FIN 3080 UNIT 9 EXAM QUESTIONS
AND ANSWERS
What do competitive bidders submit in T-bill auctions? - Answer- Quantity and
price/yield
What do non-competitive bidders submit? - Answer- Quantity only (accept market
outcome)
What is the stop-out price? - Answer- Lowest accepted price among winning bids
Who receives T-bills first in auctions? - Answer- Non-competitive bidders
How are competitive bids ranked? - Answer- From highest price to lowest price
What happens to losing bids? - Answer- They receive no allocation
What is the largest secondary market in money markets? - Answer- Treasury bill market
Who are primary dealers? - Answer- Large financial institutions designated by the Fed
What is the role of primary dealers? - Answer- Buy T-bills at auction and create
secondary market
What are smaller dealers? - Answer- Firms that trade through primary dealers
How do individuals access T-bill markets? - Answer- Through brokers or banks
What is a bond equivalent yield (BEY)? - Answer- A yield measure that allows
comparison with bonds
Why is BEY used? - Answer- To compare money market yields with longer-term
securities
What is the BEY formula? - Answer- (Ibe = (Pf - P0)/P0 × 365/N)
How does BEY compare to discount yield? - Answer- BEY is always higher than
discount yield
What is effective annual return (EAR)? - Answer- Annual return including compounding
, Why is EAR important? - Answer- Accounts for compounding effects
What is the EAR formula? - Answer- EAR = (1 + periodic return)^(365/N) - 1
What is bid yield in T-bills? - Answer- Yield dealers pay when buying from investors
What is asked yield in T-bills? - Answer- Yield investors pay when buying from dealers
What is asked yield converted to BEY? - Answer- Bond equivalent yield
What is commercial paper? - Answer- Unsecured short-term debt issued by
corporations
What are typical maturities of commercial paper? - Answer- 1 to 270 days (usually 20-
45 days)
What are typical denominations of commercial paper? - Answer- $100k to $1M
Does commercial paper have a secondary market? - Answer- No (held to maturity)
Why is credit rating important for commercial paper? - Answer- It is unsecured
What is the purpose of commercial paper? - Answer- Raise short-term funds
What does commercial paper compete with? - Answer- Bank loans
What are federal funds? - Answer- Short-term loans between banks (usually overnight)
What is the maturity of federal funds? - Answer- Typically 1 day
What is the fed funds rate? - Answer- Interest rate for borrowing between banks
Why is the fed funds rate important? - Answer- Key target of monetary policy
Do federal funds have a secondary market? - Answer- No
What are repurchase agreements (repos)? - Answer- Sale of securities with agreement
to repurchase later
What is the maturity of repos? - Answer- 1 day to 3 months (usually 1-14 days)
What are money markets? - Answer- Markets that trade short-term debt securities with
maturities of less than one year
AND ANSWERS
What do competitive bidders submit in T-bill auctions? - Answer- Quantity and
price/yield
What do non-competitive bidders submit? - Answer- Quantity only (accept market
outcome)
What is the stop-out price? - Answer- Lowest accepted price among winning bids
Who receives T-bills first in auctions? - Answer- Non-competitive bidders
How are competitive bids ranked? - Answer- From highest price to lowest price
What happens to losing bids? - Answer- They receive no allocation
What is the largest secondary market in money markets? - Answer- Treasury bill market
Who are primary dealers? - Answer- Large financial institutions designated by the Fed
What is the role of primary dealers? - Answer- Buy T-bills at auction and create
secondary market
What are smaller dealers? - Answer- Firms that trade through primary dealers
How do individuals access T-bill markets? - Answer- Through brokers or banks
What is a bond equivalent yield (BEY)? - Answer- A yield measure that allows
comparison with bonds
Why is BEY used? - Answer- To compare money market yields with longer-term
securities
What is the BEY formula? - Answer- (Ibe = (Pf - P0)/P0 × 365/N)
How does BEY compare to discount yield? - Answer- BEY is always higher than
discount yield
What is effective annual return (EAR)? - Answer- Annual return including compounding
, Why is EAR important? - Answer- Accounts for compounding effects
What is the EAR formula? - Answer- EAR = (1 + periodic return)^(365/N) - 1
What is bid yield in T-bills? - Answer- Yield dealers pay when buying from investors
What is asked yield in T-bills? - Answer- Yield investors pay when buying from dealers
What is asked yield converted to BEY? - Answer- Bond equivalent yield
What is commercial paper? - Answer- Unsecured short-term debt issued by
corporations
What are typical maturities of commercial paper? - Answer- 1 to 270 days (usually 20-
45 days)
What are typical denominations of commercial paper? - Answer- $100k to $1M
Does commercial paper have a secondary market? - Answer- No (held to maturity)
Why is credit rating important for commercial paper? - Answer- It is unsecured
What is the purpose of commercial paper? - Answer- Raise short-term funds
What does commercial paper compete with? - Answer- Bank loans
What are federal funds? - Answer- Short-term loans between banks (usually overnight)
What is the maturity of federal funds? - Answer- Typically 1 day
What is the fed funds rate? - Answer- Interest rate for borrowing between banks
Why is the fed funds rate important? - Answer- Key target of monetary policy
Do federal funds have a secondary market? - Answer- No
What are repurchase agreements (repos)? - Answer- Sale of securities with agreement
to repurchase later
What is the maturity of repos? - Answer- 1 day to 3 months (usually 1-14 days)
What are money markets? - Answer- Markets that trade short-term debt securities with
maturities of less than one year
