Money Markets MCQs

By: Prof. Dr. Fazal Rehman | Last updated: July 12, 2024

What is the primary purpose of the money market? A) To provide long-term capital for businesses B) To facilitate short-term borrowing and lending C) To trade in stocks and equities D) To offer long-term investment opportunities Answer: B) To facilitate short-term borrowing and lending Which of the following is a common instrument traded in the money market? A) Corporate bonds B) Treasury bills C) Common stocks D) Municipal bonds Answer: B) Treasury bills What is a Treasury bill (T-bill)? A) A long-term government bond B) A short-term government security issued at a discount C) A type of corporate bond D) A dividend-paying stock Answer: B) A short-term government security issued at a discount What is a certificate of deposit (CD)? A) A short-term debt security issued by corporations B) A deposit account that pays interest for a fixed term C) A type of government bond D) A form of equity investment Answer: B) A deposit account that pays interest for a fixed term Which instrument is used by corporations to manage their short-term funding needs? A) Commercial paper B) Treasury bonds C) Convertible bonds D) Equity shares Answer: A) Commercial paper What is commercial paper? A) A type of long-term corporate bond B) A short-term unsecured debt instrument issued by corporations C) A government-issued security D) A savings bond Answer: B) A short-term unsecured debt instrument issued by corporations What does “repo” stand for in the money market? A) Repurchase agreement B) Repayment obligation C) Reinvestment policy D) Redemption option Answer: A) Repurchase agreement What is a repurchase agreement (repo)? A) A long-term loan between banks B) A short-term agreement to sell and repurchase securities at a specified price C) A bond issued by the central bank D) An equity investment Answer: B) A short-term agreement to sell and repurchase securities at a specified price Which of the following is NOT a characteristic of money market instruments? A) Short-term maturity B) High liquidity C) Low risk D) High yield Answer: D) High yield What is the purpose of a money market mutual fund? A) To invest in long-term government bonds B) To provide high returns on equity investments C) To invest in short-term money market instruments D) To trade in real estate Answer: C) To invest in short-term money market instruments Which of the following instruments is typically issued at a discount and matures at face value? A) Certificate of Deposit B) Treasury Bill C) Commercial Paper D) Repurchase Agreement Answer: B) Treasury Bill What is the typical maturity range for Treasury bills? A) 1 month to 1 year B) 1 year to 10 years C) 10 years to 30 years D) Over 30 years Answer: A) 1 month to 1 year Which of the following is a short-term borrowing tool for banks? A) Eurodollar deposits B) Corporate bonds C) Municipal bonds D) Common stocks Answer: A) Eurodollar deposits What does “LIBOR” stand for? A) London Interbank Offered Rate B) London International Bond Rate C) Long-term Interest Bearing Obligation Rate D) Low Interest Bank Offered Rate Answer: A) London Interbank Offered Rate Which of the following best describes a “bearer” security in the money market? A) A security that is registered in the name of the owner B) A security that can be transferred by delivery C) A security that cannot be transferred D) A security issued by the government Answer: B) A security that can be transferred by delivery What is the main difference between a “repo” and a “reverse repo”? A) A repo involves selling securities, while a reverse repo involves buying them B) A repo is a long-term transaction, while a reverse repo is short-term C) A repo involves unsecured lending, while a reverse repo involves secured lending D) A repo is used for equity investments, while a reverse repo is used for debt securities Answer: A) A repo involves selling securities, while a reverse repo involves buying them What is the primary role of central banks in the money market? A) To invest in long-term securities B) To regulate and control money supply and interest rates C) To trade in equities D) To issue corporate bonds Answer: B) To regulate and control money supply and interest rates Which of the following instruments is typically used for very short-term borrowing by corporations? A) Commercial paper B) Treasury bond C) Certificate of deposit D) Municipal bond Answer: A) Commercial paper What is the main purpose of a “reverse repo” transaction? A) To borrow securities and sell them B) To lend securities and buy them back later C) To buy securities and sell them later D) To issue new securities Answer: B) To lend securities and buy them back later Which of the following is NOT typically traded in the money market? A) Treasury bills B) Commercial paper C) Corporate bonds D) Repurchase agreements Answer: C) Corporate bonds What is the typical term length for a commercial paper? A) 1 day to 270 days B) 1 month to 1 year C) 1 year to 5 years D) 5 years to 10 years Answer: A) 1 day to 270 days Which of the following is a feature of a Treasury bill? A) Pays interest periodically B) Issued at face value C) Issued at a discount to face value D) Can be converted into stocks Answer: C) Issued at a discount to face value What does the term “discount rate” refer to in the context of money market instruments? A) The interest rate paid on a bond B) The difference between the purchase price and face value of a Treasury bill C) The rate at which commercial paper is issued D) The fee charged for managing a money market fund Answer: B) The difference between the purchase price and face value of a Treasury bill What is a “banker’s acceptance”? A) A short-term debt instrument issued by banks B) A long-term loan issued by banks C) A form of equity issued by banks D) A repurchase agreement Answer: A) A short-term debt instrument issued by banks Which market is often referred to as the “cash market”? A) The bond market B) The equity market C) The money market D) The real estate market Answer: C) The money market What is the “primary market” for money market instruments? A) Where existing money market instruments are traded B) Where new money market instruments are issued C) Where equities are traded D) Where long-term bonds are issued Answer: B) Where new money market instruments are issued Which of the following is NOT a typical feature of a certificate of deposit (CD)? A) Fixed interest rate B) Insured by the FDIC C) Fixed maturity date D) Tradable on secondary markets Answer: D) Tradable on secondary markets What is the role of a “clearing house” in money markets? A) To issue new money market instruments B) To facilitate the settlement of transactions between buyers and sellers C) To trade in equities D) To provide loans to corporations Answer: B) To facilitate the settlement of transactions between buyers and sellers Which of the following is a money market instrument issued by a corporation? A) Treasury bill B) Repurchase agreement C) Commercial paper D) Certificate of deposit Answer: C) Commercial paper What does “issuer” mean in the context of money market instruments? A) The entity that buys the securities B) The entity that sells or issues the securities C) The broker who facilitates the transaction D) The regulator overseeing the market Answer: B) The entity that sells or issues the securities Which of the following is a feature of a money market fund? A) High volatility B) High returns compared to equities C) Low risk and high liquidity D) Long-term investment horizon Answer: C) Low risk and high liquidity What does “maturity” refer to in the context of money market instruments? A) The length of time until the instrument is issued B) The date on which the instrument matures and repayment is made C) The date on which interest payments are made D) The date of the initial investment Answer: B) The date on which the instrument matures and repayment is made Which instrument is used to manage cash balances and short-term funding needs? A) Treasury bond B) Common stock C) Money market fund D) Real estate investment trust (REIT) Answer: C) Money market fund What is a “short-term interest rate”? A) The rate on loans with a maturity of more than 10 years B) The rate on money market instruments with a maturity of less than one year C) The rate on bonds with a maturity of more than 10 years D) The rate on long-term corporate bonds Answer: B) The rate on money market instruments with a maturity of less than one year Which instrument typically offers the lowest yield? A) Corporate bonds B) Treasury bills C) Commercial paper D) Certificates of deposit Answer: B) Treasury bills What does “face value” mean for money market instruments? A) The amount received at maturity B) The amount paid for the instrument at issuance C) The amount of interest earned D) The amount paid for the instrument in the secondary market Answer: A) The amount received at maturity Which of the following is a feature of a Eurodollar deposit? A) Deposits held in U.S. dollars outside of the U.S. B) Deposits held in foreign currencies C) Deposits with high interest rates and long terms D) Deposits insured by the FDIC Answer: A) Deposits held in U.S. dollars outside of the U.S. What does “discounted” mean in relation to Treasury bills? A) Sold for less than face value B) Sold for more than face value C) Sold at face value D) Sold with added interest Answer: A) Sold for less than face value Which of the following is NOT a feature of a money market mutual fund? A) Investment in short-term debt securities B) High liquidity C) Low risk D) Investment in long-term equities Answer: D) Investment in long-term equities What is the main purpose of a “money market account”? A) To provide high returns on investment B) To offer a safe place for holding cash with interest earnings C) To trade in stocks and bonds D) To invest in real estate Answer: B) To offer a safe place for holding cash with interest earnings Which of the following is an example of a short-term funding tool for governments? A) Treasury bonds B) Treasury bills C) Municipal bonds D) Corporate bonds Answer: B) Treasury bills What does the term “securities lending” refer to in the money market? A) Selling securities to investors B) Borrowing securities for short-term use with an agreement to return them C) Investing in long-term securities D) Lending money to businesses Answer: B) Borrowing securities for short-term use with an agreement to return them Which of the following is typically used by financial institutions to manage liquidity? A) Long-term bonds B) Equity shares C) Repurchase agreements D) Municipal bonds Answer: C) Repurchase agreements What is “interest rate risk” in the context of money market instruments? A) The risk of interest rates rising, causing the value of fixed-rate instruments to fall B) The risk of default by the issuer C) The risk of a decrease in principal value D) The risk of interest rate fluctuations in equity investments Answer: A) The risk of interest rates rising, causing the value of fixed-rate instruments to fall Which of the following describes a “prime rate”? A) The interest rate charged by banks to their most creditworthy customers B) The interest rate on government securities C) The rate on long-term corporate bonds D) The rate on savings accounts Answer: A) The interest rate charged by banks to their most creditworthy customers What is a “short-term loan” in the money market? A) A loan with a maturity of more than 5 years B) A loan with a maturity of 1 year or less C) A loan with a maturity of 10 years D) A loan with no maturity Answer: B) A loan with a maturity of 1 year or less Which of the following is a money market instrument used for foreign exchange transactions? A) Eurodollar deposit B) Treasury bill C) Commercial paper D) Certificate of deposit Answer: A) Eurodollar deposit What is the “yield” on a money market instrument? A) The total return earned on the instrument B) The initial purchase price of the instrument C) The face value of the instrument D) The amount paid for the instrument on the secondary market Answer: A) The total return earned on the instrument Which institution typically issues certificates of deposit (CDs)? A) Corporations B) Governments C) Banks D) Insurance companies Answer: C) Banks Which of the following instruments is often used by governments to manage short-term cash flow needs? A) Treasury bonds B) Treasury bills C) Corporate bonds D) Municipal bonds Answer: B) Treasury bills