Chapter 4: Monetary Policy and Interest Rate Determination

1. 1) A three month Treasury bill (TBill1) is issued onto the market with a face value of £100. The bill is bought on the primary market at £98, the following day a new three month Treasury bill (TBill2) is bought on the primary market at £97.50. The approximate annualised return on the (TBill1) on issue was:

8.16% and its price will fall on the secondary market. 2% and its price will fall on the secondary market. 8.16% and its price will rise on the secondary market. 2% and its price will rise on the secondary market.

2. Which one of the following is an example of a primary market instrument?

A three month Treasury bill with 1 month remaining to maturity. Shares of BP quoted on the London Stock Exchange. An issuance of Tesla corporate bonds to the value of $500 million. A pool of mortgages that are securitized and sold by a commercial bank to an insurance company.

3. Which of the following would be classified as a money market security?

A share in Texaco. A five year Treasury bond. A Treasury bill. A Eurobond.

4. Which one of the following theories cannot explain a negatively sloped yield curve?

The liquidity preference theory. The preferred habitat theory The market segmentation theory The expectations theory.

5. Which one of the following is the result of central an expansionary open market operation?

The price of Treasury bills rises, the short term rate of interest falls and the money supply increases. The price of Treasury bills falls, the short term rate of interest falls and the money supply increases. The price of Treasury bills rises, the short term rate of interest falls and the money supply decreases. The price of Treasury bills falls, the short term rate of interest rises and the money supply increases.

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