Chapter 3: Markets and Instruments (The Money Market)

Question 1

are the most marketable of all money market instruments.

Answer 1

T-Bills

Question 2

represent the simplest form of borrowing: The government raises money by selling bills to the public.

Answer 2

T-bills

Question 3

include short-term, marketable, liquid, low-risk debt securities.

Answer 3

Money market instruments

Question 4

sometimes are called cash equivalents, or just cash for short.

Answer 4

Money market instruments

Question 5

include longer-term and riskier securities.

Answer 5

Capital Markets

Question 6

are much more diverse than those found within the money market.

Answer 6

Capital Market

Question 7

is subdivided into segments: longer-term bond markets, equity markets, and the derivative markets for options and futures.

Answer 7

Capital market

Question 8

is a subsector of the fixed-income market. It consists of very short-term debt securities that usually are highly marketable.

Answer 8

Money Market

Question 9

are easily accessible to small investors.

Answer 9

Money market funds

Question 10

pool the resources of many investors and purchase a wide variety of money market securities on their behalf.

Answer 10

Mutual Funds

Question 11

T-bills with initial maturities of 91 days or 182 days are issued _________; Offerings of 52 week bills are made _________.

Answer 11

Weekly; monthly

Question 12

an order for a given quantity of bills at a specific offered price. The order is filled only if the bid is high enough relative to other bids to be accepted, then the bidder gets the order at the bid price.

Answer 12

competitive Bid

Question 13

an unconditional offer to purchase bills at the average price of the successful competitive bids.

Answer 13

Noncompetitive bid

Question 14

Competitive bidders face two dangers:

Answer 14

• They may bid too high and overpay for the bills or
• Bid too low and be shut out of the auction.

Question 15

_____________________ by contrast, pay the average price for the issue, and all ________________ are accepted up to a maximum of $1 million per bid.

Answer 15

Noncompetitive bidders; noncompetitive bids

Question 16

In recent years, noncompetitive bids have absorbed between ______________ of the total auction.

Answer 16

10% and 25%

Question 17

are highly liquid or are easily converted to cash and sold at low transaction cost and with not much price risk.

Answer 17

T-bills

Question 18

True or False

Individuals can purchase T-bills directly at auction or on the secondary market from a government securities dealer.

Answer 18

True

Question 19

True or false

The income earned on T-bills is not exempt from all state and local taxes, another characteristic distinguishing bills from other money market instruments.

Answer 19

False

Question 20

is a time deposit with a bank.

Answer 20

Certificate of Deposits

Question 21

issued in denominations greater than $100,000 are usually negotiable, however; that is, they can be sold to another investor if the owner needs to cash in the certificate before its maturity date.

Answer 21

Certificate of Deposits

Question 22

Are short-term unsecured debt notes issued by large and well-known companies rather than borrow directly from banks.

Answer 22

Commercial Paper

Question 23

Are very often backed by a bank line of credit, which gives the borrower access to cash that can be used (if needed) to pay off the paper at maturity.

Answer 23

commercial paper

Question 24

Have maturities that range from less than one, two months, and up to 270 days; longer maturities would require registration with the Securities and Exchange Commission and so are almost never issued.

Answer 24

Commercial Paper

Question 25

The failure to meet the terms of a contract, such as failure to make interest or principal payments when due on a loan.

Answer 25

Default

Question 26

starts as an order to a bank by a bank’s customer to pay a sum of money at a future date, typically within six months. At this stage, it is similar to a postdated check.

Answer 26

Banker’s acceptance

Question 27

are dollar-denominated deposits at foreign banks or foreign branches of American banks.`

Answer 27

Eurodollars

Question 28

Dealers in government securities use repurchase agreements, ” as a form of short-term, usually overnight, borrowing.

Answer 28

Repos

Question 29

The dealer sells government securities to an investor on an overnight basis, with an agreement to buy back those securities the next day at a slightly higher price. The increase in the price is the overnight interest. The dealer thus takes out a one-day loan from the investor, and the securities serve as collateral.

Answer 29

Repos

Question 30

is essentially an identical transaction, except that the term of the implicit loan can be 30 days or more.

Answer 30

Term Repor

Question 31

is the mirror image of a repo. Here, the dealer finds an investor holding government securities and buys them, agreeing to sell them back at a specified higher price on a future date.

Answer 31

Reverse Repo

Question 32

Individuals who buy stocks on margin borrow part of the funds to pay for the stocks from their broker.

Answer 32

Brokers’ Calls