36 Questions
What is a characteristic of securities in money markets?
High liquidity and short term debt
Why do investors use money markets?
To warehouse surplus funds for short periods of time
What advantage do money markets have over banks?
Distinct cost advantage
What is the purpose of money markets for corporations and the US?
Timing of cash inflows and outflows not well synchronized
What is the main purpose of money markets?
To provide a low-cost source of funds for short-term financing
Why are negotiable certificates of deposits usually settled?
Usually negotiated between bank and customer
What makes banker's acceptances ideal for foreign transactions?
They provide a guarantee of payment in international trade
What is the annualized investment rate if a T-bill is purchased for $9360 maturing in 270 days for $10000?
9.24%
In a T-bill auction with a par value of 2.1 billion for 91-day T-bills, if only competitive bids are accepted, who will get the bills?
The highest bidder in terms of price
What is the London Interbank Offered Rate (LIBOR) used for?
Determining the interest rate offered for sale of funds
What is the main characteristic of Eurodollars?
They are issued by non-US banks
What is the primary function of Federal Funds?
To meet regulatory requirements for banks
What is the main purpose of Repurchase Agreements?
To provide short-term financing for businesses
What is the main characteristic of Commercial Paper?
It is a short-term way of financing for businesses
What is the main characteristic of Treasury Bills?
They are issued by the US government
What is Libor?
An interest rate at which banks can borrow funds from other banks in the euro market
What is the significance of Asset-backed commercial paper in the 2008 financial crisis?
It led to a run on ABCPs
What is securitization?
The process of turning non-tradable financial contracts into tradable instruments
What is Commercial Mortgage Backed Securities (CMBS)?
A way for banks to earn money by pooling mortgages and selling them to SPVs
What is maturity transformation?
The act of banks using short-term deposits for long-term loans
Why did diversification not work well after 2008?
The complexity and lack of understanding led to a run on ABCPs
How did banks make money in the 2008 crisis?
By issuing bad loans and making money with fees
What caused the lack of trust in Money Market Mutual Funds (MMMFs) in 2008?
The Reserve Primary Fund breaking the buck
What are Banker's Acceptances important for?
International trade, allowing for contingent payments
Which of the following is a money market instrument with maturities ranging from 28 days to 12 months and are commonly discounted?
Treasury bills
What is the primary method through which the Federal Reserve controls interest rates?
Open-market operations
Which market involves short-term funds transferred between financial institutions, usually for one day, and are used by banks to meet reserve requirements?
Federal funds market
What market did the collapse of Lehman Brothers involve due to high repo haircuts?
Repurchase agreements market
Which of the following was involved in the LIBOR scandal, impacting the cost of mortgages and loans?
Banks estimating borrowing costs
What type of securities are bank-issued, document a deposit, and specify the interest rate and maturity date, with maturities typically between 1 and 4 months?
Negotiable certificates of deposit
What is the typical range of maturities for negotiable certificates of deposit?
1-4 months
What is the primary function of the Federal Reserve's expansionary monetary policy?
Increasing the money supply and lowering interest rates
Which entity conducts auctions for Treasury bills every Thursday, with both competitive and non-competitive bids influencing the price paid?
US Treasury Department
What is the typical range of maturities for Treasury bills?
28 days to 12 months
What market does the Federal Reserve use to conduct monetary policy by buying/selling Treasuries?
Repurchase agreements market
What entity was involved in the LIBOR scandal and required government intervention to save banks?
Banks estimating borrowing costs
Study Notes
Money Market Instruments and Functions
- Money market instruments include stocks, bonds, cash, and short-term instruments like Treasury bills, federal funds, commercial paper, LIBOR, Eurodollar, and repurchase agreements
- Key participants in money markets include the US Treasury Department, the Federal Reserve System, commercial banks, businesses, investment companies, finance companies, and insurance companies
- The Federal Reserve controls interest rates through open-market operations, with the current target interest rate around 5.25-5.5%
- Expansionary monetary policy involves the Fed buying government securities in the bond/money market, increasing the money supply and lowering interest rates
- Treasury bills have maturities ranging from 28 days to 12 months and are commonly discounted, providing a return through capital appreciation
- Treasury bills are auctioned to dealers every Thursday, with both competitive and non-competitive bids influencing the price paid, and the interest rate on T-bills is typically close to the inflation rate
- Federal funds are short-term funds transferred between financial institutions, usually for one day, and are used by banks to meet reserve requirements
- Repurchase agreements are similar to the federal funds market but involve nonbanks, with the Fed using this market to conduct monetary policy by buying/selling Treasuries
- The collapse of Lehman Brothers was influenced by high repo haircuts, which resulted in the firm not being able to get enough cash
- Negotiable certificates of deposit are bank-issued securities that document a deposit and specify the interest rate and maturity date, with maturities typically between 1 and 4 months
- The LIBOR scandal involved banks estimating how much interest they would have to pay to borrow cash, impacting the cost of mortgages and loans
- The LIBOR scandal led to government intervention to save banks and revealed the impact of borrowing costs on the financial sector
Test your knowledge of money market instruments and their functions with this quiz. Learn about Treasury bills, federal funds, repurchase agreements, and more. Explore the roles of key participants like the Federal Reserve and commercial banks, and understand how interest rates are controlled through open-market operations.
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