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

类似问题

Is the following statement true or false? In the products of methylation-hydrolysis, every -OH group corresponds to the position of a glycosidic bond in the starting polysaccharide.

Which of the follwoing structures represents amylopectin?

Which of the following is true about an aldopentose?I. It is a monosaccharide.II. It contains a CHO groupIII. It is a disaccharide.IV. It is an oligosaccharide.

For stock A, we have 𝛽 𝑖 = 0.70. Suppose the expected market risk premium next year is 9% and the risk-free rate is 3%. What is the expected return of this stock based on the CAPM? (Please answer in % and round to 2 decimal places. If the answer is 8.057%, then in the box, write 8.06)

The following graph shows the Security Market Line in the current economy. If a stock has a β of 1.2, what is the expected return of this stock based on the CAPM? (Please answer in % and round to 2 decimal places. If the answer is 8.057%, then in the box, write 8.06)

更多留学生实用工具

智能学习助手

风格化写作助手

论文查重助手

文献引用助手

课堂转译助手

课堂笔记助手

Quiz搜索助手

学校历年真题

智能刷题助手

智能匹配练习

希望你的学习变得更简单