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# Chapter 5 Money Markets

17. A dealer is quoting a \$10,000 face 60 day T-Bill quoted at 3.22 bid, 3.14 ask. You
could buy this bill at _____ or sell it at _____.
A) \$9,947.67 , \$9,946.33
B) \$9,678.00 , \$9,686.00
C) \$9,686.00 , \$9,678.00
D) \$9,946.33 , \$9,947.67
E) None of the above

## Answer: A Page: 131 Level: Medium

Rationale: Buy at 10,000× [1-(0.0314× 60/360)] ; Sell at 10,000 × [1-
(0.0322× 60/360)]

24. A 90 day \$1 million CD has a 4% annual rate quote. If you buy the CD, how much
will you collect in 90 days?
A) \$1,040,000
B) \$1,009,863
C) \$1,000,000
D) \$1,015,012
E) \$1,010,000

## Answer: E Page: 142 Level: Medium

Rationale: \$1 mill × [1 + (0.04× 90/360)

30. A U.S. exporter sells \$50,000 of furniture to a Latin American importer. The exporter
requires the importer to obtain a letter of credit. When the bank accepts the draft the
exporter discounts the 90 day note at a 6% discount. What is the exporter's true
effective annual financing cost?
A) 6.00%
B) 6.18%
C) 6.32%
D) 6.24%
E) 6.45%

## Answer: C Page: 125 Level: Difficult

Rationale: 50,000*[1-(0.06*90/360)] = 49,250; (50,000/49,250)365/90-1 =6.32%

31. A Chinese exporter sells \$75,000 of toys to a French importer. The Chinese exporter
requires the French importer to obtain a letter of credit. When the bank accepts the
draft the exporter discounts the 60 day note at a 3.5% discount. What is the exporter's
true effective annual financing cost?
A) 3.62%
B) 3.57%
C) 3.35%
D) 3.78%
E) 3.97%

## Answer: A Page: 125 Level: Difficult

Rationale: 75,000*[1-(0.035*60/360)] = 74,562.5; (75,000/74,562.5)365/60-1 =3.62%

32. If a \$10,000 par T-Bill has a 4.5% discount quote and a 180 day maturity, what is the
price of the T-Bill?
A) \$9,550
B) \$9,525
C) \$9,775

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D) \$9,675
E) None of the above
Answer: C Page: 132 Level: Easy
Rationale: 9775=10,000*[1-(0.045*180/360)]

33. A 90 day T-Bill is selling for \$9,915. The par is \$10,000. The effective annual return
on the T-Bill is (watch your rounding)
A) 4.09%
B) 3.48%
C) 3.47%
D) 3.52%
E) 3.55%

## Answer: D Page: 124-125 Level: Medium

Rationale: (10,000 / 9915)(365 / 90) - 1

34. Suppose that \$10 million face value commercial paper with a 270 day maturity is
selling for \$9.65 million. What is the BEY on the paper?
A) 3.627%
B) 4.903%
C) 4.836%
D) 4.934%
E) None of the above

## Answer: B Page: 141 Level: Medium

Rationale: ((10 mill / 9.65 mill) – 1)* (365 / 270)

35. A \$5 million jumbo CD is paying a quoted 4.25% interest rate on 120 day maturity
CDs. How much money could you withdraw at maturity if you invest in the CD?
A) \$5,000,000
B) \$5,069,863
C) \$4,929,167
D) \$5,212,500
E) \$5,070,833

## Answer: E Page: 142 Level: Medium

Rationale: 5,000,000 *[1 + (0.0425*120/360)]

37. A 120 day maturity money market security has a bond equivalent yield of 4.25%. The
security's EAR is
A) 4.44%
B) 4.28%
C) 4.93%
D) 4.31%
E) None of the above

## Answer: D Page: 124-125 Level: Difficult

Rationale: EAR = (1+ (0.0425 / (365/120)))365/120 – 1 = 4.31%

44. A government securities dealer needs to make an 8% pre-tax annual return on \$10
million of capital employed to make it worthwhile to make a market in T-Bills. If the
bid discount on \$10,000, ninety day T-Bills is 3%, and the dealer can expect to do
5400 round trip deals today what must the ask discount be? Hint: A round trip is a

Bid Price = 10,000 × [1 - .03× (90/360)] = \$9,925

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\$10 million × (0.08/365) = (Required Ask Price - \$9,925) × 5400 deals
Ask Discount = ((\$10,000 - \$9,925.41)/\$10,000) × (360/90) = 2.9836%
Page: 131 Level: Difficult

47. A corporate treasurer has \$6 million to park (invest) for 60 days. Commercial paper
rates are a 3.44% discount and CD rates are 3.52%. Comparing the bond equivalent
yields over a 365 day year, which is the best alternative? What is the opportunity cost
of leaving the funds idle?

Find the BEY on each
CP: Price = \$6 mill * [1 - 0.0344*(60/360)] = \$5,965,600
[(\$6 mill / \$5,965,600) - 1] * (365 / 60) = 3.5079% BEY
CD: \$6 mill × [1 + 0.0352*(60/360)] = \$6,035,200
[(\$6,035,200/\$6 mill) - 1] * (365/60) = 3.5689% BEY
The best deal is the CD and the opportunity cost is 3.5689%
Page: 123, 125 Level: Difficult

50. Ninety day commercial paper can be bought at a 4% discount. What are the bond
equivalent yield and the effective annual rate on the commercial paper? Why do these
rates differ?

Commercial paper price/100 of par = 100*(1 – (0.04*90/360))
= 99.00
Effective annual rateCP = (100 / 99.00)365/90 – 1 = 4.16%
Bond equivalent yield = [(100 – 99.00) / 99.00] * 365/90 = 4.097%

The discount quote is an annual quote calculated as (Par - Price) / Par, assuming that
there are 360 days in a year. The bond equivalent yield is an annual rate calculated as
(Par - Price) / Price, which is the normal way to express a percentage return (\$ return
per \$ invested), assuming that there are 365 days in the year. The effective annual
return or EAR is the same as the bond equivalent yield, except that the EAR
annualizes the rate of return assuming the proceeds from each 90 day period are
reinvested during the next 90 day period and so on. Page: 126 Level: Medium

51. You are a corporate treasurer for Esso Oil. The quoted rate on dollar denominated
euro commercial paper is just blipped down recently. Your firm can issue \$5 million
of 30 day euro commercial paper in the London markets at 3.45%. You can also
invest the proceeds in the U.S. in comparable maturity negotiable dollar denominated
CDs which are quoting 3.95%. Ignoring any transactions costs, how much money, if
any, can Esso make by borrowing in the euro markets and investing in the U.S.? Is
this a good deal or not? Should you expect it to last? Explain.

Initial proceeds from issuing euro commercial paper (CP) = \$5 million * [1-
(0.0345*30/360)] = \$4,985,625
Invest the proceeds of \$4,985,625 in 30 day CDs and will wind up with \$4,985,625 *
[1+(0.0395*30/360)] = \$5,002,036
Repay the \$5,000,000 owed on the CP and Esso will clear \$2,036.

If the CDs are not very risky then this represents an arbitrage opportunity for Esso,
because they are not using their own money the rate of return is infinite. Since this is
an arbitrage strategy we would not expect this big a difference in the rates to persist.
(Exxon constructed a similar arbitrage several years ago using euro commercial paper
and T-bills.) Page: Integrative Level: Difficult

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