Banks are the principal holders of U.S. Treasury bills.
  16. The English auction method gives security dealers an incentive to share information and collude to divide up the market.

    a) True
    b) False
    a) True

    The danger of bidding too high to get the securities under the English auction approach may encourage participants to collude on the bids.
  17. Among the largest investors in U.S. Treasury bills are the Federal Reserve Banks.

    a) True
    b) False
    a) True

    Commercial banks, nonfinancial corporations, state and local governments, and the Federal Reserve Banks are the principal holders of U.S. Treasury bills.
  18. The English auction method gives security dealers an incentive to share information and collude to divide up the market.

    a) True
    b) False
    a) True

    The danger of bidding too high to get the securities under the English auction approach may encourage participants to collude on the bids.
  19. Demand loans from banks are one of the most heavily used sources of funds for U.S. Treasury bill dealer houses.

    a) True
    b) False
    a) True

    Demand loans and repurchase agreements are the major sources of funds for U.S. Treasury bill dealers.
  20. In a typical repurchase-agreement transaction, a bank sells securities to a dealer in T-bills with an agreement to buy them back after a short period of time.

    a) True
    b) False
    b) False

    In a typical repurchase-agreement transaction the dealer sells the T-bills to a bank and agrees to repurchase them a short time later.
  21. The principal source of a T-bill dealer's income is the commissions earned on trades.

    a) True
    b) False
    b) False

    The T-bill dealer's principal source of income is the positive spread between the bid and asked prices of a T-bill. Dealers also gain capital appreciation by correctly forecasting the movement of interest rates. Dealers do not usually charge commissions on their trades.
  22. The principal use of federal funds is to

    A) pay for goods purchased by the U.S. government
    B) enable Treasury bill dealers to finance reverse repurchase agreements
    C) adjust deposit balances of commercial banks at the Federal Reserve Bank
    D) raise money from agencies of the federal government
    • C) adjust deposit balances of commercial banks at the Federal Reserve Bank 
    •   
    • The others are incorrect because these options do not describe a use of federal funds as that term is defined in the text.
  23. Assume that a Treasury bill with a $100 par value is purchased for $98 and matures in 90 days. The discount rate of return on this bill is

    A) .5 percent 
    B) 2 percent 
    C) 4 percent 
    D) 8 percent
    D) 8 percent

    The proper formula is

    DR=

    par value-purchase price  360     ____________________x_____
              par value             days to maturity                    

    =  $100-98        360 
    __________ x   ______   
          $100            90
     
    (this multiple choice question has been scrambled)
  24. Which of the following constitutes the largest category of debt owed by U.S. households?

    A) home mortgages
    B) security credit 
    C) consumer installment credit 
    D) trade credit 
    A) home mortgages

    All others are incorrect because consumer installment credit, security credit, and trade credit are all much smaller percentages of the total debt of U.S. households than is the category of home mortgages. Home mortgages constitute about 65 percent of the total debt of U.S. households.
     
    (this multiple choice question has been scrambled)
  25. Risks that are lower for typical money market securities than for typical capital market securities include which of the following? I. default risk II. inflation riskAnswer   

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

    Because of the short duration and high quality of typical money market securities, both types of risks are lower than for typical capital market securities.
     
    (this multiple choice question has been scrambled)
  26. Investors in money market securities are typically seeking all the following objectives EXCEPT

    A) long term capital appreciation   
    B) a positive rate of return   
    C) safety of principal   
    D) liquidity .
    A) long term capital appreciation   

    Money market securities have original maturities of no more than one year and actual maturities often far shorter than that. Hence, long term capital appreciation is not an objective of those investing in money market investments.
     
    (this multiple choice question has been scrambled)
  27. All the following are money market securities EXCEPT

    A) securities dealer loans   
    B) Series EE savings bonds
    C) Treasury bills   
    D) federal funds   
    B) Series EE savings bonds

    Series EE bonds are long-term securities and, thus, are not money market securities. Money market securities have maturities of one year or less.
    (this multiple choice question has been scrambled)
  28. Characteristics of the money market include all the following EXCEPT

    A) It is a highly efficient market.
    B) It is a very shallow and narrow market. C) It is a telephone market.
    D) It is a market in which payment is made almost immediately.
    B) It is a very shallow and narrow market.

    The money market is very deep and broad and has the capability to absorb a great number of very large transactions with only a small effect on interest rates and securities prices.
  29. All the following organizations typically act as both borrowers from and lenders to the money market EXCEPT

    A) the U.S. Treasury   
    B) the Federal Reserve System   
    C) large nonfinancial corporations   
    D) large commercial banks .
    A) the U.S. Treasury   

    The U.S. Treasury almost always acts on only one side of the money market, as a borrower of funds from it.
     
    (this multiple choice question has been scrambled)

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