Differentiate Cash Instruments - Series 65

1. What is the primary market risk that can affect money market instruments even when credit risk is low?

   Interest rate risk (price sensitivity, usually small due to short maturities). Short-term instruments fluctuate in market value with interest rate changes, though brief durations limit the extent of price volatility.

2. What is the main liquidity tradeoff of a bank certificate of deposit (CD) versus a demand deposit?

   CD has reduced liquidity and may have early-withdrawal penalties. CDs lock funds for a fixed term to earn higher interest, imposing penalties for early access unlike immediately withdrawable demand deposits.

3. Which statement is correct: Eurodollar deposits are FDIC-insured or generally not FDIC-insured?

   Generally not FDIC-insured. Held abroad, Eurodollar deposits fall outside FDIC's U.S.-based insurance scope, exposing them to full credit risk.

4. What is a Eurodollar deposit in the context of money market instruments?

   A U.S. dollar-denominated time deposit held at a non-U.S. bank. Eurodollar deposits are held outside U.S. jurisdiction, offering higher yields but subject to foreign banking regulations.

5. Which option is generally considered to have the lowest credit risk: T-bills, commercial paper, or negotiable CDs?

   U.S. Treasury bills (T-bills). T-bills carry implicit U.S. government backing, making their credit risk negligible compared to corporate or bank-issued instruments.

6. What is the defining feature of a demand deposit account regarding withdrawals?

   Funds are payable on demand with immediate liquidity. Demand deposits allow unrestricted, immediate access to funds, distinguishing them from time deposits with withdrawal restrictions.

7. What is the standard maximum insurance amount per depositor, per insured bank, per ownership category?

   $250,000$ per depositor, per bank, per ownership category. FDIC sets this limit to protect depositors while encouraging prudent banking, with categories like single or joint accounts allowing higher total coverage.

8. What is the principal risk of a money market mutual fund (MMMF) that does not apply to insured deposits?

   NAV can fall below $1$ (no federal deposit insurance). MMMF shares aim for stable $$1 NAV but lack insurance, allowing potential principal loss if underlying assets decline in value.

9. What is a banker's acceptance (BA) in the money market?

   A bank-guaranteed time draft used in trade financing. BAs facilitate international trade by providing bank-backed payment guarantees, reducing risk for exporters in transactions.

10. What is the key risk difference between an insured bank deposit and a Treasury bill?

    Deposit: bank default risk insured; T-bill: U.S. government credit risk. Insured deposits protect against institutional failure via FDIC, while T-bills rely on the U.S. government's full faith and credit.

11. Which option is a direct obligation of the U.S. government: Treasury bill or federal agency discount note?

    Treasury bill is a direct obligation of the U.S. government. T-bills are issued directly by the Treasury, unlike agency notes which lack explicit government guarantee.

12. What is the correct classification of a money market mutual fund (MMMF): deposit product or investment company security?

    Investment company security (mutual fund), not a deposit product. Regulated under the Investment Company Act of 1940, MMMFs pool investor funds to buy money market securities, distinct from bank deposits.

13. What is the key distinction between a bank CD and a corporate commercial paper note?

    CD is an insured deposit; commercial paper is an uninsured security. Bank CDs are deposit products with FDIC insurance against bank default, unlike commercial paper which is an unsecured corporate debt instrument.

14. What is the primary risk protection provided by FDIC insurance on bank deposits?

    Protection against bank default (principal up to coverage limits). FDIC insurance safeguards depositors from loss of principal due to bank failure, covering up to specified limits per account category.

15. What is a repurchase agreement (repo) in money market terms?

    A short-term loan collateralized by securities with an agreement to repurchase. Repos function as collateralized borrowing, with the repurchase obligation ensuring return of securities at a specified price.

16. Identify the primary risk in a repo if the counterparty fails to repurchase the securities.

    Counterparty (credit) risk, partially mitigated by collateral. If the seller defaults, the buyer may face losses on collateral value, though overcollateralization reduces but does not eliminate this risk.

17. Which entity provides federal insurance for deposits at credit unions?

    NCUA (via the National Credit Union Share Insurance Fund). The NCUA administers federal insurance for credit union shares through its dedicated fund, similar to FDIC for banks.

18. Which money market instrument is typically issued at a discount and matures at par: T-bill or bank CD?

    Treasury bill (T-bill). T-bills are zero-coupon securities where the discount provides the yield, maturing at face value without periodic interest.

19. Which option is an insured deposit: a bank money market deposit account or a money market mutual fund?

    Bank money market deposit account (MMDA) is insured; MMMF is not. Bank MMDAs qualify as deposits eligible for FDIC insurance, whereas MMMFs are securities without such federal protection.

20. Which option is most liquid in normal markets: T-bills, negotiable CDs, or commercial paper?

    T-bills (deep, active secondary market). T-bills benefit from high issuance volume and government backing, enabling easy trading and minimal bid-ask spreads in secondary markets.

21. What is the typical maturity range associated with money market instruments on the Series 65 exam?

    Short-term debt, typically $1$ year or less. Money market instruments are defined by short maturities to minimize interest rate risk and provide high liquidity for cash management.

22. Which option is typically exempt from state and local income tax on interest: T-bills or bank CDs?

    T-bills (U.S. Treasury interest is state and local tax-exempt). Federal tax law exempts U.S. Treasury interest from state and local taxes, unlike fully taxable bank deposit interest.

23. Which type of risk is most directly associated with commercial paper issued by a corporation?

    Credit (default) risk of the issuer. As unsecured short-term debt, commercial paper exposes investors to the issuer's default possibility without collateral or insurance backing.

24. Which product can legally impose liquidity fees or redemption gates in stress: insured bank deposit or MMMF?

    Money market mutual fund (MMMF). SEC rules permit MMMFs to use fees or gates during liquidity crises to prevent runs, unlike rigidly protected insured deposits.

25. Identify the instrument that is a bank deposit but may be sold in a secondary market: passbook savings or negotiable CD?

    Negotiable CD. Negotiable CDs are transferable instruments allowing resale, unlike non-tradable passbook accounts tied to the original depositor.

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