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Chapter 02 - Asset Classes and Financial Instruments Chapter 02 Asset Classes and Financial Instruments Answer Key Multiple Choice Questions 2-1
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Chapter 02 - Asset Classes and Financial Instruments 1. Which of the following is/are not characteristic of a money market instrument? A. Liquidity B. Marketability C. Long maturity D. Liquidity premium E. Long maturity and liquidity premium Money market instruments are short-term instruments with high liquidity and marketability; they do not have long maturities nor pay liquidity premiums. 2. You sold a futures contract on oats at a futures price of 233.75 and at the time of expiration the price was 261.25. What was your profit or loss? A. $1375.00 B. -$1375.00 C. -$27.50 D. $27.50 E. $1325.00 There are 5,000 bushels per contract and prices are quoted in cents per bushel. Thus, your loss was ($2.3375 $2.6125) = $0.275 per bushel, or $0.275 * 5,000 = $1,375. 3. Treasury Inflation-Protected Securities (TIPS) A. pay a fixed interest rate for life. B. pay a variable interest rate that is indexed to inflation. C. provide a constant stream of income in real (inflation-adjusted) dollars. D. have their principal adjusted in proportion to the Consumer Price Index. E. provide a constant stream of income in real (inflation-adjusted) dollars and D have their principal adjusted in proportion to the Consumer Price Index. TIPS provide a constant stream of income in real (inflation-adjusted) dollars because their principal is adjusted in proportion to the Consumer Price Index. 4. Which one of the following is not a money market instrument? A. A Treasury bill B. A negotiable certificate of deposit C. Commercial paper D. A Treasury bond E. A Eurodollar account Money market instruments are instruments with maturities of one year or less, which applies to all of the above except Treasury bonds. 2-2
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Chapter 02 - Asset Classes and Financial Instruments 5. T-bills are financial instruments initially sold by ________ to raise funds. A. commercial banks B. the U.S. government C. state and local governments D. agencies of the federal government E. the U.S. government and agencies of the federal government 2-3
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Chapter 02 - Asset Classes and Financial Instruments Only the U.S. government sells T-bills in the primary market. 6. The bid price of a T-bill in the secondary market is A. the price at which the dealer in T-bills is willing to sell the bill. B. the price at which the dealer in T-bills is willing to buy the bill. C. greater than the asked price of the T-bill. D. the price at which the investor can buy the T-bill. E. never quoted in the financial press. T-bills are sold in the secondary market via dealers; the bid price quoted in the financial press is the price at which the dealer is willing to buy the bill. 7. The smallest component of the money market is A. repurchase agreements B. small-denomination time deposits C. savings deposits D. money market mutual funds E. commercial paper According to Table 2.1, small-denomination time deposits are the smallest component of the money market.
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