Interest Rates and Money Market Instruments: A Comprehensive Guide
1. Which one of the following is the interest rate that the largest commercial banks charge their most creditworthy corporate customers for short-term loans?
C. prime
2. Which one of the following terms applies to a rate that serves as an indicator of future trends?
A. bellwether
3. Which one of the following rates is the rate that banks charge each other for overnight loans of $1 million or more?
C. Federal funds
4. Which one of the following rates is the rate a commercial bank must pay the Federal Reserve to borrow reserves overnight?
A. discount
5. Which one of the following rates is used by brokerage firms as the basis for determining margin loan rates?
E. call money
6. Which one of the following is unsecured debt issued by corporations on a short-term basis?
A. commercial paper
7. A $100,000 or more term deposit at a bank is called which one of the following?
E. certificate of deposit
8. Which one of the following describes a banker’s acceptance?
C. postdated check with payment guaranteed by a bank
9. Which one of the following is defined as U.S. dollar-denominated deposits held in a foreign bank?
A. Eurodollars
10. Which one of the following abbreviations is the interest rate that international banks charge one another for overnight Eurodollar loans?
E. LIBOR
11. Which one of the following is a short-term debt instrument issued by the U.S. Treasury?
D. T-bill
12. A pure discount security is an interest-bearing asset that pays:
C. a single payment at maturity.
13. Which one of the following is a basis point?
C. 0.01 percent
14. Which one of the following is the method used to quote interest rates on money market instruments?
bank discount basis
15. The Treasury yield curve is a graph which plots Treasury yields against which one of the following?
C. maturities
16. Which one of the following is defined as the relationship between the interest rate on default-free, pure discount bonds and the time to maturity?
D. term structure of interest rates
17. Pure discount bonds which are created by separating the interest and principal payments from U.S. Treasury bonds are called U.S. Treasury:
C. STRIPS.
18. Which one of the following rates is the normally quoted rate?
A. nominal
19. Which one of the following best describes a real interest rate?
D. nominal rate minus inflation
20. Which one of the following best describes the Fisher hypothesis?
C. interest rates tend to be higher than inflation rates
21. Which one of the following theories states that the term structure of interest rates reveals the financialmarket’s projections of future interest rates?
D. expectations theory
22. Which one of the following is defined as a forward rate?
E. expected future interest rate implied by current interest rates
23. Which one of the following proposes that lenders must be financially rewarded for loaning funds on a long-term versus a short-term basis?
D. maturity preference theory
24. The market segmentation theory states that interest rates on debt vary dependent upon market
segments which are segmented based upon which one of the following?
A. time to maturity
25. U.S. Treasury bill rates were the highest during which one of the following time periods?
C. 1979-1981
26. Which one of the following statements is correct concerning U.S. Treasury bill rates for the period 1800 – 2007?
C. T-bill rates were lower than 1 percent for a period of time
27. Banks are most apt to quote short-term loan rates as:
A. prime plus a spread.
28. Which one of the following rates is generally considered the bellwether rate for bank loans to business firms?
D. prime
29. City Bank needs a one-day reserve loan of $2.6 million from Country Bank. Which one of the following interest rates will be charged on this loan?
B. Federal funds
30. First Bank needs to borrow money overnight from the Federal Reserve in order to meet its reserve requirements. Which one of the following interest rates will be charged on this loan?
C. discount
31. Which one of the following actions is the Federal Reserve most likely to take if it is concerned about a slowing economy?
B. lower the discount rate
32. The rate which an investor pays a brokerage firm for a margin loan is based on a negotiated premium which is added to which one of the following rates?
B. call
33. Assume that a large corporation, such as General Electric, needs money in the short-term. Which one of the following securities is that corporation most likely to issue to meet this need?
A. commercial paper
34. Which one of the following statements is correct concerning large-denomination certificates of deposit?
A. The security can be sold to another investor.
35. Which one of the following facilitates international trade?
C. banker’s acceptance
36. You notice that the interest rate on your credit card is set at LIBOR plus 8.9 percent. Given this, the rate you will pay is primarily influenced by the money market rates in which one of the following?
D. London, England
37. Which one of the following is the largest market in the world for new debt securities with maturities of one year or less?
B. U.S. Treasury bill
38. The overnight repurchase rate is the rate charged on overnight loans which are collateralized by which one of the following securities?
A. Treasury securities
39. Which one of the following features applies to a U.S. Treasury bill? B. pure discount security
40. The market rate on a bond fell from 8.76 percent to 8.73 percent. This is a decline of how many fbasis points? E. 3
41. Which one of the following is correct when computing the price of a debt security when using a discount yield? D. The computation will be based on a 360-day year.
42. Which of the following will increase the price of a money market instrument computed using a
discount yield? I. increase in discount yield II. decrease in discount yield III. increase in days to maturity IV. decrease in days to maturity. E. II and IV only
43. Which one of the following is used by Treasury dealers to indicate the price they are willing to pay to purchase a Treasury bill? B.bid discount
44. Which one of the following statements is correct concerning a Treasury bill? B.The asked yield on a Treasury bill is a bond equivalent yield.
45. The bond equivalent yield adjusts for leap years by using 366 days starting with: C. March 1 of the year prior to the leap year and ending with February 29 of the leap year.
46. Money market rates are generally one or the other of which two rates? I. bank discount rate
II. bond equivalent rateIII. annual percentage rate IV. effective annual rate. B. I and III only
47. Consider a money market instrument with 48 days to maturity and a quoted ask price of 99. Which two of the following statements are correct as they relate to this instrument? I. The bond equivalent yield is an effective annual rate.II. The bank discount rate is lower than the bond equivalent yield.III. The bank discount rate is an effective annual rate.IV. The bond equivalent yield is lower than the effective annual rate. E. II and IV only
48.Which two of the following are the largest categories of fixed-income securities in the U.S.? I. U.S. government debt II. corporate debt III. municipal government debt IV. real estate mortgage debt D. I and IV only
49. Which one of the following borrowers will pay the rates depicted on a Treasury yield curve? E. default-free borrower
50. Which of the following statements are true as applied to U.S. agency debt? I. It is equally as risky as Treasury debt. II. It is frequently subject to state taxes.III. It has the same credit guarantee as U.S. Treasury debt. IV. It generally has a lower yield than U.S. Treasury debt with the same maturity. A. II only
51. Which one of the following applies to “Yankee bonds”? E. foreign-issued bonds sold in the U.S.
52. Which one of the following statements is correct? C. The term structure of interest rates is based on default-free, pure discount securities.
53. Treasury STRIPS are: C. zero-coupon securities.
54. The approximate nominal interest rate is computed as the real rate: D. plus the inflation rate.
55. Which one of the following statements is correct? D. Treasury bill returns tend to vary in direct relation to inflation rates.
56. Which one of the following debt instruments guarantees investors a positive real rate of return? D. TIPS
57. Inflation-indexed Treasury securities: I. adjust the principal amount on an annual basis.
II. are default-free.III. offer a positive real rate of return. IV. have a variable coupon rate. A. II and III only
58. Based on expectations theory, the term structure of interest rates will be _____ anytime investors believe that interest rates will be higher in the future than they are today. D. upward sloping
59. The variable f1,1 as used in the expectations theory is interpreted as the forward rate for one year: D. commencing in one year.
60. According to the expectations theory and the Fisher hypothesis, a downward-sloping term
structure is indicative of which of the following based on market expectations? I. nominal interest rates are expected to increase II. nominal interest rates are expected to decline
III. inflation rates are expected to increase IV. inflation rates are expected to decrease E. II and IV only
61. Which of the following statements are true?I. Lenders have a preference for shorter maturities.II. Lenders have a preference for longer maturities.III. Borrowers have a preference for shorter maturities.IV. Borrowers have a preference for longer maturities. C. I and IV only
62. Based solely on the maturity preference theory, long-term interest rates: E. should be higher than short-term rates.
63. Which one of the following statements concerning the modern fixed-income market is correct? C. Market segmentation theory does little to explain the modern fixed-income market.
64. Which of the following comprise the nominal interest rate on default-free securities according to the modern view of the term structure of interest rates? I. liquidity premium II. real rate III. interest rate risk premium IV. inflation premium D. II, III, and IV only
65. Modern term structure theory supports the contention that the term structure of interest rates will: E. change over time.
66. You want to purchase a security that will pay you $1,000 six years from now. If you want to earn an annual nominal rate of 7.5 percent, how much should you pay for this investment today? D. $647.96
67. You invest $3,600 today at a nominal annual rate of 5.5 percent. This investment will pay one payment five years from now. What will be the amount of that payment? C. $4,705.06
68. An investment will make one payment of $24,000 eleven years from now. What is the current value of this investment if the nominal rate of return is 5.8 percent? D. $12,908.30
69. A $1,000 face value, 120-day bond is quoted at a bank discount yield of 3.38 percent. What is the current bond price? E. $988.73
70. A bond has a face value of $20,000 and matures in 62 days. What is the bank discount yield if the bond is currently selling for $19,792.30? E. 6.03 percent
71. A $5,000 face value bond is quoted at a bank discount yield of 2.8 percent. What is the current value of the bond if it matures in 36 days? D. $4,986
72. A $50,000 face value bond matures in 68 days and has a bank discount yield of 4.5 percent. What is the current value of the bond? E. $49,575.00
73. A Treasury bill has 21 days to maturity and a bank discount yield of 1.89 percent. What is the bond equivalent yield? C. 1.92 percent
74. A Treasury bill is quoted at a bank discount yield of 1.08 percent and has 12 days to maturity. What is the bond equivalent yield given that this is a leap year? C. 1.10 percent
75. What is the bond equivalent yield on a 30-day Treasury bill that has a bank discount yield of 2.01 percent? D. 2.04 percent
76. A Treasury bill has a face value of $200,000, an asked yield of 2.12 percent, and matures in 28 days. What is the price of this bill? D. $199,670.22
77. A Treasury bill has a face value of $100,000, a price of $99,797.12, and matures in 35 days. What is the asked yield? B. 2.12 percent
78. A Treasury bill has a face value of $50,000, an asked yield of 2.87 percent, and matures in 31 days.What is the price of this bill? E. $49,878.42
79. Your credit card has an annual percentage rate of 18.9 percent and compounds interest daily. What is the effective annual rate? E. 20.80 percent
80. A Treasury bill matures in 73 days and has a bond equivalent yield of 4.18 percent. What is the effective annual rate? A. 4.25 percent
81. A Treasury bill matures in 81 days and has a bond equivalent yield of 2.79 percent. What is the effective annual rate? B. 2.82 percent
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