Question

1. Which of the following statements is most likely to be correct?

A. An on-the-run Treasury issue tends to sell at a lower price.

B. An on-the-run Treasury issue is the most recent issue for a maturity.

C. An on-the-run Treasury issue tends to sell at a higher price.

2. The following 2 statements were made:

Statement 1: "Money market accounts are wholesale funds available for banks."

Statement 2: "A withdrawal penalty is imposed if the depositor realizes a negotiable certificate of deposit before maturity."

A. Both statements are correct.

B. Exactly one of the statement is correct.

C. None of the statements is correct.

3. A 4% semi-annual pay bond with a maturity of 10 years was sold to yield 6%. One year passes and interest rates remained unchanged at 6%. What will have happened to the bond's price during this period?

A. It will have increased.

B. It will have decreased.

C. It will have remained constant.

Answer 1

Solution for 1

A is incorrect. Since, an on-the-run Treasury is the most-recently issued one, it is more liquid and hence is more sought-after, and hence, usually trades at a premium.

B is correct. An on-the-run Treasury issue is the most recent issue for a given maturity.

C is also correct. An on-the-run Treasury issue tends to sell at a higher price. Again, since it is more liquid, and has a higher demand, it tends to trade at a premium compared to off-the run Treasuries.

Solution fo 2)

Option C) None of the statements are correct

Money market accounts is a deposit account for individuals, which usually offer a higher interest rate compared to a savings account. Hence they are not wholesale funds.

A withdrawal penalty is imposed only on certificate of deposits, when an investor withdraws before maturity.

Negotiable certificate of deposits is freely transferable in the secondary markets.

Solution for 3)

C) It will have remained constant.

As long as the yield remains the same, the price of the bond will remain the same. The maturity of the bond doesn't matter.