Exercise 1 – True or False

Name: ___________________________________________ Score: ________

Section: ________________________________

Instruction: Write T if the answer is True and F if the answer is False on the space provided for each
number.

_________ 1. Money market is a place where short-term debt securities like commercial paper, banker’s
acceptances and repurchase agreement are issue. Answer: True

_________ 2. Like the capital market, the money market is traded in a formal exchange.
Answer: False

_________ 3. The parties in the money market include corporations, financial institutions, and the
government. Answer: True

_________4. Money market securities are issued by entities that are highly liquid and needs money in a
short period. Answer: True

_________5. Discounting is the process of knowing the present value of any amount in the future.
Answer: True

_________6. The bond equivalent yield is a useful tool used by investors to determine the annual yield on
a security offered at add-on. Answer: False

_________7. To make a comparison on financial instruments with different compounding periods, the
effective annual rate (EAR) is used. Answer: True

_________8. Treasury bills and negotiable certificates of deposits are bought and sold on a discount
basis.
Answer: False

_________9. Commercial paper is an example of money paper that pays interest at the maturity date.
Answer: False

_________10. The single payment yield is intended for securities where the interest payment together
with the principal is made at the maturity period. Answer: True

_________11. The maturity value less the discounted value is the profit earned in investing in a
repurchase agreement.
Answer: False

_________12. The BSP designates secondary government securities dealers who will purchase the
majority of the T-bills sold competitively in the auction. Answer: False
_________13. Certificate of time deposit is issued by the Bangko Sentral ng Pilipinas to their
depositors who would like to invest their excess money for less than a year.
Answer: False
_________14. One advantage of a money market fund is that it allows small investors to have
access to professionally managed and diversified portfolios. Answer: True

_________15. The open-end investment companies operate within a fixed number of units or
shares and do not issue new shares of stock regularly. Answer: False

_________ 16. Term money is part of the money market that is loaned or deposited for a fixed period.
Answer: True

_________ 17. The euro currency is when a multinational corporation where the home office is located in
the US puts up a regional office in London. Answer: True

_________ 18. LIBOR is the rate offered to Eurodollar funds offered in the international money
market. Answer: True

_________ 19. Banker’s acceptances are mainly used for transactions to finance the shipment and
handling of merchandise by the exporter. Answer: False

_________ 20. Issuance of commercial papers needs the approval of the BSP before it is issued or
sold. Answer: False

_________ 21. Prime rate is the rate offered to valued clients. Answer: True

_________ 22. The investment in money market funds is composed of the pool of funds coming
from investors to invest them in securities. Answer: True

_________ 23. The Negotiable Certificate of Deposit has a secondary market where the investor can sell
it at realizable value before its maturity. Answer: True

_________ 24. Commercial paper and T-bill can be traded in the secondary market. Answer: False

_________ 25. T-bills are bought and sold by the government as tool to implement the monetary
policy. Answer: True
 Exercise 2 – Multiple Choice Concepts

Name: ___________________________________________ Score: ________

Section: ________________________________

Instruction: Encircle the letter that corresponds to your answer.

1. It is a money market security sold at an auction at a discount from par value.

a. Commercial paper
b. Treasury bills
c. Negotiable certificate of deposit
d. Banker's acceptances

2. These are securities with maturities of one year or less.

a. capital market instruments
b. money market instruments
c. preferred stock
d. mortgage securities

3. Negotiable certificate of deposit and repurchase agreement are sold

a.at future value
b.at a discount from par value
c.at a premium about par value
d.at present value

4. All are money market security, except

a. commercial paper
b. Treasury bill
c. negotiable certificate of deposit
d. preferred stock

5. T-bills and commercial paper are sold:

a. with a stated coupon rate
b. at a discount from par value
c. at a premium about par value
d. at par value

6. Which of the following is/are a money market instrument?

I. banker's acceptance
II. commercial paper
III. repurchase agreements

a. I and II
b. II and III
 c. I and III
d. All of them
7. It is a financial instrument used by exporters and importers where the bank guarantees a future
payment to a firm.
a. a repurchase agreement.
b. a negotiable certificate of deposit.
c. a banker's acceptance.
d. commercial paper.

8. It is a money market transaction that is most likely to represent a loan from one commercial bank to
another.
a. Banker's acceptance
b. Negotiable certificate of deposit
c. Overnight borrowing
d. Commercial paper

9. Which of the following financial securities does not have a secondary market?
a. Commercial paper
b. Treasury bill
c. Negotiable certificate of deposit
d. Banker’s acceptance

10. One of the following securities is used by financial institutions in a repo transaction.
a. commercial paper
b. certificate of deposit
c. Treasury bill
d. common stock
 Exercise 3 – Multiple Choice Concepts

Name: ___________________________________________ Score: ________

Section: ________________________________

Instruction: Encircle the letter that corresponds to your answer.

1. The commercial paper is issued at

a. single payment yield
b. discounted yield
c. yield to call
d. future value

2. LIBOR is
a. the interest rate charged on international interbank loans.
b. the average rate charged on commercial loans in Asia
c. the rate charged by the BSP for loans to banks.
d. Answer not given

3. Which of the following characterized money market securities?

I. Minimal trading costs

II. Minimal price volatility
III. Life greater than one year

a. I and II
b. II and III
c. I and III
d. I, II, and III

4. A repurchase agreement is in essence uses _____________ as collateral to another financial

institution.
a. commercial paper loan.
b. banker's acceptance.
c. certificate of deposit.
d. treasury bill

5. It is a short-term unsecured promissory note issued by a company.

a. Commercial paper.
b. Banker's acceptance.
c. Certificate of deposit.
d. Treasury bill

6. A time draft payable to a seller of goods with payment guaranteed by a bank is a

a. commercial paper
b. treasury bill.
 c. repurchase agreement
d. banker's acceptance
7. Which of the following money market securities can be sold in the secondary market?

I. Treasury bill
II. Commercial paper
III. Negotiable certificate of deposit

a. I and II
b. I and III
c. II and III
d. I, II, and III

8. Which of the following statements show the difference between the discount yield on a T-bill and T-
bill's bond equivalent yield (BEY)?

I. the discount yield is the return per peso of face value and the BEY is a return per peso
originally invested.
II. a 360-day year is used on the discount yield and the BEY uses 365 days.
III. the discount yield is calculated without compounding, and the BEY is calculated with
compounding.

a. I and II only
b. I and III only
c. I and III only
d. I, II, and III

9. The following formula is used to calculate the ________ of a money market investment.

Pf – P0 x 360
P0 n

a. Discount yield
b. Bond equivalent yield
c. Effective annual return
d. Single-payment yield

10. Which one of the following statement/s is/are true about the commercial paper?

I. It is an unsecured short-term promissory note.

II. Company allowed to issue is highly liquid
III. It has no secondary market.

a. I and II
b. I and III
c. II and III
d. I, II, and III
 Exercise 4 – Multiple Choice - Problems

Name: ___________________________________________ Score: ________

Section: ________________________________

Instruction: Encircle the letter that corresponds to your answer.

1. Rottie bought a P10 million face value commercial paper with a 270-day maturity is selling for P9.55
million. What is the bond equivalent yield on the commercial paper?
a. 4.71 percent
b. 6.42 percent
c. 6.37 percent
d. 6.28 percent

Answer: C
BEY = 10,000,000 – 9,550,000 x 365 = 0.06369 or 6.37%
9,550,000 270

2. Richard bought a P10,000 par Treasury bill at P9,575 and sell it 60 days later for P9,675. What was
Richard’s effective annual rate?
a. 6.29 percent
b. 6.35 percent
c. 6.52 percent
d. 6.67 percent

Answer: D
Explanation: (9,675/9,575)(365/60) − 1 = .06524 = 6.52%

3. A 180-day P3 million negotiable certificate of deposit has a 4.25 percent annual rate quote. If ABC
Corporation bought the CD, how much will ABC Corporation collect in 180 days?
a. P3,047,439
b. P3,045.678
c. P3,062,877
d. P3,063,087

Answer:
FV = P3 million (1.0425)180/360
= P3,063,087

4. Ms. Grande, a Philippine exporter sells P150,000 of furniture to a London importer. The exporter
requires the importer to obtain a letter of credit. When the bank accepts the draft, the exporter
discounts the 120-day note at a 5.25 percent discount. What is Ms. Grande’s effective annual rate?
a. 5.52%
b. 5.42%
c. 5.32%
d. 5.29%
 Answer: A
P150,000 – 147,375 x 365 = 5.42%
147,375 120
365/120
EAR = 1 + 0.0542
365/120 -1 = 0.0552 or 5.52%

5. A firm plans to issue a 30-day commercial paper for P9,900,000. Par value is P10,000,000. What is
the firm's discount yield?
a. 12.00%
b. 12.12%
c. 12.17%
d. 12.28%

Answer
id = P10,000,000 – P9,900,000 x 360 = 12.00%
P10,000,000 30

6. ABX is a T-bill dealer authorized by BSP. ABX quoted a P10,000 face 180-day T-bill quoted at 2.75
bid, 2.65 ask. You could buy this bill at ________ or sell it at ________.
a. P9,869.23; P9,864.36.
b.P9,864.36; P9,869.23.
c. P9,867.50; P9,862.50.
d.P9,862.50; P9,867.50.

Answer: C
Buy at 10,000 × [1 − (0.0265 × 180/360)]; sell at 10,000 × [1 − (0.0275 × 180/360)].

7. Mariel Transport purchases a Treasury bill with a P10,000 par value for P9,645. One hundred days
later, Mariel sells the T-bill for P9,719. What is Mariel’s expected annualized yield from this
transaction?
a. 2.74%
b. 2.76%
c. 2.78%
d. 2.80%

Answer = 9,719 – 9,645 x 365 = 2.80%

9,645 100

8. FLT invested in a T-bill. If he requires a 5 percent annualized return on a six-month T-bill with a par
value of P10,000, how much is he willing to pay?
a. 10,000
b. 9,524
c. 9,759
d. None of these are correct.

Answer = P10,000(1.05)-6/12 = P9,759

9. APM buys commercial paper with a 60-day maturity for P985,000. Par value is P1,000,000, and the
investor holds it to maturity. What is its discount yield?
a. 9.00%
b. 9.13%
c. 9.14%
d. 9.26%

Answer
Discount yield = 1,000,000 – 985,000 x 360 = 0.09 or 9.0%
1,000,000 60

10. Joyce Malto purchased an NCD a year ago in the secondary market for P980,000. She redeems it
today and receives P1,000,000. She also receives an interest of P30,000. Ms. Malto’s annualized yield
on this investment is:
a. 2.0 percent
b. 5.10 percent
c. 5.00 percent
d. 2.04 percent

Answer
1,030,000 = 980,000(1 + r)
1,030,000 -1 = r
980,000
r = 5.10%
 Exercise 5 – Multiple Choice - Problems

Name: ___________________________________________ Score: ________

Section: ________________________________

Instruction: Encircle the letter that corresponds to your answer.

1. A repurchase agreement calls for an investor to buy securities for P4,925,000 and sell them back in
60 days for P5,000,000. What is the yield?
a. 9.43 percent
b. 9.28 percent
c. 9.14 percent
d. 9.00 percent

Answer
irepo, sp = 5,000,000 – 4,925,000 x 360 = 0.0914 or 9.14%
4,925,000 60

2. An investor initially purchased securities at a price of P9,923,418, with an agreement to sell them
back at a price of P10,000,000 at the end of 90 days. What is the bond equivalent yield of the repo?
a. 3.06%
b. 3.09%
c. 3.11%
d. 3.14%

Answer
irepo, sp = 10,000,000 – 9,923,418 x 360 = 3.09%
9,923,418 90

BEY = 10,000,000 – 9,923,418 x 365 = 3.11%

10,000,000 90

3. An investor initially purchased securities at a price of P9,923,418, with an agreement to sell them
back at a price of P10,000,000 at the end of 90 days. What is the effective annual rate of the repo?
a. 3.06%
b. 3.09%
c. 3.11%
d. 3.14%

Answer
irepo, sp = 10,000,000 – 9,923,418 x 360 = 3.09%
9,923,418 90

BEY = 10,000,000 – 9,923,418 x 365 = 3.11%

 10,000,000 90

EAR = [1 + 0.0311 ]365/90 – 1 = 0.0314 or 3.14%

365/90
4. May purchases a six-month (182-day) T-bill with a P100,000 par value for P97,000. What is the T-
bills discount yield?
a. 3.09%
b. 5.93%
c. 6.02%
d. 6.11%

Answer
Discount yield = P100,000 – P97,000 x 360 = 0.0593 or 5.93%
P100,000 182

5. May purchase a six-month (182-day) T-bill with a P100,000 par value for P97,000. What is the T-
bills bond-equivalent yield?
a. 3.09%
b. 5.93%
c. 6.02%
d. 6.11%

Answer
Discount yield = P100,000 – P97,000 x 360 = 0.0593 or 5.93%
P100,000 182

BEY = P100,000 – P97,000 x 365 = 0.06016 or 6.02%

P100,000 182

6. What is the effective annual return on a P5 million commercial paper that currently sells at 98.50
percent of its face value and is 120 days from maturity?
a. 4.50%
b. 4.56%
c. 4.63%
d. 4.70%

Answer:
Discount yield = P5,000,000 – P4,925,000 x 360 = 0.045 or 4.50%
P5,000,000 120

BEY = P5,000,000 – P4,925,000 x 365 = 0.0463 or 4.63%

P4,925,000 120

EAR = (1 + 0.0463 )365/136 – 1 = 0.0470 or 4.70%

365/136

7. What is the effective annual rate on fed funds that are 3 days from maturity and have a quoted
nominal yield of 0.25 percent?
a. 0.2468%
b. 0.2530%
c. 0.2535%
 d. 0.2538%

Answer:

iff, be = 0.25%(365/360) = 0.2535%

EAR = (1 + 0.002535)365/3 – 1 = 0.2538%

365/3

8. Suppose a bank enters a repurchase agreement in which it agrees to buy Treasury securities
from a correspondent bank at a price of P24,990,000, with the promise to buy them back at a
price of P25,000,000. What is the yield on the repo if it has a 7-day maturity?
a. 2.0571%
b. 2.0865%
c. 2.0857%
d. 2.1072%

Answer
irepo, sp = P25,000,000 - P24,990,000 x 360 = 2.0571%
P24,990,000 7

9. ABC bought a commercial paper of a major Philippine corporation for P498,000. The paper
has a face value of P500,000 and is 45 days from maturity. What is the discount yield in
buying the commercial paper?
a. 3.20%
b. 3.22%
c. 3.24%
d. 3.26%

Answer:
The discount yield on the commercial paper is calculated as

icp, d = P500,000 - P498,000 x 360 = 3.20%

P500,000 45

10. Kathleen purchased a three-month, P500,000 negotiable CD, with a quoted nominal yield of
0.50% percent. What is its bond equivalent yield?
a. 0.4931%
b. 0.5069%
c. 1.9724%
d. 2.0276%

Answer
cd, be = 0.50%(365/360) = 0.5069%
 Exercise 7 – Straight Problems

Name: ___________________________________________ Score: ________

Section: ________________________________

Instruction: Show your solutions in the space provided after each problem.

1.A P100,000 180-day commercial paper can be bought at 5.0%. What are the bond equivalent yield and
the effective annual rate on the commercial paper?

Answer:
Bond equivalent yield = 100,000 – 97,500 x 365 = 5.20%
97,500 180
365/180
Effective annual rate = 1 + 0.0520 – 1 = 5.27%
365/180

2.An investor initially purchased securities at a price of P9,923,418, with an agreement to sell them back at
a price of P10,000,000 at the end of 90 days. What are the yield, bond equivalent yield, and effective
annual rate?

Answer: 3.10%
Discount yield = P10,000,000 – P9,923,418 x 360 = 3.063%
P10,000,000 90

BEY = P10,000,000 – P9,923,418 x 365 = 3.1058%

P10,000,000 90

EAR = (1 + 0.031058 )365/90 – 1 = 3.1422%

365/136

3.Assume an investor purchased a six-month T-bill with a P10,000 par value for P9,825. What are the
discount yield, bond equivalent yield, and effective annual rate?

Answer
Discount Yield = P10,000 – P9,825 x 365 = 7.00%
P9,825 90

BEY = P10,000 – P9,825 x 365 = 7.224%

P10,000 90

EAR = (1 + 0.07224 )365/90 – 1 = 7.4217%

365/90
4.Sarah invested in a Negotiable certificate of deposit for 6 months with a 0.65 percent quoted annual
interest rate.

Required:
a. Calculate the bond equivalent yield and effective annual rate on the NCD.
b. How much should be received by Sarah at the maturity date?
c. Immediately after the NCD is issued, the secondary market price on the P5,000,000 NCD falls to
P4,996,875. In this regard, what are the new secondary market quoted yield, the second equivalent
yield, and the effective annual rate on the P2,000,000 face value NCD?

Answer:
a. BEY = 0.65%(365/360) = 0.6590%

EAR = (1 + 0.006590 )2 – 1 = 0.66%

2

b. FV = P5,000,000(1 + 0.006590) = P5,016,475

2

c. Before getting the single payment yield, get first the bond equivalent yield

P5,016,475 = 4,996,875(1 + r/2)

P5,016,475 - 1 = r
P4,996,875 2

2(0.003922451) = r

r = 0.007844 or 0.7844% Bond equivalent yield

Single payment yield = 0.7844%(360/365) = 0.7737%

2
Effective annual rate = 1 + 0.007844 – 1 = 0.7859%
2

5.A money market security that has a par value of P1,500,000 sells for P1,322,490. Given that the security
has a maturity of two years, what is the investor’s required rate of return?

Answer
P1,500,000 = P1,322,490(1 + r)2

P1,500,000 = (1 + r)2
P1,322,490

1.1342 = (1 + r)2
 1.0649 = 1 + r

r = 0.0649 or 6.49%

6.Lucky purchased an NCD a year ago in the secondary market for P1,960,000. The NCD matures today at
a price of P2,000,000, and Lucky received P90,000 in interest. What is Phil’s return on the NCD?

Answer:
Yield = P2,000,000 + P90,000 – P1,960,000 = 0.0663 or 6.63%
P1,960,000

7.Current Treasury-bill yields are approximately 2 percent. Let us assume Mr. Geronimo is considering a
purchase of a P100,000 newly-issued six-month Treasury bill and he expects that the interest rates to
increase within the six three months and has a required rate of return of 2.5 percent. Based on this
information, how much is Mr. Geronimo willing to pay for a six-month Treasury bill?

Answer
P100,000 = PV(1 + 0.025)
2

P100,000 = PV(1.0125)

PV = P100,000/1.0125

= P98,765.43

8. The overnight fed funds was 0.45%. If one bank borrowed money for 2 days, what are the
bond equivalent yield and the effective annual rate of borrowing?

Answer
BEY = 0.45%(365/360) = 0.4563%

EAR = 1 + 0.004563 365/3 – 1 = 0.4573%

365/3