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Money Markets: Problems

This document contains sample questions and answers about money market instruments. It discusses topics like commercial paper, banker's acceptances, Treasury bills, repurchase agreements, and calculating yields. For example, it explains that commercial paper is issued by bank holding companies, finance companies, and other creditworthy financial institutions. It also provides examples of how exporting firms, importing firms, commercial banks, and investors would use banker's acceptances.

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Tonie Nascent
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250 views3 pages

Money Markets: Problems

This document contains sample questions and answers about money market instruments. It discusses topics like commercial paper, banker's acceptances, Treasury bills, repurchase agreements, and calculating yields. For example, it explains that commercial paper is issued by bank holding companies, finance companies, and other creditworthy financial institutions. It also provides examples of how exporting firms, importing firms, commercial banks, and investors would use banker's acceptances.

Uploaded by

Tonie Nascent
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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Chapter 6

Money Markets

8. What types of financial institutions issue commercial paper?


ANSWER: Bank holding companies and finance companies commonly issue commercial paper. In
addition very strong and credit worthy financial companies

12. Explain how each of the following would use banker's acceptances: (a) exporting firms, (b) importing
firms, (c) commercial banks, and (d) investors.
ANSWER: A banker's acceptance can (a) protect an exporter from the risk of nonpayment by the
importer, (b) protect importing firms from the risk of paying for goods without ever receiving them,
(c) enable banks to offer exporters and importers a service for which it charges a fee, and (d) offer
investors an investment instrument (when exporters sell the acceptance in the secondary market).

Problems
1. Assume an investor purchased a six-month T-bill with a $10,000 par value for $9,000 and sold it
ninety days later for $9,100. What is the yield?
ANSWER:

2. Newly issued three-month T-bills with a par value of $10,000 sold for $9,700. Compute the T-bill
discount.
ANSWER:

33
34  Chapter 6/Money Markets

3. Assume an investor purchased six-month commercial paper with a face value of $1,000,000 for
$940,000. What is the yield?
ANSWER:

4. Stanford Corporation arranged a repurchase agreement in which it purchased securities for


$4,900,000 and will sell the securities back for $5,000,000 in 40 days. What is the yield (or repo rate)
to Stanford Corporation?
ANSWER:

5. You paid $98,000 for a $100,000 T-bill maturing in 120 days. If you hold it until maturity, what is the
T-bill yield? What is the T-bill discount?
ANSWER:
YT = (SP – PP/ PP) (365 / n)
YT = (100,000 – 98,000 / 98,000) (365 / 120) =6.2%
T-bill discount = (Par – PP / PP) (360 / n)
T-bill discount = (100,000 – 98,000 / 100,000) (360 / 120)
T-bill discount = 0.06 = 6.00%
6. The Treasury is selling 91-day T-bills with a face value of $10,000 for $8,800. If the investor holds
them until maturity, calculate the yield.
ANSWER:
YT = (SP – PP/ PP) (365 / n)
YT = (10,000 – 8,800 / 8,800) (365 / 91) = 54.69%
7. A money market security that has a par value of $10,000 sells for $8,816.60. Given that the security
has a maturity of two years, what is the investor’s required rate of return?
ANSWER:
= (SP – PP/ PP) (360 / n)
= (10,000-8,816.6) / 8,816.6 (360/n)
= 1183.4/8816.6 (360/720)
= 0.134 (1/2)
= 0.067
= 6.71%
Chapter 6/Money Markets  35

8. A U.S. investor obtains British pounds when the pound is worth $1.50 and invests in a one-year
money market security that provides a yield of 25 percent (in pounds). At the end of one year, the
investor converts the proceeds from the investment back to dollars at the prevailing spot rate of $1.52
per pound. Calculate the effective yield.
ANSWER:
% change in S = 1.52 – 1.50/1.50 = 0.0133 = 1.33%
Ye = (1 + Yf) (1 + % change in S) – 1
Ye = (1.25) (1.0133) – 1 = 0.2666 = 26.66%

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