Why did breaking the buck by reserve primary money a market mutual funds cause a panic among money market mutual fund investors?
Investors in money markets don't want to take risks
What is flight to quality? Provide on example of flight to quality in mm or bond markets during to 07-09 financial crises.
Flight to quality is when investors buy bonds with high credit rating and a low default risk and sell bonds with a low credit rating and a high default risk during a recession because of concerns for safety in their investment.
Only high quality collatera
Why are repurchase agreement (repo) yields usually lower than yields on federal funds loans of the same maturity between the same counterparties?
Repos have lower yield because they are collateralized
When you compare bank discount yield to bond equivalent yield for the same security, which of the following statements is correct?
Bank discount yield is lower than bond equivalent yield.
Which of the following money market instruments CANNOT be a liability of a commercial bank?
Treasury bills
When T-bill yields fell and yields of other money market instruments rose during the recent financial crisis, it was a manifestation of a(n) _____.
flight to quality
During the financial crisis of 2007-2009, ____.
commercial banks increased the amount of cash assets on their balance sheets.
Money markets provide an efficient means for economic units to _____.
adjust their liquidity positions
Which of the following institutions do not actively participate in the money markets?
Life insurance companies
Which of the following money market instruments does not have a secondary market?
Federal Funds
Which of the following is NOT a characteristic of money markets or money market instruments?
Low marketability
Which of the following money market instruments has the lowest perceived default risk?
U.S. Treasury bills
Commercial Paper Funding Facility (CPFF) _____.
...
A competitive bid in the Treasury securities auction is characterized by _____.
the bidder specifying the quantity of securities desired
the bidder specifying the discount rate he is willing to accept
all winning bidders accepting the stop-out yield of the auction
The first signs of the recent crisis in the money markets were seen in the market for ____.
asset-backed commercial paper (ABCP)
Which of the following statements is true about Negotiable Certificates of Deposit (NCDs)?
NCDs can be traded before maturity.
Which of the following money market instruments are time drafts drawn on and accepted by commercial banks?
Bankers acceptances
Which of the following may be a liability of a non-financial corporation?
Commercial Paper
Advantage of TIPS
Protection from inflation: The yield on a TIPS is a real rate of return since the principal is adjusted for inflation.
Disadvantage of TIPS
Principal adjustments are subject to tax each year (even though no cash is received);
Coupon rate is low ? little current income in the form of coupons.
There is a 3% decline to duration, how much would the actual decline be?
actual decline would be less
There is a 3% increase to duration, how much would the actual decline be?
would be over the duration estimate
Which of the following statements about STRIPS is NOT true?
STRIPS provide investors with protection against inflation.
The U.S. Treasury announces an auction for 5-year T-notes in the amount of $15bln. Non-competitive bids received total $2bln. The following are the top competitive bids received:
Bidder #1: $3bln. at 3.15%
Bidder #2: $2bln. at 3.16%
Bidder #3: $4bln. at 3
3.20%
The U.S. Treasury announces an auction for 2-year T-notes in the amount of $25bln. Non-competitive bids received total $3bln. The following are the top competitive bids received:
Bidder #1: $7bln. at 1.25%
Bidder #2: $5bln. at 1.32%
Bidder #3: $6 bln. at
1.25%
If an investor wanted to purchase bonds with no or extremely low credit risk and to eliminate reinvestment risk, s/he should purchase _____.
Treasury STRIPS
The U.S. Treasury announces an auction for 5-year T-notes in the amount of $15bln. No non-competitive bids were received. The following are the top competitive bids received:
Bidder #1: $3bln. at 3.15%
Bidder #2: $2bln. at 3.16%
Bidder #3: $4bln. at 3.175
3.22%
Which of the following bonds are denominated in the currency different from the currency of the country they are sold in?
Eurobonds
What is the difference between general obligation and revenue bonds?
General obligation bonds are state and local government bonds backed by the full faith and credit of the issuing political entity, while revenue bonds are state and local government bonds sold to finance specific revenue-producing projects.
Which of the following bonds issued by foreign entities are denominated in the currency of the country they are sold in?
Yankee bonds
Samurai bonds
High default risk bonds that did not become popular until the 1980s are called ________.
Junk bonds
Income from ____ is exempt from federal income tax.
Municipal bonds
Explain the economic role of the money markets and why they are important to business firms
The money markets are where financial and non financial businesses adjust their liquidity positions by borrowing or investing for short periods of times. the most important economic function of the money market is to provide an efficient means for economi
Identify the key characteristics of money market instruments and why each characteristic is important
Investors and money market instruments want to take as little risk as possible given the temporary nature of their cash surplus.
Money market instruments:
1. have low default risk
2. have low price risk because of their short terms-to-maturity
3. are high
discuss the market for treasury bills and short-term agency securities
the most important security issued by the us treasury dept is the T-bill. They have maturities of 1 year or less, are highly marketable, and are almost free of default risk bc they are backed by the gov.
Explain the fed funds market and explain why it is one of the most important financial markets in the US
one of the most important financial markets in the US is the fed funds market (the market in which commercial banks and other financial institutions lend each other excess funds overnight. Its most important role of the fed funds market is that it facilit
identify other money market instruments that play an important role in liquidity markets
A repo consists of the sale of security, usually a US treasury security, with the condition that after a specified period of time, the original seller will buy the security back at a predetermined price.
Commercial paper is a short-term promissory note is
Describe the relationship amazing yields on various money market instruments
they serve as close substitutes for one another. The yields on money market instruments are highly correlated with one another. However, when concerns about credit quality or marketability of an instrument arise, investors quickly exit the market in a fli
discuss how markets for different money market instruments were affected by the global financial crisis of 2007-2009
a result of the financial crisis was a loss in confidence in the ability of money market participants to meet their short-term obligations. In response, investors shifted to even less risky securities. this increased the demand and price of T-bills
explain the role and function of capital markets. how does their role differ from that of the money markets?
capital markets- where businesses finance assets that produce core business products for the firm; they produce these products to earn a profit. They have maturities of typically 5<
money markets- where firms warehouse idle funds until needed or borrow mo
explain what STRIPS are and how they can be helpful in immunizing a bond portfolio against interest rate risk
A STRIP is a treasury note or bond that has been separated into 2 securities:
1. coupon interest payments
2. principle payments
created from the book entry securities by the treasury department at the request of large commercial banks
zero coupon bonds ar
discuss how the municipal bond market differs from the market for corporate bonds and the instruments traded in each market
1. municipal securities are tax exempt and corporate securities are taxable
2. issuers of corporate bonds are large businesses, municipal bonds have more than 50,000 issuers
explain what junk bonds are and why the market for them developed in the late 1980s
Junk bonds are bonds that have credit rating below investment grade
firms with below-investment grade ratings could not sell public debt and could obtain longer-term financing only through loans from commercial banks
in the 1980s the public market was dev
identify some of the reasons that bond markets are becoming global
1. globalization of business
2. the advent of computer and telecommunication technology
3. the political and economic detente that has allowed the reduction of trade barriers and the standardization of regulations and business practices
discuss how the bond markets were affected by the global financial crisis of 2007-2009
resulted in the widening of bond market spreads. after markets returned to relative normalcy in 2009 and 2010, corporations around the world issued large amounts of debt to take advantage of low interest rates.
explain the different measures of yield that are important for analyzing a bond's performance
1. yield to maturity
- the rate of return assuming the bond is held to maturity and that all coupon payments are reinvested to earn the YTM
2. expected yield
-the rate of return that reflects the anticipated holding period and the anticipated coupon reinv
explain how changes in interest rates cause bond prices to change
bond prices and bond yields move inversely
when market yields increase, bond prices decrease and vice versa
the change in bond prices for a given change in market yield, also known as bond price volatility, is greater for bonds with longer maturities and
describe interest rate risk and its two components
Interest rate risk- the change in the value of a bond given a change in market yields
1. price risk- changes in the market price resulting from changes in the market yield
2. reinvestment risk- the variation in reinvestment income resulting from changes i
explain how interest risk can be measured
investors and financial institutions can measure interest rate risk using duration. bonds with more interest rate risk have larger durations and those with less interest rate risk have smaller durations
describe how investors and financial institutions manage interest rate risk
manage interest rate risk by using duration. by matching the duration of a bond investment with the length of the desired investment horizon or holding period, price risk and reinvestment risk offset each other.
this strategy can eliminate the fluctuation