Chapter 6—Money Markets

1. Securities with maturities of one year or less are classified as a. capital market instruments. b. money market instruments. c. preferred stock. d. none of the above ANS: B PTS: 1 2. Which of the following is not a money market security? a. Treasury bill b. negotiable certificate of deposit c. common stock d. federal funds ANS: C PTS: 1 3. ____ are sold at an auction at a discount from par value. a. Treasury bills b. Repurchase agreements c. Banker's acceptances d. Commercial paper ANS: A PTS: 1 4. Jarrod King, a private investor, purchases a Treasury bill with a $10,000 par value for $9,645. One hundred days later, Jarrod sells the T-bill for $9,719. What is Jarrod's expected annualized yield from this transaction? a. 13.43 percent b. 2.78 percent c. 10.55 percent d. 2.80 percent e. none of the above ANS: D PTS: 1 5. If an investor buys a T-bill with a 90-day maturity and $50,000 par value for $48,500 and holds it to maturity, what is the annualized yield? a. about 13.4 percent b. about 12.5 percent c. about 11.3 percent d. about 11.6 percent e. about 10.7 percent ANS: B PTS: 1 6. An investor buys a T-bill with 180 days to maturity and $250,000 par value for $242,000. He plans to sell it after 60 days, and forecasts a selling price of $247,000 at that time. What is the annualized yield based on this expectation?a. about 10.1 percent b. about 12.6 percent c. about 11.4 percent d. about 13.5 percent e. about 14.3 percent ANS: B PTS: 1 7. Assume investors require a 5 percent annualized return on a six-month T-bill with a par value of $10,000. The price investors would be willing to pay is $____. a. 10,000 b. 9,524 c. 9,756 d. none of the above ANS: C PTS: 1 8. A newly issued T-bill with a $10,000 par value sells for $9,750, and has a 90-day maturity. What is the discount? a. 10.26 percent b. 0.26 percent c. $2,500 d. 10.00 percent e. 11.00 percent ANS: D PTS: 1 9. Large corporations typically make ____ bids for T-bills so they can purchase larger amounts. a. competitive b. noncompetitive c. very small d. none of the above ANS: A PTS: 1 10. 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. A and B both occur with about equal frequency ANS: B PTS: 1 11. T-bills and commercial paper are sold a. with a stated coupon rate. b. at a discount from par value. c. at a premium about par value. d. A and C e. none of the above ANS: B PTS: 112. ____ is a short-term debt instrument issued only be well-known, creditworthy firms and is normally issued to provide liquidity or finance a firm's investment in inventory and accounts receivable. a. A banker's acceptance b. A repurchase agreement c. Commercial paper d. A Treasury bill ANS: C PTS: 1 13. Commercial paper has a maximum maturity of ____ days. a. 45 b. 270 c. 360 d. none of the above ANS: B PTS: 1 14. 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 ANS: D PTS: 1