An investment adviser is comparing a bank money market deposit account with a money market mutual fund whose portfolio consists only of certificates of deposit issued by FDIC-insured banks.
Which statement is correct regarding a bank money market deposit account and a money market mutual fund whose portfolio consists only of certificates of deposit issued by FDIC-insured banks? Answer: The money market fund's shares are not FDIC insured even though its CDs are from FDIC-insured banks; shareholders bear the risk of loss.
FDIC insurance covers deposits at insured banks; it does not cover mutual fund shares, even when the fund owns CDs issued by FDIC-insured banks. A money market fund is an open-end investment company, not a bank deposit, and its shareholders bear the risk of loss. SIPC protects customers when a broker-dealer fails; it does not insure fund losses. A bank money market deposit account is a bank deposit and is FDIC insured.
An investment adviser is considering a 30-day repurchase agreement for a client's cash reserve. Under the agreement, the dealer sells U.S. Treasury securities to the client and agrees to repurchase them in 30 days at a higher price.
Which of the following statements regarding repurchase agreements is true? Answer: A repurchase agreement is a collateralized loan to the dealer; it is not FDIC insured, and the buyer bears credit risk if the dealer defaults.
A repurchase agreement is a money-market instrument under which the dealer sells securities to the buyer and agrees to repurchase them at a higher price; economically, it is a short-term collateralized loan to the dealer. The statement that a Treasury-collateralized repurchase agreement has the same credit risk as a direct Treasury bill is wrong because the buyer is exposed to the dealer's default; Treasury collateral reduces but does not eliminate that risk. The statement that a repurchase agreement is a bank deposit and FDIC insured is wrong because a repurchase agreement is not a deposit and is not FDIC insured. The statement that the buyer has no credit risk if the dealer fails is wrong because the buyer may have to sell the collateral and could recover less than the amount owed. The correct statement is that the repurchase agreement is a collateralized loan to the dealer, is not FDIC insured, and the buyer bears credit risk if the dealer defaults.
A single client with no children receives a $1,000,000 inheritance. The client wants to deposit the entire amount at one FDIC-insured bank while keeping every dollar protected by FDIC deposit insurance.
Which arrangement of accounts at that bank would make the entire $1,000,000 eligible for FDIC deposit insurance? Answer: $250,000 in an individual account, $250,000 in a payable-on-death account naming one sibling, and $500,000 in a payable-on-death account naming two siblings as equal beneficiaries.
Under FDIC deposit insurance rules, coverage is $250,000 per depositor, per insured bank, per ownership category, and revocable trust/POD coverage is $250,000 per beneficiary. The correct arrangement uses a $250,000 individual account plus $750,000 in POD accounts spread among three beneficiaries: one sibling for $250,000 and two siblings for $500,000. The individual account is fully insured, and the POD accounts are fully insured at $250,000 per beneficiary, so all $1,000,000 is covered. The option with $500,000 in an individual account and $500,000 in a one-beneficiary POD account is only half covered: $250,000 of the individual account and $250,000 of the POD account are insured, leaving $500,000 uninsured. The option with a $500,000 joint account and a $500,000 one-beneficiary POD account is covered for the joint account (each owner's $250,000 share) plus $250,000 for the POD, leaving $250,000 uninsured. A $1,000,000 POD account with three equal beneficiaries is covered at $250,000 per beneficiary, or $750,000, leaving $250,000 uninsured.
A retired client keeps $30,000 of emergency cash in a money market deposit account at an FDIC-insured bank. The client asks the IAR to identify the primary risk of keeping the funds in this account.
Which risk should the IAR identify? Answer: Inflation risk, because the yield on the account may not keep pace with the rate of inflation.
A money market deposit account is an FDIC-insured bank deposit: its principal does not fluctuate with interest rates, it has no maturity date, and the $30,000 balance is within the FDIC limit. The primary risk is inflation risk — the account's yield may not keep pace with the cost of living, reducing the client's purchasing power. The statement that rising rates will reduce principal value describes marketable fixed-income securities, not a bank deposit. The statement that the balance exceeds FDIC coverage is wrong on the facts ($30,000 is below the $250,000 limit). The statement that the bank may not allow withdrawal before maturity is wrong because a money market deposit account has no maturity; it is not a CD.
A customer has $750,000 of cash in a brokerage account at a SIPC-member broker-dealer. The broker-dealer deposits $250,000 of the cash into a money market deposit account at each of three different FDIC-insured banks, all in the customer's name. Each account is a single-ownership account.
Which statement is correct regarding FDIC deposit insurance coverage? Answer: A customer's single-ownership deposits at different FDIC-insured banks are insured separately, up to the $250,000 limit at each bank.
Under FDIC rules, deposit insurance is per depositor, per insured bank, per ownership category. Deposits at separate FDIC-insured banks are covered separately, up to the limit at each bank. The statement that deposits at different banks are combined misstates the per-bank rule. SIPC protects customers of a failed broker-dealer, not bank deposits. A money market deposit account offered by an FDIC-insured bank is a bank deposit and is insurable.
An investor in the 24% federal and 6% state marginal income tax brackets is comparing a 13-week U.S. Treasury bill with a bond equivalent yield of 4.50% to a fully taxable money market mutual fund with a 7-day yield of 4.60%. Ignore the net investment income tax and assume neither tax is deductible in computing the other.
Which statement is correct about the after-tax yields? Answer: The T-bill has the higher after-tax yield: 4.50% x (1 - 0.24) = 3.42%, versus 4.60% x (1 - 0.30) = 3.22% for the fund.
T-bill interest is subject to federal income tax but is exempt from state and local income tax. Income from the fully taxable money market fund is taxable at both levels. Because neither tax is deductible in computing the other, the T-bill's after-tax yield is 4.50% x (1 - 0.24) = 3.42%, while the fund's after-tax yield is 4.60% x (1 - 0.24 - 0.06) = 3.22%. The T-bill therefore has the higher after-tax yield. The nominal-yield comparison ignores taxes, T-bill interest is not exempt from federal tax, and the fund is not superior at a 24% federal rate because both investments are federally taxable.
A brokerage customer's account holds $400,000 in shares of a money market mutual fund. The broker-dealer becomes insolvent, and in the same week the money market fund's NAV declines from $1.00 to $0.98 per share.
Which statement describes the customer's protection? Answer: SIPC protects the money market fund shares up to $500,000, but the NAV decline is a market loss that SIPC does not pay.
Under the Securities Investor Protection Act, SIPC protects customer securities and cash held by a failed broker-dealer up to $500,000 per customer, with cash claims limited to $250,000; it does not insure against declines in the market value of investments. A money market mutual fund share is a security, so the $400,000 position is eligible for SIPC protection up to the securities limit, but the decline in NAV from $1.00 to $0.98 is a market loss the customer bears. The statement that money market fund shares are treated as cash is wrong because mutual fund shares are securities, not cash, so the $250,000 cash cap does not apply. FDIC insurance does not cover mutual fund shares; the customer is not a depositor merely because the fund holds bank deposits. The statement that money market fund shares are excluded from SIPC coverage is the reverse of the rule—mutual fund shares are covered securities.
A client tells an IAR that she wants to place $300,000 in a money market mutual fund because she believes it is FDIC-insured, just like a bank money market deposit account.
How should the IAR respond? Answer: The money market deposit account is FDIC-insured to $250,000, leaving $50,000 unprotected, while the money market mutual fund is not FDIC-insured.
Under FDIC rules, a money market deposit account is a bank deposit insured up to $250,000 per depositor, per bank, per ownership category; a $300,000 deposit would leave $50,000 unprotected in a single ownership category. A money market mutual fund is an investment-company security, not a bank deposit, and is not FDIC-insured. The response that the fund becomes insured when it holds only insured CDs is wrong because deposit insurance does not pass through to fund shares. The response that both products are insured up to $250,000 misapplies the deposit-insurance limit to mutual fund shares. The response that neither product is insured and that SIPC protects bank deposits confuses the two protection systems: SIPC protects securities held at a failed broker-dealer, never bank deposits.
An investor who has no other deposits at the bank purchases a $200,000 negotiable certificate of deposit issued by an FDIC-insured bank. The CD matures in six months.
Which statement about this investment is correct? Answer: The CD is fully covered by FDIC insurance and can be sold before maturity in the secondary market at a price that reflects current interest rates.
Under FDIC rules, a negotiable certificate of deposit is a bank deposit and is insured up to $250,000, so this $200,000 CD is fully covered; as a money-market instrument, a negotiable CD can also be sold in the secondary market before maturity, and the sale price will reflect current interest rates and may differ from face value. The statement that the investor can require the issuing bank to redeem the CD at face value before maturity confuses negotiability with a demand-deposit feature — the bank is not obligated to redeem a negotiable CD early without penalty. The statement that the secondary market is restricted to banks is wrong; broker-dealers and other investors participate. The statement that negotiable form makes the CD an uninsured security misstates both the deposit nature and the FDIC coverage of CDs.
- Which statement about money market instruments is correct?
Answer: A repurchase agreement is a short-term collateralized transaction in which one party sells a security and agrees to repurchase it at a specified higher price.
For money market instruments, a repurchase agreement is a short-term collateralized loan: one party sells a security and agrees to buy it back at a specified higher price. Commercial paper is an unsecured short-term promissory note; the statement that it is secured by receivables describes asset-backed commercial paper, not general commercial paper. Federal funds are overnight loans of reserve balances between depository institutions, not loans from the Federal Reserve — the Fed lends reserves through the discount window. A negotiable certificate of deposit remains a bank deposit for FDIC purposes; negotiability does not remove deposit insurance.
At one FDIC-insured bank, a customer has a $250,000 certificate of deposit in a taxable individual account with $5,000 of accrued interest, and a $250,000 certificate of deposit inside a traditional IRA. The bank fails before the CD matures.
Which statement is correct regarding FDIC coverage? Answer: The customer is insured for $500,000: the taxable CD is covered up to $250,000, the $5,000 of accrued interest is uninsured, and the IRA is covered separately up to $250,000.
FDIC coverage is calculated by ownership category. The taxable individual account has $250,000 of principal plus $5,000 of accrued interest, but the limit for that category is $250,000, so the $5,000 is uninsured. The traditional IRA is in the retirement-account category and is separately insured up to $250,000. Thus total insured deposits are $500,000. Accrued interest counts toward the limit rather than being added on top, and different ownership categories are not combined.
An IAR recommends a national municipal money market mutual fund to a client who lives in a state with a personal income tax. The client asks whether the fund's dividends are tax-free in the client's taxable account for the 2026 tax year.
Which statement is correct? Answer: The fund's dividends are generally exempt from federal income tax, but the client may owe state income tax on the portion from out-of-state municipal bonds.
Under IRC § 103, interest on municipal securities is generally exempt from federal income tax, and IRC § 852(b)(5) permits a mutual fund to pass that exemption through to shareholders as exempt-interest dividends. State tax treatment is separate: many states exempt their own municipal obligations but tax interest from out-of-state municipal bonds, so a client in a state with an income tax may owe state income tax on the portion of a national fund's dividends attributable to out-of-state bonds. The statement that the dividends are exempt from both federal and state taxes wrongly assumes state tax treatment matches federal law; the statement that the dividends are federally taxable reverses the IRC § 103 exemption; and the statement that federal exemption requires a six-month holding period invents a condition that does not exist.
A certain money market instrument, a time draft drawn on a bank and accepted by that bank, is used to finance international trade.
Which statement is correct about this instrument? Answer: It is a banker's acceptance; the accepting bank is primarily liable for payment, and the instrument is not FDIC insured.
The instrument described is a banker's acceptance, a short-term money market instrument created to finance trade. Once accepted, the bank is primarily liable for payment, but the instrument is not a deposit and therefore is not FDIC insured. Commercial paper is an unsecured corporate obligation, a negotiable CD is a bank time deposit, and a Treasury bill is a direct U.S. government obligation.
For tax year 2026, an investor in the 32% federal income tax bracket and the 6% state income tax bracket is comparing a six-month US Treasury bill with a six-month certificate of deposit at a bank. Both would be held to maturity.
Which statement about the Treasury bill is correct? Answer: The T-bill is bought at a discount, and the discount is interest income that is taxable federally but exempt from state and local income taxes.
Under federal tax law, the discount at which a Treasury bill is bought is interest income, not capital gain, and interest on direct US government obligations is taxable on the federal return but exempt from state and local income tax. The statement that the T-bill's return is exempt from both federal and state taxes wrongly extends the state-tax exemption to the federal level. The statement characterizing the discount as a short-term capital gain misstates the character of the income—the discount is interest, not gain. The statement that the T-bill pays semiannual interest is wrong because Treasury bills are discount instruments that pay no periodic interest.
- A 91-day US Treasury bill with a face value of $100,000 is purchased at a price of $99,000 and held to maturity. Using the bond equivalent yield convention, what is the bill's annualized yield?
Answer: 4.05%
The bond equivalent yield annualizes the return using the purchase price and a 365-day year: ($1,000 ÷ $99,000) × (365 ÷ 91) = 4.05%. The 3.96% figure is the bank discount yield, which divides the discount by the $100,000 face value and uses a 360-day year. The 4.00% figure uses the purchase price but a 360-day year. The 4.01% figure uses the face value with a 365-day year.
