Chap002 - Chapter 2 Asset Classes and Financial Investments...

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Chapter 2 Asset Classes and Financial Investments Multiple Choice Questions 1. Which of the following is not a characteristic of a money market instrument? A) liquidity B) marketability C) long maturity D) liquidity premium E) C and D Answer: E Difficulty: Easy Rationale: Money market instruments are short-term instruments with high liquidity and marketability; they do not have long maturities nor pay liquidity premiums. 2. 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 Answer: D Difficulty: Easy Rationale: Money market instruments are instruments with maturities of one year or less, which applies to all of the above except Treasury bonds. See Table 2.1. 3. 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) B and D Answer: B Difficulty: Easy Rationale: Only the U. S. government sells T-bills in the primary market. 1
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Asset Classes and Financial Investments 4. 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. Answer: B Difficulty: Easy Rationale: 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. 5. Commercial paper is a short-term security issued by ________ to raise funds. A) the Federal Reserve Bank B) commercial banks C) large, well-known companies D) the New York Stock Exchange E) state and local governments Answer: C Difficulty: Easy Rationale: Commercial paper is short-term unsecured financing issued directly by large, presumably safe corporations. 6. Which one of the following terms best describes Eurodollars: A) dollar-denominated deposits in European banks. B) dollar-denominated deposits at branches of foreign banks in the U. S. C) dollar-denominated deposits at foreign banks and branches of American banks outside the U. S. D) dollar-denominated deposits at American banks in the U. S. E) dollars that have been exchanged for European currency. Answer: C Difficulty: Moderate Rationale: Although originally Eurodollars were used to describe dollar-denominated deposits in European banks, today the term has been extended to apply to any dollar- denominated deposit outside the U. S. 2
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Chap002 - Chapter 2 Asset Classes and Financial Investments...

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