Money Market and Treasury Bills Overview
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Questions and Answers

What characterizes the money market?

  • High risk and low gain
  • Short-term, highly liquid instruments (correct)
  • Long-term investment options
  • Low liquidity investments

    • What is the typical minimum denomination for Treasury Bills?

  • $50,000
  • $1,000
  • $100,000
  • $10,000 (correct)

    • Which of the following best describes the default risk associated with Treasury Bills?

  • Moderate risk due to market fluctuations
  • High default risk from foreign governments
  • Low risk as compared to corporate bonds
  • No default risk (correct)

    • How is the bank discount rate (rBD) calculated for a Treasury Bill?

    <p>($10,000 − P) ÷ $10,000 × 360 ÷ n</p> Signup and view all the answers

    For Treasury Bills, what type of interest payment do they provide?

    <p>They are zero-coupon securities</p> Signup and view all the answers

    What is the typical liquidity status of Certificates of Deposit (CDs)?

    <p>High liquidity with limited marketability</p> Signup and view all the answers

    Which type of institution issues Treasury Bills?

    <p>Federal Government</p> Signup and view all the answers

    What is the minimum maturity period for a typical Certificate of Deposit (CD)?

    <p>14 days</p> Signup and view all the answers

    Which statement regarding the money market is true?

    <p>It is a component of the fixed-income market.</p> Signup and view all the answers

    When calculating the bank discount rate for Treasury Bills, which variable represents the market price of the T-bill?

    <p>P</p> Signup and view all the answers

    In terms of taxation, which of the following is true about Treasury Bills?

    <p>Owed federal tax but exempt from state and local tax.</p> Signup and view all the answers

    In the context of Treasury Bills, what does a high liquidity indicate?

    <p>Quickly convertible into cash without significant loss.</p> Signup and view all the answers

    What is the typical maturity period for Treasury Bills?

    <p>Shorter than 1 year.</p> Signup and view all the answers

    Which characteristic is not associated with Certificates of Deposit (CDs)?

    <p>Available in denominations of less than $100,000.</p> Signup and view all the answers

    For a 90-day Treasury Bill priced at $9,875, what is the bank discount rate if the face value is $10,000?

    <p>5.00%</p> Signup and view all the answers

    Which statement regarding the risk profile of Treasury Bills is accurate?

    <p>They are considered as having no default risk.</p> Signup and view all the answers

    What differentiates the liquidity of Treasury Bills from that of typical stocks?

    <p>Treasury Bills can be sold quickly at market prices.</p> Signup and view all the answers

    What is the primary issuer of Treasury Bills?

    <p>The Federal Government.</p> Signup and view all the answers

    What type of issuer is responsible for creating Certificates of Deposit (CDs)?

    <p>Depository Institutions</p> Signup and view all the answers

    Which of the following statements about the maturity period of Treasury Bills is false?

    <p>They have a longer maturity than Certificates of Deposit.</p> Signup and view all the answers

    Which statement accurately describes the taxation of interest earned on Treasury Bills?

    <p>Owed at the federal level, exempt from state and local taxes.</p> Signup and view all the answers

    What is the implication of high liquidity in the context of money market instruments?

    <p>They can be easily converted to cash without affecting their price.</p> Signup and view all the answers

    In the bank discount rate formula for Treasury Bills, what does the variable 'n' represent?

    <p>The number of days until maturity.</p> Signup and view all the answers

    What characteristic differentiates Treasury Bills from typical stocks?

    <p>Treasury Bills carry no default risk.</p> Signup and view all the answers

    Which of the following characteristics is associated with the money market?

    <p>Short-term and low-risk financial instruments.</p> Signup and view all the answers

    Which factor is least likely to influence the pricing of Treasury Bills?

    <p>Currency exchange rates.</p> Signup and view all the answers

    What is the typical denomination for Certificates of Deposit (CDs)?

    <p>Any value, but $100,000 or more is common.</p> Signup and view all the answers

    What does the term 'discount' refer to in the interest type of Treasury Bills?

    <p>They are sold for less than their face value.</p> Signup and view all the answers

    What is the main feature of Treasury Bills that distinguishes them from other financial instruments?

    <p>Short-term nature</p> Signup and view all the answers

    In terms of liquidity, how do Certificates of Deposit (CDs) compare to Treasury Bills?

    <p>CDs are less liquid than Treasury Bills.</p> Signup and view all the answers

    What is the primary factor that affects the bank discount rate (rBD) for Treasury Bills?

    <p>The market price of the T-bill.</p> Signup and view all the answers

    What is the consequence of the federal taxation status of Treasury Bills for investors?

    <p>Investors owe federal taxes but are exempt from state and local taxes.</p> Signup and view all the answers

    What role do depository institutions play in relation to Certificates of Deposit (CDs)?

    <p>They issue the certificates and set the terms.</p> Signup and view all the answers

    Which maturity period typically applies to a Treasury Bill?

    <p>4, 13, 26, or 52 weeks</p> Signup and view all the answers

    Which of the following best describes the type of interest paid on Treasury Bills?

    <p>Discounted interest paid upfront.</p> Signup and view all the answers

    What is a common characteristic of money market instruments such as Treasury Bills?

    <p>Stability with minimal risk of loss.</p> Signup and view all the answers

    How does the denomination of Treasury Bills typically compare to that of other fixed-income instruments?

    <p>Denominations tend to be higher.</p> Signup and view all the answers

    What distinguishes the default risk of Treasury Bills from other fixed-income securities?

    <p>No default risk as they are government-backed.</p> Signup and view all the answers

    What is a key feature of Treasury Bills regarding interest payments?

    <p>They offer a zero-coupon structure.</p> Signup and view all the answers

    How is the maturity period for Treasury Bills characterized?

    <p>They can have maturities ranging from 4 to 52 weeks.</p> Signup and view all the answers

    What distinguishes Treasury Bills from other types of investments in terms of risk?

    <p>They exhibit no default risk.</p> Signup and view all the answers

    In which way do Certificates of Deposit (CDs) primarily differ from Treasury Bills?

    <p>CDs offer less liquidity than Treasury Bills.</p> Signup and view all the answers

    What aspect of taxation applies specifically to interest earned on Treasury Bills?

    <p>It is exempt from federal taxation but taxable at state and local levels.</p> Signup and view all the answers

    What is the significance of the bank discount rate formula for Treasury Bills?

    <p>It provides a way to calculate the yield on Treasury Bills.</p> Signup and view all the answers

    What denotes the liquidity status of Treasury Bills as an investment?

    <p>They can be sold easily in secondary markets.</p> Signup and view all the answers

    Which of the following accurately reflects the market behavior of Treasury Bills?

    <p>They are commonly auctioned in denominations of $1,000 and $10,000.</p> Signup and view all the answers

    Which statement presents a characteristic of money markets as a whole?

    <p>They involve short-term, highly liquid instruments.</p> Signup and view all the answers

    What common feature of Treasury Bills limits the risk exposure for investors?

    <p>They have no default risk associated with them.</p> Signup and view all the answers

    Study Notes

    Money Market

    • A subsector of the fixed-income market
    • Short-term debt securities
    • Highly liquid
    • Low risk
    • Often traded in large denominations

    Treasury Bills

    • Issued by: The Federal Government
    • Denomination: Commonly 10,000,alsoavailablein10,000, also available in 10,000,alsoavailablein1,000 denominations
    • Maturity: 4, 13, 26 or 52 weeks
    • Liquidity: High
    • Default Risk: None
    • Interest Type: Discount
    • Taxation: Owed: Federal. Exempt: State, Local

    Treasury Bill Bank Discount Rate

    • Calculation: (Face Value – Price) / Face Value * (360 / Days to Maturity)
    • Where:
      • rBD = Bank Discount Rate
      • P = Market Price of the T-bill
      • n = Number of days to maturity
    • Example: A 90-day T-bill with a price of $9,875 will have a bank discount rate of 5.00%

    Certificates of Deposit (CDs)

    • Issued by: Depository institutions
    • Denomination: Any amount, but $100,000 or more are more easily traded
    • Maturity: Varies, Typically 14-day minimum
    • Liquidity: High for bank CDs

    Money Market

    • The Money Market is a subsector of the fixed-income market.
    • Money markets are highly liquid, low risk and short-term.
    • Money markets often have large denominations.

    Treasury Bills

    • Treasury Bills are issued by the Federal Government.
    • Treasury Bills have a denomination of 1,000or1,000 or 1,000or10,000.
    • Treasury bills mature in 4, 13, 26 or 52 weeks.
    • Treasury Bills are highly liquid.
    • Treasury Bills have no default risk.
    • Treasury Bills pay interest as a discount.
    • Treasury Bills are taxable at the federal level, but exempt from state and local taxes.

    Bank Discount Rate

    • The Bank Discount Rate (rBD) is the annualized return on a Treasury bill based on its discount.
    • rBD = (Face Value - Price) / Face Value * 360 / n
      • Face Value = Par Value
      • Price = Market Price
      • n = Number of days to maturity
    • The Bank Discount Rate is a simple percentage calculation.
    • Example: For a 90-day T-bill with a price of $9,875, the Bank Discount Rate is:
      • rBD = (10,000−10,000 - 10,000−9,875) / $10,000 * 360 / 90
      • rBD = 5%

    Certificates of Deposit

    • Certificates of Deposit (CDs) are time deposits issued by depository institutions.
    • Certificates of Deposit denominations vary, but $100,000 or more are marketable.
    • Certificates of Deposit maturities vary, typically 14 days minimum and beyond.
    • Certificates of Deposit are generally considered to be highly liquid.

    Money Market

    • The money market is a subsector of the fixed-income market
    • Investments in the money market have short-term maturities
    • Investments in the money market are highly liquid and low risk
    • Denominations are typically large

    Treasury Bills

    • Treasury Bills are issued by the Federal Government
    • The common denomination is 10,000;10,000; 10,000;1,000 denominations are also available
    • Treasury Bills have maturities of 4, 13, 26 or 52 weeks
    • Treasury Bills have a high level of liquidity
    • Treasury Bills have no risk of default
    • Interest is paid via a discount
    • Treasury Bills are subject to federal taxes, but exempt from state and local taxes

    Bank Discount Rate (T-bill quotes)

    • Bank Discount Rate is calculated by dividing the difference between the face value and the purchase price by the face value, then multiplying by 360 and dividing by the number of days to maturity
    • Formula: rBD = ( 10,000−P)/10,000 - P ) / 10,000−P)/10,000 * 360 / n
      • rBD = bank discount rate
      • P = market price of the T-bill
      • n = number of days to maturity
    • For example: 90-day T-bill, P = $9,875
      • rBD = ( 10,000−10,000 - 10,000−9,875 ) / $10,000 * 360 / 90
      • rBD = .05 = 5.00%

    Certificates of Deposit (CDs)

    • Certificates of Deposit are issued by depository institutions
    • Denominations can be any amount, however, $100,000 or more are considered marketable
    • Maturities vary, but typically a minimum of 14 days is required
    • CDs have a high level of liquidity

    Money Market

    • The Money Market is a subsector of the fixed-income market.
    • It focuses on short-term debt securities with maturities less than a year.
    • These securities are typically highly liquid and perceived as low-risk investments.
    • Denominations often come in large values.

    Treasury Bills (T-bills)

    • Issued by the Federal Government of the United States.
    • Typically have a denomination of 10,000withsmallerdenominations(10,000 with smaller denominations (10,000withsmallerdenominations(1,000) available.
    • Maturities are offered in 4-week, 13-week, 26-week, and 52-week increments.
    • T-Bills boast high liquidity due to the U.S. Government backing.
    • They have no default risk, meaning the government guarantees repayment.
    • Interest payment is calculated based on a discount rate, meaning they are sold at a discount and redeemed at face value at maturity.
    • Federal taxes apply to the interest income generated, while state and local taxes do not.

    Bank Discount Rate

    • A way to express T-Bill yield. The formula for calculating Bank Discount Rate (rBD) is (Face Value – Purchase Price / Face Value) * (360 / Days to Maturity).
    • For example: A 90-day T-Bill with a face value of 10,000andapurchasepriceof10,000 and a purchase price of 10,000andapurchasepriceof9,875 yields a Bank Discount Rate of ((10,000 - 9,875) / 10,000) * (360/90) = 5.00%.

    Certificates of Deposit (CDs)

    • CDs are issued by depository institutions (banks and credit unions).
    • They are financial products allowing investors to deposit money for a fixed term, earning interest payments until maturity.
    • They can be issued in any denomination, but marketable CDs usually have a minimum denomination of $100,000.
    • Maturities vary, but typically start at a minimum of 14 days. CDs generally have high liquidity, especially for those with shorter maturities.

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    Bodie, Kane, and Marcus Essentials of Investments 12e Chapter 2 PDF

    Description

    This quiz covers the essentials of the money market, including short-term debt securities like Treasury Bills and Certificates of Deposit. It discusses the characteristics, risks, and calculations relevant to these financial instruments. Ideal for students learning about fixed-income markets.

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