Amanda is interested on analyzing money market mutual funds (MMMFs) and the potential runs by investors on these funds. She considered the statements below. Which of these statements is correct?

Question

BlackTom AI · Accepted Answer

Simultaneous redemptions create fire sales: when many MMMFs face withdrawals at once they sell assets into a stressed market, pushing prices down and impairing all funds’ ability to meet redemptions.

1. Relevant knowledge points and concepts
- Money market mutual funds (MMMFs) perform liquidity transformation: they offer redeemable shares while holding short-term assets.  
- Runs occur when many investors redeem at once (first‑mover advantage), forcing funds to sell assets.  
- Fire sales: large, contemporaneous selling depresses market prices, creating mark‑to‑market losses and systemic spillovers.  
- MMMFs are not generally insured like bank deposits (except temporary crisis programs).

2. Step‑by‑step reasoning
- Investors redeem from many funds simultaneously.  
- Funds must generate cash quickly, so they sell assets (commercial paper, repo, etc.).  
- The sudden supply overwhelms buyers, lowering market prices.  
- Lower prices reduce the value of remaining assets in all funds holding similar securities, worsening balance sheets and prompting further redemptions — a negative feedback loop.

3. Calculation example (intermediate steps)
- Suppose a fund family and peers each hold assets worth $1,000. Collective redemptions force sale of 300 units at a distressed price of $0.85 (instead of $1.00).  
- Cash raised = 300 × $0.85 = $255. Remaining assets = 700 × $0.85 = $595.  
- Total asset value after sale = $255 + $595 = $850. NAV fell from $1,000 to $850 (15% loss), reducing the fund’s capacity to satisfy further redemptions.

4. Why the correct answer is correct
- The described mechanism directly explains systemic runs: simultaneous redemptions cause simultaneous asset sales, price declines, and harder access to cash for every fund — exactly the statement chosen.

5. Why other options are incorrect
- “MMMFs did not experience runs in 2008–09”: false — the Reserve Primary Fund ‘broke the buck’ and many funds faced runs, prompting guarantees.  
- “Funds holding more liquid assets are more exposed”: incorrect — less liquid asset holdings increase vulnerability because they can’t be sold without price impact.  
- “Investors are always covered by insurance”: false — MMMFs are generally uninsured; temporary guarantees were crisis measures.  
- “MMMFs are designed to provide risky and illiquid investments”: false — they aim for safety and liquidity.

6. Conclusion
The correct choice is: “If many MMMFs experience significant redemptions at the same time, they all have to sell assets simultaneously, lowering the price of these assets and making harder for each fund to give cash back to its investors.” This matches the provided answer.

Amanda is interested on analyzing money market mutual funds (MMMFs) and the potential runs by investors on these funds. She considered the statements below. Which of these statements is correct?单项选择题

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