Chapter 9
The Money Markets
? Multiple Choice Questions
1.
Activity in money markets increased significantly in the late 1970s and early 1980s because of (a) rising short-term interest rates.
(b) regulations that limited what banks could pay for deposits. (c) both (a) and (b). (d) neither (a) nor (b). Answer: C 2.
Money market securities have all the following characteristics except they are not (a) short term. (b) money. (c) low risk. (d) very liquid. Answer: B 3.
Money market instruments
(a) are usually sold in large denominations. (b) have low default risk. (c) mature in one year or less.
(d) are characterized by all of the above.
(e) are characterized by only (a) and (b) of the above. Answer: D 4.
The banking industry
(a) should have an efficiency advantage in gathering information that would eliminate the need for
the money markets.
(b) exists primarily to mediate the asymmetric information problem between saver-lenders and
borrower-spenders.
(c) is subject to more regulations and governmental costs than are the money markets. (d) all of the above are true.
(e) only (a) and (b) of the above are true. Answer: D
112 Mishkin/Eakins ? Financial Markets and Institutions, Fifth Edition
5.
In situations where asymmetric information problems are not severe,
(a) the money markets have a distinct cost advantage over banks in providing short-term funds. (b) the money markets have a distinct cost advantage over banks in providing long-term funds. (c) banks have a distinct cost advantage over the money markets in providing short-term funds. (d) the money markets cannot allocate short-term funds as efficiently as banks can. Answer: A
Brokerage firms that offered money market security accounts in the 1970s had a cost advantage over banks in attracting funds because the brokerage firms (a) were not subject to deposit reserve requirements. (b) were not subject to the deposit interest rate ceilings.
(c) were not limited in how much they could borrow from depositors. (d) had the advantage of all the above.
(e) had the advantage of only (a) and (b) of the above. Answer: E
Which of the following statements about the money market are true?
(a) Not all commercial banks deal for their customers in the secondary market.
(b) Money markets are used extensively by businesses both to warehouse surplus funds and to raise
short-term funds.
(c) The single most influential participant in the U.S. money market is the U.S. Treasury
Department.
(d) All of the above are true.
(e) Only (a) and (b) of the above are true. Answer: E
Which of the following statements about the money markets are true?
(a) Most money market securities do not pay interest. Instead the investor pays less for the security
than it will be worth when it matures.
(b) Pension funds invest a portion of their assets in the money market to have sufficient liquidity to
meet their obligations.
(c) Unlike most participants in the money market, the U.S. Treasury Department is always a
demander of money market funds and never a supplier. (d) All of the above are true.
(e) Only (a) and (b) of the above are true. Answer: D
Which of the following are true statements about participants in the money markets? (a) Large banks participate in the money markets by selling large negotiable CDs.
(b) The U.S. government and corporations borrow in the money markets because cash inflows and
outflows are rarely synchronized.
(c) The Federal Reserve is the single most influential participant in the U.S. money market. (d) All of the above are true.
(e) Only (a) and (b) of the above are true. Answer: D
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10. The most influential participant(s) in the U.S. money market
(a) is the Federal Reserve.
(b) is the U.S. Treasury Department. (c) are the large money center banks.
(d) are the investment banks that underwrite securities.
Answer: A
11. The Fed is an active participant in money markets mainly because of its responsibility to
(a) lower borrowing costs to encourage capital investment. (b) control the money supply.
(c) increase the interest income of retirees holding money market instruments.
(d) assist the Securities and Exchange Commission in regulating the behavior other money market
participants.
Answer: B
12. Commercial banks are large holders of _________ and are the major issuer of _________.
(a) negotiable certificates of deposit; U.S. government securities (b) U.S. government securities; negotiable certificates of deposit (c) commercial paper; Eurodollars (d) Eurodollars; commercial paper
Answer: B
13. The primary function of large diversified brokerage firms in the money market is to
(a) sell money market securities to the Federal Reserve for its open market operations.
(b) make a market for money market securities by maintaining an inventory from which to buy
or sell.
(c) buy money market securities from corporations that need liquidity. (d) buy T-bills from the U.S. Treasury Department.
Answer: B
14. Finance companies raise funds in the money market by selling
(a) commercial paper. (b) federal funds.
(c) negotiable certificates of deposit. (d) Eurodollars.
Answer: A
15. Finance companies play a unique role in money markets by
(a) giving consumers indirect access to money markets.
(b) combining consumers’ investments to purchase money market securities on their behalf. (c) borrowing in capital markets to finance purchases of money market securities. (d) assisting the government in its sales of U.S. Treasury securities.
Answer: A
114 Mishkin/Eakins ? Financial Markets and Institutions, Fifth Edition
16. When inflation rose in the late 1970s,
(a) consumers moved money out of money market mutual funds because their returns did not keep
pace with inflation.
(b) banks solidified their advantage over money markets by offering higher deposit rates. (c) brokerage houses introduced highly popular money market mutual funds, which drew
significant amounts of money out of bank deposits.
(d) consumers were unable to take advantage of higher rates in money markets because of the
requirement of large transaction sizes.
Answer: C
17. Which of the following is the largest borrower in the money markets?
(a) commercial banks (b) large corporations (c) the U.S. Treasury
(d) U.S. firms engaged in foreign trade
Answer: C
18. Money market instruments issued by the U.S. Treasury are called
(a) Treasury bills. (b) Treasury notes. (c) Treasury bonds. (d) Treasury strips.
Answer: A
19. The Treasury auctions 91-day and 182-day Treasury bills once a week. It auctions 52-week bills
(a) once a month.
(b) once every 13 weeks. (c) once a year.
(d) every two weeks.
Answer: A
20. Which of the following statements are true of Treasury bills?
(a) The market for Treasury bills is extremely deep and liquid.
(b) Occasionally, investors find that earnings on T-bills do not compensate them for changes in
purchasing power due to inflation.
(c) By volume, most Treasury bills are sold to individuals who submit noncompetitive bids. (d) All of the above are true.
(e) Only (a) and (b) of the above are true.
Answer: E
21. Suppose that you purchase a 91-day Treasury bill for $9,850 that is worth $10,000 when it matures.
The security’s annualized yield if held to maturity is about (a) 4 percent. (b) 5 percent. (c) 6 percent. (d) 7 percent.
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Answer: C