Question

Questions

1. Treasury bills are the safest and the most liquid type of short-term investment. The Treasury issues 13-week T-bills and 26-week T-bills on a regular basis in denominations of $1,000. Dealers bid on the new issues, but smaller investors just accept the average price. If the price of 13-week T-bills is shown to be $99.2,

a) what will be the price be?

b) Now calculate the yield.

3. Will the 26 week bills probably have a higher yield or a lower yield?

2. a) What is meant by a “flight to quality?”

b) What causes a “flight to quality?”

c) What happens to interest rates when there is a “flight to quality?” Do they go up or down?

3. a) What is commercial paper? (CP)

b) Why does CP get credit ratings but T-bills do not?

c) Why do firms issue CP instead of notes and bonds even if they need the money for a long period of time?

d) Look at Exhibit 6.7 and explain why investment in CP has declined so much. It’s explained above the graph.

4. How do individuals like us invest in T-bills, commercial paper and large negotiable CD’s, Repos and Banker’s Acceptances?
5. Why don’t money market funds invest in federal funds?
6. What are Eurodollars? How big is the Eurodollar market?
7. How was the securities firm called Bear Stearns affected by the repo market during the credit crisis of ‘08?
8. What is LIBOR and what is the scandal about bank fraud and LIBOR? Look this up.
9. Do Problem 5 but use a buy price of $99,000 instead of $98,000.
10. What is meant by investors “keeping money on the sidelines?” Why do investors do that?
11. How do low money market rates affect the stock markets?
12. Find the rate on 6 mo. T- bills, 6-month CP’s, the Federal Funds rate and LIBOR. Cite your source and the date of your data.
13. Find out the size of the U.S. money market, the U.S. stock market and the U.S. bond market. You’ll be surprised. J

Answer 1