Part I: Multiple Choices

Highlight, or otherwise prominently indicate the SINGLE best answer for each question.

1) Activity in money markets increased significantly in the late 1970s and early 1980s because of

A) rising short-term interest rates.

B) regulations that limited what banks could pay for deposits.

C) both A and B of the above.

D) neither A nor B of the above.

2) The impact of the 2007-2009 financial crisis was widespread, including

A) the collapse of Merrill Lynch.

B) the failure of Bear Stearns, the fifth-largest U.S. investment bank.

C) the bailout of Fannie Mae and Freddie Mac by the U.S. Treasury.

D) all of the above.

E) only B and C of the above.

3) When inflation rose in the late 1970s,

A) consumers moved money out of money market mutual funds because their returns did not keep pace with inflation.

B) banks solidified their advantage over money markets by offering higher deposit rates.

C) brokerage houses introduced highly popular money market mutual funds, which drew significant amounts of money out of bank deposits.

D) consumers were unable to take advantage of higher rates in money markets because of the requirement of large transaction sizes.

4) Which of the following statements about money market securities are true?

A) The interest rates on all money market instruments move very closely together over 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.

5) The usual maturity range for commercial paper is ________.

A) 1 to 270 days

B) 1 to 15 days

C) 4, 13, and 26 weeks

D) 1 to 7 days

6) Financial crises

A) are major disruptions in financial markets that are characterized by sharp declines in asset prices and the failures of many financial and nonfinancial firms.

B) occur when adverse selection and moral hazard problems in financial markets become more significant.

C) frequently lead to sharp contractions in economic activity.

D) are all of the above.

E) are only A and B of the above.

7) A firm will borrow long-term

A) if the extra interest cost of borrowing long-term is less than the expected cost of rising interest rates before it retires its debt.

B) if the extra interest cost of borrowing short-term due to rising interest rates does not exceed the expected premium that is paid for borrowing long-term.

C) if short-term interest rates are expected to decline during the term of the debt.

D) Both A and C above.

8) The Fed is an active participant in money markets mainly because of its responsibility to

A) lower borrowing costs to encourage capital investment.

B) control the money supply through open market operation.

C) increase the interest income of retirees holding money market instruments.

D) assist the Securities and Exchange Commission in regulating the behavior of other money market participants.

9) The ________ value of a bond is the amount that the issuer must pay at maturity.

A) market

B) present

C) discounted

D) face

10) Which of the following is the largest borrower in the money markets?

A) Commercial banks

B) Large corporations

C) The U.S. Treasury

D) The Fed

11) Treasury bills do not

A) pay interest.

B) have a maturity date.

C) have a face amount.

D) have an active secondary market.

12) A negotiable certificate of deposit (CD)

A) is a term security because it has a specified maturity date.

B) is a bearer instrument, meaning whoever holds the certificate at maturity receives the principal and interest.

C) can be bought and sold until maturity.

D) all of the above.

13) When asset prices fall following a boom,

A) moral hazard may increase in companies that have lost net worth in the bust.

B) financial institutions may see the assets on their balance sheets deteriorate, leading to deleveraging.

C) both A and B are correct.

D) none of the above are correct.

14) What is a credit boom?

A) An explosion in a credit cycle, which can increase or decrease lending in the short-run

B) Essentially a lending spree on the part of banks and other financial institutions

C) When credit card receivables rise due to low initial interest rates

D) The signal of the end of a credit spree, with credit contracting rapidly

15)  In an advanced economy, a financial crisis can begin in several ways, including

A) mismanagement of financial liberalization or innovation.

B) asset pricing booms and busts.

C) an increase in uncertainty caused by failure of financial institutions.

D) all of the above.

16) Typically, the interest rate on corporate bonds will be ________ the more restrictions are placed on management through restrictive covenants, because ________.

A) higher; corporate earnings will be limited by the restrictions

B) higher; the bonds will be considered safer by bondholders

C) lower; the bonds will be considered safer by buyers

D) lower; corporate earnings will be higher with more restrictions in place

17)  The process of deleveraging refers to

A) cutbacks in lending by financial institutions.

B) a reduction in debt owed by banks.

C) both A and B.

D) none of the above.

18) Which of the following is TRUE?

A) In general, money market instruments are low-risk, high-yield securities.

B) The Treasury accepts noncompetitive bids in ascending order of yield until the accepted bids reach the offering amount.

C) The market for U.S. Treasury bills is a shallow market because few individual investors are allowed to buy T-bills.

D) The term money market is actually a misnomer, because liquid securities are traded in these markets rather than money

19)Which of the following is FALSE?

A) Money market securities include Treasury bills, commercial paper, federal funds, repurchase agreements, negotiable certificates of deposit, banker's acceptances, and Eurodollars.

B) Banks are unusual participants in the money market because they buy, but do not sell, money market instruments

C) The T-bill is not an investment to be used for anything but temporary storage of excess funds because it barely keeps up with inflation

D) Money markets are used extensively by businesses both to warehouse surplus funds and to raise short-term funds.

20) Stage Two of a financial crisis in an advanced economy usually involves a ________ crisis.

A) currency

B) stock market

C) banking

D) commodities

21) Which of the following led to the U.S. financial crisis of 2007-2009?

A) Financial innovation in mortgage markets

B) Agency problems in mortgage markets

C) An increase in moral hazard at credit rating agencies

D) All of the above

E) only A and B of the above

22) Negotiable certificates of deposit (CDs)

A) are bearer instruments because their holders earn the interest and principal at maturity.

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.

23) A coupon bond pays the owner of the bond

A) the same amount every month until the maturity date.

B) a fixed coupon payment every period, and also the face value of the bond at the maturity date.

C) the face value of the bond plus an interest payment once the maturity date has been reached.

D) the face value at the maturity date.

E) none of the above.

24) A credit market instrument that pays the owner only the face value of the security at the maturity date and nothing prior to then is called a

A) simple loan.

B) fixed-payment loan.

C) coupon bond.

D) discount bond.

25) (I) A discount bond requires the borrower to repay the principal at the maturity date plus an interest payment. (II) A coupon bond pays the lender a fixed coupon payment every year until the maturity date, when a specified final amount (face or par value) is repaid.

A) (I) is true, (II) false.

B) (I) is false, (II) true.

C) Both are true.

D) Both are false.

26) Dollars received in the future are worth ________ than dollars received today. The process of calculating what dollars received in the future are worth today is called ________.

A) more; discounting

B) less; discounting

C) more; inflating

D) less; inflating

27) If your noncompetitive bid for a Treasury bill is successful, then you will

A) certainly pay less than if you had submitted a competitive bid.

B) certainly pay more than if you had submitted a competitive bid.

C) pay the average of prices offered in other noncompetitive bids.

D) pay the same as other successful noncompetitive bidders.

28) Unlike most money market securities, commercial paper

A) 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 default risk.

D) all of the above.

E) only A and B of the above.

29) 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 them for changes in purchasing power due to inflation.

C) By volume, most Treasury bills are sold to individuals who submit noncompetitive bids.

D) All of the above are true.

E) Only A and B of the above are true.

30) A banker's acceptance is

A) used to finance goods that have not yet been transferred from the seller to the buyer.

B) an order to pay a specified amount of money to the bearer on a given date.

C) not able to be sold until maturity

D) all of the above.

E) only A and B of the above.

31) Eurodollars

A) are time deposits with fixed maturities and are, therefore, somewhat illiquid.

B) may offer the borrower a lower interest rate than can be received in the domestic market.

C) are limited to London banks.

D) are all of the above.

E) are only A and B of the above.

32) An ex ante real interest rate is adjusted for ________ changes in the price level.

A) actual

B) expected

C) nominal

D) real

33) Money market transactions

A) do not take place in any one particular location or building.

B) are usually arranged purchases and sales between participants over the phone by traders and completed electronically.

C) are both A and B of the above.

D) are none the the above

34) If a $10,000 face value discount bond maturing in one year is selling for $9,000, then its yield to maturity is approximately

A) 9 percent.

B) 10 percent.

C) 11 percent.

D) 12 percent.

35)Finance companies raise funds in the money market by selling

A) commercial paper.

B) federal funds.

C) negotiable certificates of deposit.

D) Eurodollars.

36) If a $10,000 face value discount bond maturing in one year is selling for $8,000, then its yield to maturity is

A) 10 percent.

B) 20 percent.

C) 25 percent.

D) 40 percent.

37) The nominal interest rate minus the expected rate of inflation

A) defines the real interest rate.

B) is a better measure of the incentives to borrow and lend than the nominal interest rate.

C) is a more accurate indicator of the tightness of credit market conditions than the nominal interest rate.

D) all of the above.

E) only A and B of the above.

38) If you expect the inflation rate to be 15 percent next year and a one-year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is

A) 7 percent.

B) 22 percent.

C) -15 percent.

D) -8 percent.

E) none of the above.

39) In which of the following situations would you prefer to be making a loan?

A) The interest rate is 9 percent and the expected inflation rate is 7 percent.

B) The interest rate is 4 percent and the expected inflation rate is 1 percent.

C) The interest rate is 13 percent and the expected inflation rate is 15 percent.

D) The interest rate is 25 percent and the expected inflation rate is 50 percent.

40) Suppose that you purchase a 182-day Treasury bill for $9,850 that is worth $10,000 when it matures. The security's annualized yield for your investment if held to maturity is ABOUT

A) 1.5%.

B) 2%.

C) 3%.

D) 6%.

41) Which of the following statements about the money markets are true?

A) Money markets are used extensively by businesses both to warehouse surplus funds and to raise SHORT-TERM funds.

B) Pension funds invest a portion of their assets in the money market to have sufficient liquidity to meet their obligations.

C) Unlike most participants in the money market, the U.S. Treasury Department is always 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.

42) Which of the following statements about the money markets are true?

A) Most money market securities do not pay interest. Instead, the investor pays less 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 have sufficient liquidity to meet their obligations.

C) Unlike most participants in the money market, the U.S. Treasury Department is always 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.

43) Financial crises

A) occur when adverse selection and moral hazard problems in financial markets become more significant.

B) are a recent phenomenon that occur only in developing countries.

C) invariably lead to debt deflation.

D) all of the above.

E) none of the above.

44) The interest rate that is adjusted for actual changes in the price level is called the

A) ex post real interest rate.

B) expected interest rate.

C) ex ante real interest rate.

D) none of the above.

45)The change in the bond's price relative to the initial purchase price is

A) the current yield.

B) coupon payment.

C) yield to maturity.

D) rate of capital gain.

*46) (I) Municipal bonds that are issued to pay for essential public projects are exempt from federal taxation. (II) General obligation bonds do not have specific assets pledged as security or a specific source of revenue allocated for their repayment.

A) (I) is true, (II) false.

B) (I) is false, (II) true.

C) Both are true.

D) Both are false

*47) Which of the following are true for a coupon bond?

A) When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate.

B) The price of a coupon bond and the yield to maturity are negatively related.

C) The yield to maturity is greater than the coupon rate when the bond price is below the par value.

D) All of the above are true.

E) Only A and B of the above are true.

Part II: Short Answer questions

1. What is the annualized discount rate % and your annualized investment rate % on a Treasury bill that you purchase for $9,940 that will mature in 91 days for $10,000?

2. If a $10,000 face value discount bond maturing in one year is selling for the following price as in the table, what are their YTM? Complete the table below, and briefly comment what relationship do you observe between YTM and current price?

3. Treasury-Bill Auction

In a Treasury auction of $1.3 billion par value 91-day T-bills, the following bids were submitted:

a. If only these competitive bids are received, who will receive T-bills, in what quantity, and at what price?

b. If the Treasury also received $500 million in non-competitive bids, who will receive T-bills, in what quantity, and at what price?