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Finance
Q:
Which of the following may be issued in the primary market by well-known creditworthy firms to borrow funds?
a. bankers acceptances
b. retail CDs
c. commercial paper
d. federal funds
Q:
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?
a. 9.43 percent
b. 9.28 percent
c. 9.14 percent
d. 9.00 percent
Q:
When a firm sells its commercial paper at a ____ price than projected, its cost of raising funds will be ____ than what it initially anticipated.
a. higher; higher
b. lower; lower
c. higher; lower
d. lower; higher
e. higher; lower AND lower; higher
Q:
Which of the following statements is incorrect with respect to the federal funds rate?
a. It is the rate charged by financial institutions on loans they extend to each other.
b. It is the interest rate in which the Federal Reserve charges on loans that it provides to commercial banks.
c. Commercial banks are the most active participants in the federal funds market.
d. Financial market participants view changes in the federal funds rate as an indicator of potential changes in other money market rates.
e. The Federal Reserve adjusts the amount of funds in depository institutions in order to influence the federal funds rate.
Q:
The federal funds market allows depository institutions to borrow
a. short-term funds from each other.
b. short-term funds from the Treasury.
c. long-term funds from each other.
d. long-term funds from the Federal Reserve.
e. short-term funds from the Treasury AND long-term funds from the Federal Reserve.
Q:
Which of the following is NOT a money market security?
a. Treasury bill
b. negotiable certificate of deposit
c. common stock
d. federal funds
Q:
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.
a. higher than; recessionary
b. higher than; boom economy
c. less than; boom economy
d. less than; recessionary
Q:
Which of the following is true of money market instruments?
a. Their yields are highly correlated over time.
b. They typically sell for par value when they are initially issued (especially T-bills and commercial paper).
c. Treasury bills have the highest yield.
d. They all make periodic coupon (interest) payments.
e. They typically sell for par value when they are initially issued (especially T-bills and commercial paper) AND treasury bills have the highest yield.
Q:
Which of the following is NOT a money market instrument?
a. banker's acceptance
b. commercial paper
c. negotiable CD
d. repurchase agreement
e. All of these are money market instruments.
Q:
Commercial paper has a maximum maturity of ____ days.
a. 45
b. 270
c. 360
d. None of these are correct.
Q:
Treasury bills
a. have a maturity of up to five years.
b. have an active secondary market.
c. are commonly sold at par value.
d. commonly offer coupon payments.
Q:
Commercial paper is
a. always directly placed with investors.
b. always placed with the help of commercial paper dealers.
c. placed either directly or with the help of commercial paper dealers.
d. always placed by bank holding companies.
Q:
A ____ is not a money market security.
a. Treasury bill
b. negotiable certificate of deposit
c. bond
d. banker's acceptance
e. All of these are money market securities.
Q:
The effective yield of a foreign money market security is ____ when the foreign currency weakens against the dollar.
a. increased
b. reduced
c. always negative
d. unaffected
Q:
The LIBOR scandal in 2012 involved
a. banks reporting inflated earnings from their loans.
b. hackers breaking into the loan documentation files.
c. banks falsely reporting the interest rates they offered in the interbank market.
d. collusion among the banks when setting the commercial paper rate.
Q:
At any given time, the yield on commercial paper is ____ the yield on a T-bill with the same maturity.
a. slightly less than
b. slightly higher than
c. equal to
d. much less than
Q:
An investor buys commercial paper with a 60-day maturity for $985,000. Par value is $1,000,000, and the investor holds it to maturity. What is the annualized yield?
a. 8.62 percent
b. 8.78 percent
c. 8.90 percent
d. 9.14 percent
e. 9.00 percent
Q:
Robbins Corp. frequently invests excess funds in the Mexican money market. One year ago, Robbins invested in a one-year Mexican money market security that provided a yield of 25 percent. At the end of the year, when Robbins converted the Mexican pesos to dollars, the peso had depreciated from $.12 to $.11. What is the effective yield earned by Robbins?
a. 25.00 percent
b. 35.41 percent
c. 14.59 percent
d. None of these are correct.
Q:
When a bank guarantees a future payment to a firm, the financial instrument used is called
a. a repurchase agreement.
b. a negotiable CD.
c. a banker's acceptance.
d. commercial paper.
Q:
The rate at which depository institutions effectively lend or borrow funds from each other is the ____.
a. federal funds rate
b. discount rate
c. prime rate
d. repo rate
Q:
The minimum denomination of commercial paper is
a. $25,000.
b. $100,000.
c. $150,000.
d. $200,000.
Q:
Treasury bills are sold through ____ when initially issued.
a. insurance companies
b. commercial paper dealers
c. auction
d. finance companies
Q:
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.
a. 3.10
b. 0.77
c. 1.00
d. None of these are correct.
Q:
Because money market securities have a short-term maturity and typically cannot be sold easily, they provide investors with a low degree of liquidity.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
Q:
Money market securities must have a maturity of three months or less.
a. True
b. False
Q:
Most repo transactions use government securities.
a. True
b. False
Q:
At each T-bill auction, the prices paid for three-month T-bills are significantly lower than the prices paid for six-month bills.
a. True
b. False
Q:
Money market security values are less sensitive to interest rate movements than bonds.
a. True
b. False
Q:
T-bills must offer a premium above negotiable certificates of deposit (NCDs) to compensate for less liquidity and safety.
a. True
b. False
Q:
Money market securities are issued in the primary market through a telecommunications network by the Treasury, corporations, and financial intermediaries that wish to obtain short-term financing.
a. True
b. False
Q:
Junk commercial paper is commercial paper that is not rated or has a low rating.
a. True
b. False
Q:
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).
a. True
b. False
Q:
Money markets are used to facilitate the transfer of short-term funds from individuals, corporations, or governments with excess funds to those with deficient funds.
a. True
b. False
Q:
Exporters can hold a banker's acceptance until the date at which payment is to be made, but they frequently sell the acceptance before then at a discount to obtain cash immediately.
a. True
b. False
Q:
There is no limit to the amount of T-bills that can be purchased by noncompetitive bidders in a T-bill auction.
a. True
b. False
Q:
The amount of commercial paper outstanding today is approximately twice as large as it was before the credit crisis that began in 2008.
a. True
b. False
Q:
An international interbank market facilitates the transfer of funds from banks with excess funds to those with deficient funds.
a. True
b. False
Q:
T-bills do not offer coupon payments but are sold at a discount from par value.
a. True
b. False
Q:
A major drawback to investing in Treasury bills is that they cannot easily be liquidated.
a. True
b. False
Q:
A line of credit provided by a commercial bank gives a company the right (but not the obligation) to borrow a specified maximum amount of funds over a specified period of time.
a. True
b. False
Q:
Indicate whether the statement is true or false.During periods of uncertainty about the economy, there is a shift from risky money market securities to Treasury securities.a. Trueb. False
Q:
Which of the following is NOT a reason that a stimulative monetary policy may be ineffective?
a. The effects of a stimulative policy may be disrupted by expectations of inflation.
b. Retirees who rely on interest income may restrict their spending.
c. Lending institutions may increase their standards for borrowers, so some potential borrowers may not qualify for loans.
d. Higher interest rates caused by the stimulative policy might reduce economic growth.
Q:
A loose-money policy tends to ____ economic growth and ____ the inflation rate.
a. stimulate; place downward pressure on
b. stimulate; place upward pressure on
c. dampen; place upward pressure on
d. dampen; place downward pressure on
Q:
The Fed normally controls the money supply by buying and selling ________.
a. Federal Reserve notes
b. Treasury securities
c. certificates of deposit
d. federal fund notes
Q:
Inflation is commonly the result of a
a. large budget deficit.
b. high level of interest rates.
c. high level of unemployment.
d. high level of aggregate demand.
Q:
If a firm has a credit risk premium of 3 percent and the Treasury security rate is 4 percent, the firm will be able to borrow at ________. If the Fed implements a monetary policy that raises the Treasury security rate to 6 percent, the cost of borrowing for the firm will be ________.
a. 7 percent; 10 percent
b. 4 percent; 6 percent
c. 7 percent; 9 percent
d. 1 percent; 3 percent
Q:
In general, there is
a. a positive relationship between unemployment and inflation.
b. an inverse relationship between unemployment and inflation.
c. an inverse relationship between GDP and inflation.
d. a positive relationship between GDP and unemployment.
Q:
A high budget deficit tends to place ____ pressure on interest rates; the Fed's tightening of the money supply tends to place ____ pressure on interest rates.
a. upward; upward
b. upward; downward
c. downward; downward
d. downward; upward
Q:
Financial institutions such as commercial banks, bond mutual funds, insurance companies, and pension funds maintain large portfolios of bonds, so their portfolios are ____ affected when the Fed ____ interest rates.
a. adversely; decreases
b. adversely; increases
c. favorably; increases
d. adversely; decreases AND favorably; increase
Q:
The ____ indicators tend to rise or fall at the same time as a business cycle.
a. leading
b. lagging
c. coincident
d. None of these are correct.
Q:
A weak dollar can stimulate ____, discourage ____, and ____ the U.S. economy.
a. U.S. exports; U.S. imports; weaken
b. U.S. exports; U.S. imports; stimulate
c. U.S. imports; U.S. exports; stimulate
d. None of these are correct.
Q:
The intent of the Feds strategy to resolve the credit crisis in 20082009 was to
a. increase long-term interest rates.
b. require corporations to issue more commercial paper.
c. require bond rating agencies to impose higher standards on their ratings.
d. reduce interest rates.
Q:
The Feds monetary policy is commonly intended to alter the supply of funds in the banking system in order to achieve a specific targeted
a. discount rate.
b. required reserve requirement.
c. federal funds rate.
d. prime rate.
Q:
When the Fed uses open market operations to sell some of its Treasury securities, there will be
a. an outward shift in the supply schedule of loanable funds.
b. an inward shift in the supply schedule of loanable funds.
c. no shift in the supply schedule of loanable funds.
d. an outward shift in the demand schedule for loanable funds.
Q:
A ____-money policy can reduce unemployment, and a ____-money policy can reduce inflation.
a. tight; loose
b. loose; tight
c. tight; tight
d. loose; loose
Q:
Which of the following is NOT a disadvantage of inflation targeting?
a. If the U.S. inflation rate deviates substantially from the Fed's target inflation rate, the Fed could lose credibility.
b. The Fed's focus on inflation could result in a much higher unemployment level.
c. The Fed's focus on inflation will likely lead to a higher government budget deficit.
d. All of these are disadvantages of inflation targeting.
Q:
The Fed can ____ the level of spending as a means of stimulating the economy by ____ the money supply.
a. increase; decreasing
b. decrease; increasing
c. decrease; decreasing
d. increase; increasing
Q:
There is some evidence that high money supply growth may lead to _______ U.S. inflation over time, which in turn places ____ pressure on U.S. interest rates.
a. higher; upward
b. higher; downward
c. lower; downward
d. lower; upward
Q:
Which of the following best describes the relationship between the Fed and the presidential administration?
a. The Fed must receive the administrations approval before conducting monetary policy.
b. The Fed must implement a monetary policy specifically to support the administration's policy.
c. The administration must receive approval from the Fed before implementing fiscal policy.
d. The Fed must receive the administrations approval before conducting monetary policy AND the administration must receive approval from the Fed before implementing fiscal policy.
e. None of these are correct.
Q:
A credit crunch occurs when
a. interest rates decline.
b. interest rates rise.
c. creditors restrict the amount of loans they are willing to provide.
d. the economy is strong.
Q:
Global crowding out refers to the impact that
a. excessive U.S. population growth can have on interest rates.
b. excessive global population growth can have on interest rates.
c. an excessive budget deficit in one country can have on interest rates of other countries.
d. an excessive budget deficit in one country can have on exchange rates.
Q:
The Federal Reserve would be most inclined to use a stimulative monetary policy to cure a recession if oil prices are
a. low and steady.
b. low, but rising.
c. very high, but declining slightly.
d. very high and rising.
Q:
The interest rate that the Fed targets for its monetary policy is the
a. commercial paper rate.
b. federal funds rate.
c. Treasury bond coupon rate.
d. one-year certificate of deposit rate.
Q:
A ____ dollar tends to exert inflationary pressure in the United States.
a. stable
b. strong
c. weak
d. stable AND strong
Q:
A purchase of Treasury securities by the Fed leads to a(n) ____ in interest rates and a(n) ____ in the level of business investment.
a. increase; decrease
b. decrease; decrease
c. increase; increase
d. decrease; increase
Q:
Costner National, a commercial bank, obtains short-term deposits and makes long-term fixed-rate loans. It should be adversely affected when the Fed
a. purchases Treasury securities.
b. maintains a stable money supply.
c. uses a tight-money policy.
d. uses a loose-money policy.
Q:
The ____ lag is the time from when an economic problem arises until it is recognized.
a. recognition
b. adjustment
c. implementation
d. None of these are correct.
Q:
A ____ economic indicator tends to rise or fall a few months after business-cycle expansions and contractions.
a. leading
b. coincident
c. lagging
d. None of these are correct.
Q:
Which of the following is NOT an indicator of inflation?
a. housing price indexes
b. wage rates
c. oil prices
d. consumer confidence surveys
Q:
The time between when the Fed adjusts the money supply and when the adjustment has an effect on the economy is the
a. recognition lag.
b. implementation lag.
c. impact lag.
d. open-market lag.
Q:
Which of the following is true about an increase in the U.S. governments budget deficit?
a. It will lead to global crowding out if U.S. interest rates fall below the level of interest rates in other countries.
b. It will cause outflows of foreign funds from the United States as foreign investors move their funds to other countries.
c. It will cause an inward shift in the aggregate demand for loanable funds curve.
d. None of these are correct.
Q:
The time lag between when an economic problem arises and when it is reported in economic statistics is the
a. recognition lag.
b. implementation lag.
c. impact lag.
d. open-market lag.
Q:
The ____ indicators tend to rise or fall after a business cycle.
a. leading
b. lagging
c. coincident
d. None of these are correct.
Q:
Which of the following is NOT an effect of a stimulative monetary policy?
a. The risk-free rate and the credit risk premium increase.
b. A firms cost of debt decreases.
c. A firms cost of equity decreases.
d. Depository institutions experience an increase in their supply of funds.
Q:
____ serves as the most direct indicator of economic growth in the United States.
a. Gross domestic product (GDP)
b. Technology
c. The Treasury bond rate
d. The industrial production index
Q:
If the Fed uses a passive monetary policy during weak economic conditions,
a. it increases the money supply substantially.
b. it reduces the money supply substantially.
c. it allows the economy to fix itself.
d. it purchases commercial paper and mortgage-backed securities.
Q:
Which of the following might be monitored as an indicator of inflation?
a. consumer price index
b. gold prices
c. oil prices
d. All of these may be indicators of inflation.
Q:
Which of the following is true with respect to inflation targeting?
a. Inflation targeting would allow the Fed more control over inflation caused by excessive aggregate demand.
b. Inflation targeting would require the Fed to maintain very strong economic growth.
c. Inflation targeting could control the inflation caused by higher oil prices.
d. Inflation targeting would allow the Fed to have more control over the unemployment rate.
Q:
The Feds monetary policy is primarily intended to regulate commercial loans.a. Trueb. False
Q:
If the Fed implemented a policy of inflation targeting, and if the U.S. inflation rate deviated substantially from the Fed's target inflation rate, the Fed could lose credibility.
a. True
b. False