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Homework answers / question archive / University of San Carlos - Main Campus ACCTG 509 Chapter 5 True/False Questions 1)The money market is necessary because for most entities cash inflows do not occur in the same pattern as cash expenses

University of San Carlos - Main Campus ACCTG 509 Chapter 5 True/False Questions 1)The money market is necessary because for most entities cash inflows do not occur in the same pattern as cash expenses

Accounting

University of San Carlos - Main Campus

ACCTG 509

Chapter 5

True/False Questions

1)The money market is necessary because for most entities cash inflows do not occur in the same pattern as cash expenses.

 

 

  1. Money markets exist to help reduce the opportunity cost of holding cash balances.
  2. The majority of money market securities are low denomination, low risk investments designed to appeal to individual investors with excess cash.

 

 

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

 

  1. Commercial paper, negotiable certificates of deposit and bankers acceptance rates are all quoted as discount yields.

 

 

  1. Commercial paper is a short term obligation of the U.S. government.

 

  1. T-Bills have no default risk and virtually no liquidity risk, so their rate of return is the riskless time value of money.

 

 

  1. In the T-Bill secondary market the ask yield will normally be less than the bid yield.  

 

  1. The largest secondary money market in the U.S. is the secondary market for T-Bills.

 

  1. The bond equivalent yield of a T-bill will be greater than its discount yield.  

 

Multiple Choice Questions

  1. Money market securities must have which of the following characteristics?

 

    1. Low trading costs
    2. Little price risk
 
    1. High rate of return
    2. Life greater than one year

 

  1. I and III
  2. II and IV
 
  1. III and IV
  2. I and II
 
  1. I, II and III

 

 

 

 

  1. Money market securities exhibit which of the following?
    1. Large denomination
    2. Maturity greater than one year
 

 

    1. Low default risk
    2. Contractually determined cash flows

 

      1. I, II and III
      2. I, III and IV
 
      1. II, III and IV
      2. II and IV
 
      1. I, II, III and IV

 

 

 

 

  1. A repo is in essence a collateralized
  1. Banker's acceptance
  2. Certificate of deposit

 

 

 

  1. Fed funds loan
  2. Commercial paper loan
 

 

  1. Eurodollar deposit

 

 

  1. A short term unsecured promissory note issued by a company is

 

  1. Commercial paper
  2. T-Bills

 

 
  1. Repurchase agreement
 
  1. Negotiable CD
  2. Banker's acceptance

 

 

  1. A time draft payable to seller of goods, with payment guaranteed by a bank is

 

  1. Commercial paper
  2. T-Bills

 

 
  1. Repurchase agreement
 
  1. Negotiable CD
  2. Banker's acceptance

 

 

  1. In the T-Bill auction process the competitive bidder is guaranteed a                        and a noncompetitive bidder is guaranteed a                                                                                 .

 

  1. Minimum price; maximum price
  2. Maximum price; minimum price
  3. Maximum price; given quantity  
 
  1. Minimum price; maximum quantity
  2. None of the above

 

 

  1. A dealer is quoting a $10,000 face 60 day T-Bill quoted at 3.22 bid, 3.14 ask. You could buy this bill at

               or sell it at                 .

 

A) $9,947.67 ,

$9,946.33

B) $9,678.00 ,

 

 

$9,686.00

C) $9,686.00 ,

$9,678.00

 

D) $9,946.33 ,

$9,947.67

E) None of the above

 

 

  1. Rates on federal funds and repurchase agreements are stated

 

  1. On a bond equivalent basis with a 360 day year
  2. On a bond equivalent basis with a 365 day year

 

 
  1. As a discount yield with a 360 day year
  2. As an EAR
  3. As a discount yield with a 365 day year

 

 

  1. The discount yield on a T-Bill differs from a bond equivalent yield (BEY) because

 

  1. The discount yield is a percentage of face value instead of price
  2. A 360 day year is used on the discount yield instead of 365 days
  3. The discount yield is without compounding, the BEY is with compounding
  4. Both A and B
  5. A, B and C are all reasons for the difference  

 

  1. The typical spread on prime quality commercial paper and medium grade commercial paper has been about             basis points.

A)200                                              B) 22                                       C) 33                                       D) 86                                       E) 12

  

 

 

  1. The rate of return on a repo is
  1. Determined by the rate of return on the underlying collateral
  2. Strongly affected by the current Fed funds rate at the time of the repo

 

 

 

  1. Determined at the time of the repo
  2. A and C
  3. B and C

 

 

  1. All but which one of the following statements about commercial paper is true? Commercial paper

 

  1. Is an unsecured short term promissory note
  2. Has a maximum maturity of 270 days
  3. Is virtually always rated by at least one  

 

 

  1. A negotiable CD
  1. Is a bank issued transactions deposit
  2. Is a registered instrument
  3. Is a bank issued time deposit  
 

ratings agency

  1. Has no secondary market
  2. Carries above prime interest rates

 

 

 

  1. Has denominations ranging from

$50,000 to $10 million

  1. Pays discount interest

 

 

  1. A 90 day $1 million CD has a 4% annual rate quote. If you buy the CD, how much will you collect in 90 days?

 

A) $1,040,000

B) $1,009,863

 

 

C) $1,000,000

D) $1,015,012

 

E) $1,010,000

 

 

 

  1. A banker's acceptance is
  1. A time draft drawn on the exporter's bank
  2. A method to help importers evaluate the creditworthiness of exporters

 

 

  1. The most liquid of the money market securities are
 

 

  1. A liability of the importer and the importer's bank
  2. An add on instrument
  3. For greater than 1 year maturity

 

    1. Commercial paper
    2. Banker's

acceptances

 

 
    1. T-Bills
    2. Fed funds
    3. Repurchase
 

agreements

 

 

  1. In dollars outstanding the largest money market security is

 

  1. Commercial paper
  2. Banker's

acceptances

 

 
  1. T-Bills
  2. Fed funds
  3. Repurchase
 

agreements

 

 

  1. The international version of the fed funds rate is called

 

  1. LIBOR
  2. The repo rate

 

 
  1. The Euro rate
  2. International dollar
 

rate

  1. The exchange rate

 

 

  1. LIBOR is generally                      the Fed funds rate because foreign bank deposits are generally                                       than domestic bank deposits

 

  1. Greater than; less risky
  2. Less than; more risky
  3. The same as; equally risk

 

 
  1. Greater than; more risky
  2. Less than; less risky

 

 

  1. A U.S. exporter sells $50,000 of furniture to a Latin American importer. The exporter requires the importer to obtain a letter of credit. When the bank accepts the draft the exporter discounts the 90 day note at a 6% discount. What is the exporter's true effective annual financing cost (EAR)?

 

A) 6.00%

B) 6.18%

 

C) 6.32%

D) 6.24%

 

E) 6.45%

 

 

 

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