Quiz #2

Question 1

Give 2 specific reasons that a MMMF is less risky than a bank and 2 reasons that a bank is less risky for a depositor and an MMMF.

Answer 1

MMMF safer:
1. Unleveraged
2. High quality investments

Bank safer:
1. FDIC insured
2. Access to the discount window

Question 2

What government entity is the primary regulator for Money Market Mutual Funds?

Answer 2

SEC = Securities and Exchange Commission

Question 3

During the financial crisis, how did the performance of AAA subprime securitized bonds compare to AAA securitized CDO bonds?

Answer 3

“Too much of a good thing is bad”

There were so may CDOs because banks received a fee for originating them that they became greedy. Had more correlation risk.

Question 4

Give 2 specific differences between Treasury Bills and Treasury Notes.

Answer 4

T-Bill = less than one year and sold at a discount, matures to par

T-Note = 2-10 years, sold at PAR coupon semi-annual

Question 5

Give 2 reasons that a community bank is a less efficient holder of individual mortgages relative to a securitized pool (SPV).

Answer 5

1. Community Risk
2. Duration risk / Maturity Mismatch

Question 6

Ford is currently sub-investment grade at Moody’s and S&P. Their rating is the highest for sub-investment grade and only one notch below investment grade. What are Ford’s ratings at Moody’s and S&P?

Answer 6

Moody’s — Ba1

S&P — BB+

Question 7

What are 2 primary uses of capital for prime money market funds? (Ie where were investor deposits deployed)

Answer 7

1. Commercial Paper
2. Repo
3. CD
4. Treasuries