Money Market Practice Questions for the SIE

Answer: 270 days

Commercial paper is unsecured, short-term corporate debt sold at a discount from face value by prime-rated issuers to cover needs like seasonal inventory. It avoids Securities Act of 1933 registration only if it matures in 270 days (nine months) or less — which is why virtually all commercial paper is issued inside that window and no prospectus is required. A handy hook: 270 days = 9 months = no registration. Choosing 90 days confuses typical issuance practice with the legal cap; 365 days confuses the general one-year money market ceiling with the 270-day registration exemption; and the 'institutional buyers only' answer mixes this exemption up with private-placement-style exemptions, which depend on the purchasers rather than the maturity. Source: Securities Act of 1933, Section 3(a)(3) (short-term commercial paper exemption).

The Trap: Applying the one-year money market definition (365 days) instead of the 270-day registration-exemption cap

• 365 days: Misapplies the general 'one year or less' definition often used for money-market instruments to this specific registration exemption, which caps commercial paper maturity at 270 days, not 365.
• There is no maximum maturity, provided the notes are sold only to institutional investors: Confuses the short-term paper exemption with purchaser-based exemptions such as private placements; the commercial paper exemption turns on maturity, not on who buys the notes.
• 90 days: Confuses the short maturities at which commercial paper is commonly issued in practice with the legal ceiling; the registration exemption extends all the way to 270 days.

Verified against: Securities Act of 1933, Section 3(a)(3) (commercial paper: 270-day/9-month registration exemption)

Answer: A time draft guaranteed by a bank, used primarily to finance imports and exports

A banker's acceptance works like a postdated check in international trade: an importer's bank 'accepts' a time draft — guaranteeing payment on a set future date — and the accepted draft can then be sold at a discount in the money market until it matures. On the exam, BA = import/export financing. The most tempting wrong answer is the large bank time deposit, which is actually a negotiable (jumbo) CD — both involve banks, so they are easy to conflate. The unsecured corporate note is commercial paper, and the overnight interbank loan of reserves is a federal funds transaction. Source: standard money market instrument definitions under the FINRA SIE content outline (money market debt instruments).

The Trap: Guessing that a banker's acceptance is a bank CD or deposit product because of the word 'banker's'

• An overnight loan of excess reserves from one bank to another: Describes a federal funds transaction — a rate-map confusion, not a trade-finance instrument.
• A large-denomination time deposit issued by a commercial bank: Describes a negotiable (jumbo) CD — the documented most-common wrong guess, because the word 'banker's' leads test-takers to assume a bank deposit product.
• An unsecured promissory note issued by a corporation to cover seasonal cash needs: Describes commercial paper; a BA is bank-guaranteed and tied to a specific trade transaction, not general corporate borrowing.

Verified against: heavily tested: BA purpose)

Answer: A newly issued 10-year Treasury note

The money market is the marketplace for high-quality debt maturing in one year or less. Treasury bills (issued with maturities of 52 weeks or less), negotiable CDs, banker's acceptances, commercial paper, and repurchase agreements are the standard members. A newly issued 10-year Treasury note belongs to the capital market — investors buy it for intermediate-term income, not short-term cash management. Watch two classification traps: T-bills ARE money market instruments even though they are Treasuries (short maturity is what counts), and negotiable CDs qualify even though they pay stated interest at face value instead of being discount-priced. Source: FINRA SIE content outline classification of money market versus capital market debt.

The Trap: Misclassifying instruments across the one-year money-market/capital-market boundary (especially forgetting T-bills are money market instruments)

• A 26-week Treasury bill: T-bills mature in one year or less and are the benchmark money market security — this option catches students who assume all Treasury securities are long-term capital market products.
• A negotiable certificate of deposit maturing in six months: Negotiable CDs are money market instruments; students sometimes exclude them because they pay interest at face value rather than trading at a discount.
• A banker's acceptance payable in 90 days: BAs typically mature in days to months and are core money market instruments; excluded by students who misclassify them as long-term trade contracts.

Verified against: FINRA SIE content outline — classification of money market vs. capital market instruments

Answer: "The fund seeks to maintain a stable $1 share price, but it is not insured or guaranteed and could lose value."

Retail money market mutual funds transact at a stable $1.00 per-share NAV target, but that stability is an investment objective, not a guarantee. Required disclosures state that the fund is not FDIC-insured, is not guaranteed by a bank or the government, and can lose value — in severe stress a fund can 'break the buck' and fall below $1. The wrong answers each represent a real trap: FDIC insurance applies to bank deposits, never to mutual fund shares; SIPC protects custody of customer assets when a broker-dealer fails, not the market value of investments; and holding short-term, high-quality paper reduces risk but does not eliminate it. Money market funds are registered investment companies regulated under the Investment Company Act of 1940 and SEC money market fund rules.

The Trap: Believing a money market fund's $1 NAV is insured or guaranteed and the fund cannot lose money

• "No — the fund is FDIC-insured up to $250,000, just like a bank deposit.": FDIC insurance covers bank deposits, not mutual fund shares — even funds purchased through a bank. This is the documented FDIC/bank-deposit confusion.
• "No — the fund holds only short-term, high-quality debt, so a loss is impossible.": The documented 'money market funds can't lose money' misconception; in rare stress events a fund can 'break the buck' and reprice below $1.
• "No — SIPC guarantees that the fund's share price stays at $1.": SIPC replaces missing securities and cash if a broker-dealer fails; it does not protect against a decline in any investment's market value — the classic SIPC-scope misconception.

Verified against: breaking the buck)

Answer: Negotiable (jumbo) certificate of deposit

Most short-term money market debt instruments — Treasury bills, commercial paper, and banker's acceptances — are sold below face value and pay no periodic interest; the buyer's return is the built-in discount that accretes to face at maturity. The negotiable (jumbo) CD is generally the exception among these: it is issued at face value in minimum denominations of $100,000, pays interest at a stated rate, and can be sold to another investor in the secondary market before maturity. A useful memory device for this group of four: 'the jumbo CD is the interest-payer; the other three (T-bills, commercial paper, and BAs) are discount paper.' Note that a T-bill investor still earns a return — it just arrives as discount accretion rather than coupon payments, not because T-bills pay no return at all. (Other money-market instruments outside this list, such as federal funds and repurchase agreements, also carry stated interest rather than discount pricing, so the jumbo CD is not the only interest-bearing money-market instrument overall — just the exception among these four.) Source: standard money market instrument mechanics as tested under the FINRA SIE content outline.

The Trap: Assuming every money market instrument is discount-priced (missing that the jumbo CD pays stated interest at face value)

• Commercial paper: Commercial paper is discount-priced; students who miss that jumbo CDs are the exception often pick a familiar corporate instrument here.
• Treasury bill: T-bills are sold at a discount; the return is the accretion to face value, not coupon interest — the documented 'T-bill pays interest like a coupon security' confusion.
• Banker's acceptance: BAs are discount instruments sold below face value until maturity — part of the 'everything in the money market is discount paper' overgeneralization.

Verified against: Standard money-market instrument characteristics — negotiable (jumbo) CDs are issued at face value paying stated interest, versus T-bills/commercial paper/banker's acceptances sold at a discount (general money-market industry mechanics, no single governing rule)

Answer: Federal funds rate

Federal funds are overnight loans of excess reserves between banks, and the federal funds rate is set by market supply and demand — which is why it is considered the most volatile of the commonly quoted rates (it can change daily). The discount rate is different in both direction and source: it is the rate the Federal Reserve itself charges when banks borrow directly from the Fed, and the Fed sets it. The broker call rate is what banks charge broker-dealers for loans that fund margin lending, and the prime rate is what banks charge their strongest corporate borrowers. Building a 'who is borrowing from whom' map — bank-to-bank (fed funds), Fed-to-bank (discount), bank-to-broker-dealer (broker call), bank-to-top-corporate-customer (prime) — keeps these straight. Do not memorize any particular rate level; the exam tests the definitions, not current numbers.

The Trap: Flipping the federal funds rate (bank-to-bank) with the discount rate (Fed-to-bank)

• Prime rate: The prime rate is what banks charge their most creditworthy corporate customers, not other banks.
• Discount rate: The discount rate is what the Federal Reserve charges banks that borrow directly from the Fed — the documented 'who borrows from whom' flip.
• Broker call rate: The broker call (call loan) rate is what banks charge broker-dealers on loans used to finance customer margin lending — a rate-map confusion.

Verified against: heavily tested: fed funds definition)

Answer: Commercial paper

Matching each money market instrument to its issuer solves this quickly. Commercial paper is the unsecured promissory note that large, highly rated corporations sell at a discount to fund short-term needs such as seasonal inventory — typically cheaper than drawing a bank line of credit, and exempt from Securities Act registration when issued at 270 days or less. A banker's acceptance is not something a corporation issues on its own: it is created when a bank guarantees a time draft connected to an import or export transaction. Negotiable CDs are issued by banks, and Treasury bills only by the U.S. Treasury. Issuer mismatches like these are a favorite distractor pattern, so drill the map: corporations issue commercial paper, banks issue CDs (and accept BAs), the Treasury issues bills.

The Trap: Mismatching money market instruments with their issuers (treating BAs, CDs, or T-bills as general corporate financing tools)

• Treasury bills: Instrument-issuer mismatch: only the U.S. Treasury issues Treasury bills.
• Negotiable certificates of deposit: Instrument-issuer mismatch: CDs are time deposits issued by banks, not by industrial corporations.
• Banker's acceptances: The documented BA misconception in reverse: a BA arises only when a bank accepts (guarantees) a time draft tied to an import/export transaction — it is not a corporation's general-purpose borrowing tool.

Verified against: BA = trade finance)

Answer: FDIC insurance covers only $250,000; the remaining $750,000 depends on the issuing bank's creditworthiness

Negotiable (jumbo) CDs are issued in minimum denominations of $100,000 — often much larger — at face value with a stated interest rate, and because they are negotiable, they can be resold in the secondary market rather than held to maturity. FDIC insurance, however, is capped at $250,000 per depositor, per insured bank, per ownership category, so a $1,000,000 CD from one bank leaves $750,000 exposed to that bank's credit. Assuming the whole deposit is insured is the classic trap. The other wrong answers confuse a negotiable CD with a small, non-transferable retail CD, or lump it in with discount-priced money market paper — the jumbo CD is generally the money market's interest-bearing exception. Source: FDIC deposit insurance rules ($250,000 standard maximum) and standard negotiable CD mechanics.

The Trap: Believing a jumbo CD is FDIC-insured for its full face amount

• The CD was purchased at a deep discount from its face value: The discount-pricing overgeneralization: jumbo CDs are issued at face value and pay a stated rate of interest, unlike T-bills, commercial paper, and BAs.
• The treasurer must hold the CD to maturity because CDs cannot be resold: Treats a negotiable CD like a small retail bank CD; 'negotiable' means the instrument trades in an active secondary market before maturity.
• The full $1,000,000 is FDIC-insured because the CD is a bank deposit: The documented 'fully insured' trap: FDIC coverage is capped at $250,000 per depositor, per insured bank, per ownership category — not the full jumbo amount.

Verified against: FDIC deposit insurance rules (12 C.F.R. Part 330) — $250,000 standard maximum deposit insurance amount (SMDIA) per depositor, per insured bank, per ownership category

Answer: Repurchase agreement, with the price difference representing the interest on the borrowing

A repurchase agreement (repo) is, in economic substance, a collateralized short-term loan: the dealer raises overnight cash by selling securities and committing to buy them back at a slightly higher price, and that markup is the cash lender's interest. Perspective determines the label — the side that sells first and repurchases later is doing a repo, while the counterparty supplying the cash is doing a reverse repo on the very same trade. Reading 'agrees to repurchase' and jumping to 'reverse repo' is the trap this question targets. The transaction is not federal funds (those are unsecured reserve loans strictly between banks) and has nothing to do with a banker's acceptance (a bank-guaranteed trade draft). Repos are how government securities dealers routinely finance inventory. Source: standard repo/reverse repo mechanics under the FINRA SIE content outline.

The Trap: Labeling a repo as a reverse repo because the initiating party 'repurchases' (perspective/direction confusion)

• Federal funds transaction, because it is an overnight borrowing: Fed funds are unsecured overnight loans of excess reserves between banks — not collateralized dealer financing; 'overnight' alone does not make a loan fed funds.
• Reverse repurchase agreement, because the dealer has agreed to repurchase the securities: Direction-label confusion: the party that sells first and buys back later is doing a repo; 'reverse' describes the cash-lending counterparty's side of the same trade.
• Banker's acceptance, because a financial institution effectively guarantees repayment: A BA is a bank-guaranteed time draft that finances imports and exports; it has no connection to dealer inventory financing.

Verified against: Standard repurchase agreement (repo) mechanics — collateralized short-term dealer financing (general money-market industry practice, no single governing rule)

Answer: Recommend a Treasury bill maturing shortly before the closing date

A suitable recommendation must match both credit quality and time horizon. A Treasury bill maturing just before the closing is backed by the full faith and credit of the U.S. government, and because it matures when the cash is needed, market-price swings before maturity are essentially irrelevant — this is why T-bills are the benchmark 'park it safely' money market instrument. Each wrong answer embodies a distinct trap: telling a customer a money market fund 'cannot lose value' misstates the product (the $1 NAV is a target, not a guarantee) and conflicts with FINRA Rule 2150's prohibition on guaranteeing customers against loss; the single-bank jumbo CD leaves $150,000 above the $250,000 FDIC ceiling exposed to the bank's credit; and the 30-year bond eliminates default risk but not interest-rate risk — rising rates over three months could force a sale below cost. Freedom from default risk is not the same as freedom from loss.

The Trap: Equating 'safe' products with 'no possible loss' — ignoring guarantee prohibitions, the FDIC cap, and interest-rate risk over the customer's horizon

• Recommend a $400,000 negotiable CD from a single bank, explaining that FDIC insurance protects the entire amount: The 'fully insured jumbo CD' trap: FDIC coverage is capped at $250,000, leaving $150,000 exposed to the bank's credit — and the explanation given to the customer is inaccurate.
• Recommend a 30-year Treasury bond, because Treasury securities carry no default risk: Confuses credit safety with total safety: a long-term bond's market price can fall substantially over three months if rates rise, forcing a sale below cost — money market maturities carry the least interest-rate risk.
• Recommend a retail money market mutual fund and assure the customer it cannot lose value: Two violations of the documented facts: money market funds are not insured or guaranteed and can lose value, and assuring a customer against loss conflicts with FINRA's prohibition on guarantees (FINRA Rule 2150).

Verified against: FINRA Rule 2150 (prohibition against a member guaranteeing a customer's account against loss); T-bill/money-market fund/CD/bond risk characteristics are standard fixed-income mechanics