Question

Questions 1 to 10 are false statements. Please re-write each statement so that it is true. It may be as simple as one word change or more complex.

3.	Money market security prices and yields are more sensitive to changes in interest rates than long-term corporate bonds.

4.	The majority of money market securities are low denomination, low risk investments designed to appeal to individual investors with excess cash.

5.	Most money market securities are initially sold to individual investors.

6.	Recently, the Federal Reserve used commercial paper in order to manage a temporary liquidity crisis that developed when corporate tax payments were due and a Treasury note offering was being held.

7.	Repurchase agreements have no default risk, no liquidity risk, and are backed by collateral, so their rate of return is the lowest of all money market securities.

8.	Negotiable CDs are issued in denomination that range between $100,000 and 10,0000,000 with $250,000 being the most popular because it is the FDIC insurance maximum.

9.	When an FI uses the Fed Funds market, it is transacting directly with the Federal Reserve through Fedwire.

10.	Converting the discount yield of a T-bill to a bond equivalent yield will result in a lower rate of return.

Questions 11 to 14 are problems to be solved. Please include your work if you would like partial credit if the ultimate answer is incorrect. That is, if you just write a one-number answer, it’s either right or wrong.

11.	The commercial paper of RKO, Inc. has 75 days until it matures at $500,000. The current market price is $492,500. Calculate the discount yield and the bond equivalent yield of this commercial paper.

12.	A T-bill with a $1,000,000 face value and 225 days to maturity currently has a discount yield of 4.25 percent. What is the market price of this T-bill, and what is its bond equivalent rate?

13.	A bank issued a 9-month, $4 million negotiable CD with a quoted annual interest rate of 0.67 percent. Recall that negotiable CDs are single payment instruments. How much will the holder of the CD receive when it matures and what is the bond-equivalent rate of the CD?

14.

The Federal Reserve entered into a repurchase agreement with the Bank of Transylvania in which the Fed buys Treasury securities at a price of $9,967,500 from the bank, which promises to buy back the securities 21 days later at a price of $10,000,000. What will be the bond-equivalent yield on the repo?

Questions 15 to 19 are short-answer.

15.	How are the quoted rates on federal funds and repurchase agreements stated? There is a formula that you can write out, but try to explain the procedure in words too.

16.	When T-bills are originally offered or auctioned (primary market) what are the two maturities used?

17.	Some money market securities have active markets. In general, how is/are most of the trading in the money market arranged?

18.	What is/are the typical or common maturities of the following money market securities? a. Fed Funds b. Repurchase agreements c. Commercial paper d. T-bills e. Negotiable CDs

19.	What is/are the typical or common denominations (if any) of the following money market securities? a. Fed Funds b. Repurchase agreements c. Commercial paper d. T-bills e. Negotiable CDs

Answer 1

3. false

Money market security prices and yields are Less sensitive to changes in interest rates than long-term corporate bonds

4. false

The majority of money market securities are Large denomination, low risk investments designed to appeal to individual investors with excess cash.

5. false

Most money market securities are initially sold to corporates and financial agencies or banks .

6. false, federal reserve uses repurchase agreement to solve liquidity crises.

7. true