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Questions and Answers
What are the characteristics of securities in money markets?
What are the characteristics of securities in money markets?
- High liquidity, small denominations, high default risk, and short time to maturity
- High liquidity, large denominations, low default risk, and short time to maturity (correct)
- Low liquidity, small denominations, high default risk, and long time to maturity
- Low liquidity, large denominations, low default risk, and long time to maturity
Why do money markets have a distinct cost advantage over banks?
Why do money markets have a distinct cost advantage over banks?
- Banks have reserve requirements and interest rate regulations (correct)
- Money markets are less regulated than banks
- Banks have higher default risk compared to money markets
- Money markets offer higher interest rates to depositors
What is the purpose of money markets for investors?
What is the purpose of money markets for investors?
- A platform for high-risk speculative trading
- A source of long-term investment opportunities
- A place for warehousing surplus funds for short periods of time (correct)
- A source of funding for large-scale infrastructure projects
Why do corporations and the US use money markets?
Why do corporations and the US use money markets?
What was the trend of the 3-month T-bill rate in the 40s and 50s?
What was the trend of the 3-month T-bill rate in the 40s and 50s?
What happened to people's behavior when interest rates rose?
What happened to people's behavior when interest rates rose?
What are the characteristics of borrowers from money markets?
What are the characteristics of borrowers from money markets?
Which money market instrument involves bank-issued securities documenting a deposit and specifying the interest rate and maturity date?
Which money market instrument involves bank-issued securities documenting a deposit and specifying the interest rate and maturity date?
What is the typical range of maturities for Treasury bills?
What is the typical range of maturities for Treasury bills?
Which entity controls interest rates through open-market operations?
Which entity controls interest rates through open-market operations?
What is the primary function of federal funds in the money market?
What is the primary function of federal funds in the money market?
What does expansionary monetary policy involve?
What does expansionary monetary policy involve?
What was the primary factor influencing the collapse of Lehman Brothers?
What was the primary factor influencing the collapse of Lehman Brothers?
What did the LIBOR scandal impact?
What did the LIBOR scandal impact?
What is the primary function of Commercial Paper?
What is the primary function of Commercial Paper?
What was the role of Asset-backed commercial paper (ABCP) in the 2008 financial crisis?
What was the role of Asset-backed commercial paper (ABCP) in the 2008 financial crisis?
What is the main purpose of securitization?
What is the main purpose of securitization?
What is the primary function of Commercial Mortgage Backed Securities (CMBS)?
What is the primary function of Commercial Mortgage Backed Securities (CMBS)?
What is maturity transformation, and why is it considered risky?
What is maturity transformation, and why is it considered risky?
What was the outcome of Money Market Mutual Funds (MMMFs) investing in ABCPs during the 2008 crisis?
What was the outcome of Money Market Mutual Funds (MMMFs) investing in ABCPs during the 2008 crisis?
What is the significance of Banker's Acceptances in international trade?
What is the significance of Banker's Acceptances in international trade?
What is the main purpose of money markets?
What is the main purpose of money markets?
Why are Eurodollars considered short-term financing instruments?
Why are Eurodollars considered short-term financing instruments?
What is the formula for calculating the annualized discount rate for a T-bill purchased for $10,000 maturing in 270 days and sold for $9,360?
What is the formula for calculating the annualized discount rate for a T-bill purchased for $10,000 maturing in 270 days and sold for $9,360?
What is the main advantage of negotiable certificates of deposit for businesses?
What is the main advantage of negotiable certificates of deposit for businesses?
In a T-bill auction with a par value of $2.1 billion for 91-day T-bills, who will get the bills if only competitive bids are accepted?
In a T-bill auction with a par value of $2.1 billion for 91-day T-bills, who will get the bills if only competitive bids are accepted?
Why are banker's acceptances considered ideal for foreign transactions?
Why are banker's acceptances considered ideal for foreign transactions?
What is the London Interbank Offered Rate (LIBOR) based on?
What is the London Interbank Offered Rate (LIBOR) based on?
What is the primary reason for the creation of the Eurodollar market?
What is the primary reason for the creation of the Eurodollar market?
What makes commercial paper a short-term financing option for businesses and finance companies?
What makes commercial paper a short-term financing option for businesses and finance companies?
What is the typical maturity range for securities in money markets?
What is the typical maturity range for securities in money markets?
What creates additional expenses for banks in handling short-term loans and deposits?
What creates additional expenses for banks in handling short-term loans and deposits?
Why did people move to money markets in the 70s and 80s when interest rates rose?
Why did people move to money markets in the 70s and 80s when interest rates rose?
What is the primary purpose of money markets for investors?
What is the primary purpose of money markets for investors?
What are the characteristics of borrowers from money markets?
What are the characteristics of borrowers from money markets?
What was the trend of the 3-month T-bill rate in the 40s and 50s?
What was the trend of the 3-month T-bill rate in the 40s and 50s?
Why do corporations and the US use money markets?
Why do corporations and the US use money markets?
What is the primary function of Asset-backed commercial paper (ABCP) in the money market?
What is the primary function of Asset-backed commercial paper (ABCP) in the money market?
What is the main purpose of securitization in the context of money markets?
What is the main purpose of securitization in the context of money markets?
What was the outcome of Money Market Mutual Funds (MMMFs) investing in ABCPs during the 2008 crisis?
What was the outcome of Money Market Mutual Funds (MMMFs) investing in ABCPs during the 2008 crisis?
What is the typical range of maturities for Treasury bills?
What is the typical range of maturities for Treasury bills?
What is the significance of Banker's Acceptances in international trade?
What is the significance of Banker's Acceptances in international trade?
What is the primary function of repurchase agreements in the money market?
What is the primary function of repurchase agreements in the money market?
What is the primary function of Commercial Paper in the money market?
What is the primary function of Commercial Paper in the money market?
What was the main impact of the LIBOR scandal?
What was the main impact of the LIBOR scandal?
What was the role of Commercial Mortgage Backed Securities (CMBS) in the 2008 financial crisis?
What was the role of Commercial Mortgage Backed Securities (CMBS) in the 2008 financial crisis?
What is the primary reason for the collapse of Lehman Brothers?
What is the primary reason for the collapse of Lehman Brothers?
What is the primary reason for the lack of trust in Money Market Mutual Funds (MMMFs) after the 2008 crisis?
What is the primary reason for the lack of trust in Money Market Mutual Funds (MMMFs) after the 2008 crisis?
What is the primary function of negotiable certificates of deposit in the money market?
What is the primary function of negotiable certificates of deposit in the money market?
What is the main purpose of federal funds in the money market?
What is the main purpose of federal funds in the money market?
What is the key function of the Federal Reserve in controlling interest rates?
What is the key function of the Federal Reserve in controlling interest rates?
Which of the following money market securities is issued by non-US banks?
Which of the following money market securities is issued by non-US banks?
What is the main advantage of negotiable certificates of deposit for businesses?
What is the main advantage of negotiable certificates of deposit for businesses?
What is the typical range of maturities for Eurodollars?
What is the typical range of maturities for Eurodollars?
What is the formula for calculating the annualized discount rate for a T-bill purchased for $10,000 maturing in 270 days and sold for $9,360?
What is the formula for calculating the annualized discount rate for a T-bill purchased for $10,000 maturing in 270 days and sold for $9,360?
What is the main purpose of money markets for investors?
What is the main purpose of money markets for investors?
What is the primary function of Commercial Paper in the money market?
What is the primary function of Commercial Paper in the money market?
What is the main reason for the creation of the Eurodollar market?
What is the main reason for the creation of the Eurodollar market?
What was the trend of the 3-month T-bill rate in the 40s and 50s?
What was the trend of the 3-month T-bill rate in the 40s and 50s?
What is the main advantage of Banker's Acceptances for foreign transactions?
What is the main advantage of Banker's Acceptances for foreign transactions?
Study Notes
Money Market Instruments and the 2008 Financial Crisis
- Libor rates were manipulated by banks, including Barclays, with encouragement from the Bank of England
- Commercial Paper is unsecured short-term debt sold directly to investors, with a significant increase in use in the early 1980s
- Asset-backed commercial paper played a key role in the 2008 financial crisis, leading to a run on ABCPs
- Securitization involves turning non-tradable financial contracts into tradable instruments, such as ABCPs
- Commercial Mortgage Backed Securities (CMBS) is another way for banks to earn money by pooling mortgages and selling them to SPVs
- Maturity transformation, the act of banks using short-term deposits for long-term loans, is risky and was a factor in the 2008 crisis
- Diversification did not work well after 2008, as the complexity and lack of understanding led to a run on ABCPs
- Banks issued bad loans and made money with fees, transferring risk to investors
- The 2008 crisis was caused by bad loans, maturity transformation, wrong pricing models, and the failure of diversification
- Money Market Mutual Funds invested in ABCPs, leading to liquidity problems when the housing market trust decreased
- The Reserve Primary Fund breaking the buck in 2008 led to a lack of trust in MMMFs and problems for the real economy
- Banker's Acceptances are important for international trade, allowing for contingent payments, and an active secondary market until maturity
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
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Description
Test your knowledge of money market instruments and their role in the 2008 financial crisis with this quiz. Explore concepts such as Libor rates, commercial paper, asset-backed commercial paper, securitization, commercial mortgage backed securities, maturity transformation, diversification, bad loans, money market mutual funds, and banker's acceptances.
