IFE S6 Money Markets

What is the difference between interest rates and yields?

• Interest rates are generally lower than yields when comparing the same cash flows.

• Interest rates are added to the initial sum borrowed while yields are calculated by discounting the future cash flows and hence emphasise that the future cash flows are treated as constant.

• Interest rates are more variable than yields.

• There is no difference between interest rates and yields.

Which statement does NOT apply to money market funds?

• Money market funds are in essence collective investment funds that invest in the money market.

• Money market funds are high risk funds that invest in the money market.

• Money market funds are one of the few ways available to households to indirectly invest into the money market.

• Money market funds offer a sweep facility that allows investors to withdraw money on short notice.

What are repurchase agreements?

• These are contracts that give one party the right but not the obligation to buy an asset at a future date at a fixed price.

• These are money market loans that do not need to be settled in cash.

• These are contract that give on part the right to default on a loan in exchange for delivering a predefined asset of a predefined value at a future date.

• These are a form of secured loans where the lender buys an asset at a discount, and the borrower agrees to buy it back in the future.

What is a bill of exchange?

• It is a promise to pay guaranteed by a bank, that cannot be resold. Hence, if the customer does not pay, the bank will pay on her behalf.

• It is a promise to pay written by a customer to a seller that cannot be resold. It simply guarantees that the indebtedness is acknowledged by the customer and thus allows her to pay later.

• It is a promise to pay guaranteed by a bank, that can be resold. Hence, if the customer does not pay the bank will pay on her behalf to whoever holds the bill in case it is resold.

• It is a a promise to pay written by a customer to a seller that can be resold. Thus, it allows the seller to resell the bill at a discount and gain the money earlier.

What is a banker's acceptance?

• It is a promise to pay guaranteed by a bank, that cannot be resold. Hence, if the customer does not pay, the bank will pay on her behalf.

• It is a promise to pay written by a customer to a seller that cannot be resold. It simply guarantees that the indebtedness is acknowledged by the customer and thus allows her to pay later.

• It is a promise to pay guaranteed by a bank, that can be resold. Hence, if the customer does not pay the bank will pay on her behalf to whoever holds the banker's acceptance.

• It is a promise to pay written by a customer to a seller that can be resold. Thus, it allows the seller to resell the bill at a discount and gain the money earlier.

Why are central banks interested in the interest rates that are determined in money markets?

• The interest rates determined in money markets affect the profitability of banks and thus signals to central banks whether the banking sector is robust.

• The interest rates determined in money markets are the main factor that affects government borrowing and thus it helps central banks understand whether they need to support the government by printing more money.

• The interest rates determined on money markets affect the profitability of the central bank and thus a profit maximising central bank will be following the interest rate.

• The interest rates determined in money markets signal to central banks how the market prices liquidity and hence they can gain an overview whether enough liquid assets are present in the economy.

Consider a demand and supply graph representing the quantity of traded funds in the money market. What would be the effect of a decrease in the demand for liquid funds because of an external shock?

• The demand curve would shift to the right meaning that the quantity of traded funds would increase, and the interest rate would increase.

• The demand curve would shift to the right meaning that the quantity of traded funds would decrease, and the interest rate would decrease.

• The demand curve would shift to the left meaning that the quantity of traded funds would increase, and the interest rate would increase.

• The demand curve would shift to the left meaning that the quantity of traded funds would decrease, and the interest rate would decrease.

Consider a demand and supply graph representing the quantity of traded funds in the money market. What would be the effect of an increase in the supply for liquid funds because of an external shock?

• The supply curve would shift to the right meaning that the quantity of traded funds would decrease, and the interest rate would increase.

• The supply curve would shift to the right meaning that the quantity of traded funds would increase, and the interest rate would decrease.

• The supply curve would shift to the left meaning that the quantity of traded funds would decrease, and the interest rate would increase.

• The supply curve would shift to the left meaning that the quantity of traded funds would increase, and the interest rate would decrease.

Which is NOT a function of money?

• Money serves as a unit of account.

• Money serves as a store of value.

• Money serves as an insurance against inflation.

• Money serves as a means of exchange.

Which is NOT a reason for money to be worth more today than tomorrow?

• Money is worth more today because people are impatient to consume.

• Money is worth more today because the government declares it so, hence it is called fiat money.

• Money is worth more today because of inflation and given that inflation tends to be positive money loses its purchasing power over time.

• Money is worth more today because there is always some risk that a future cash flow will not occur.