UNIVERSITY OF DAR ES SALAAM

BUSINESS SCHOOL
Department of Finance

COURSE FN 307: Treasury Management

Seminar & Review Questions: Domestic & International Money Markets

Group 11, 12 & 13

1. Why do banks not eliminate the need for money markets?

2. Distinguish between competitive bidding and non-competitive bidding for Treasury
Securities.
3. Discuss various methods by which a central bank might sell its Treasury bills to financial
institutions and investors.
4. Explain what is meant by LIBOR and why it is such a pivotal rate of interest in the
financial markets. Discuss the extent to which LIBOR will be affected by changes in
dollar Treasury bill interest rates.
5. Explain what is meant by the TED spread. What does a rise in the TED spread signify on the
interbank market?
6. Explain what is meant by a Eurodollar. Discuss the historical development of the
Eurodollar market and the extent to which regulation played a role in its development.
7. Explain why Eurobanks based in London ca offer more competitive deposit and loan rates on
dollars than US-based banks.
8. The overall objective of short-term investment is often stated as maximizing the after tax
return on investment funds over a predetermined investment horizon. Discuss any four
investment constraints that depend on the corporation’s attitude on the risk return trade-
off.
9. Discuss the ways in which a Eurobank differs from a normal commercial bank.
10. Is Euro-banking activity a threat to the world financial system or does it provide much needed
services?

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11. T-Bill Math exercises – Fill in the blanks (problems 1-4,6,8 from text)
Price Principal Maturity Annualized Annualized
(days) Discount Investment
Rate Rate
TZS 4,925,0000 TZS5,000,000 182
TZS9,940,000 TZS10,000,000 35
TZS5,000,000 91 3.5%
TZS9,900,000 TZS10,000,000 91
TZS10,000,000 182 1.8%
TZS10,000,000 364 3%

12. The price of 182-day commercial paper is TZS 7,840,000. If the annualized investment rate
is 4.093% what will the paper pay at maturity?
13. Explain how investors' preferences for commercial paper change during a recession. How
should this reaction affect the difference between commercial paper rates and T-bill rates
during recessionary periods?
14. What is a banker's acceptance? Why banker’s acceptances are ideally suited for foreign trade
transactions?
15. Stanford Corporation arranged a repurchase agreement in which it purchased securities
for TZS4,900,000 and will sell the securities back for TZS5,000,000 in 40 days. What is
the yield (or repo rate) to Stanford Corporation?
16. As a treasurer of a corporation, one of your jobs is to maintain investment in liquid
securities such as Treasury securities and commercial paper. Your goal is to earn as high
a return as possible, but without taking much of a risk.
a. The yield curve is currently upward sloping, such that 10-year Treasury bonds
have an annualized yield 3 percentage points above the annualized yield of three-
month T-bills. Should you consider using some of your funds to invest in 10-year
Treasury securities?
b. Assume that you have substantially more cash than you would possibly need for
any liquidity problems. Your boss suggests that you consider investing the excess
funds in some money market securities that have a higher return than short-term
Treasury securities, such as negotiable certificates of deposit (NCDs). Given the
situation, what use of the excess funds would benefit the firm the most?

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17. In a Treasury auction of TZS 2.1 billion par value 91-day T-bills, the following bids were
submitted. If only these competitive bids are received, who will receive T-Bill, in what
quantity and at what price? If the Treasury also received TZS 800m in non-competitive
bids then who will receive T-bills, in what quantity and at what price?
Bidder Bid Amount Price
1 TZS500mn TZS0.9940
2 TZS750mn TZS0.9901
3 TZS1.5bn TZS0.9925
4 TZS1bn TZS0.9936
5 TZS600m TZS0.9939

NB:
Seminar Presentantion Questions are in bold