Money Market Instruments

Financial Markets
and Institutions
6th Edition
PowerPoint Slides for:
By Jeff Madura
Prepared by
David R. Durst
The University of Akron
CHAPTER
6
Money
Markets
Copyright 2002 Thomson Publishing. All rights reserved.
Chapter Objectives
Provide a background on money market
securities
Explain how institutional investors use money
markets
Explain the globalization of money markets
Money Market Securities
Maturity of a year or less
Debt securities issued by corporations and
governments that need short-term funds
Large primary market focus
Purchased by corporations and financial
institutions
Secondary market for securities
Treasury Bills
Commercial paper
Negotiable certificates of deposits
Repurchase agreements
Federal funds
Bankers acceptances
Treasury bills
Issued to meet the short-term needs of the U.S.
government
Attractive to investors
Minimal default riskbacked by Federal Government
Excellent liquidity for investors
Short-term maturity
Very good secondary market


Treasury bill auction (fill bids in amount
determined by Treasury borrowing needs)
Bid process used to sell T-bills
Bids submitted to Federal Reserve banks by the
deadline
Bid process
Accepts highest bids
Accepts bids until Treasury needs generated
Competitive Bidding

Treasury bill auctionnoncompetitive bids
($1 million limit)
May be used to make sure bid is accepted
Price is the weighted average of the accepted competitive
bids
Investors do not know the price in advance so they submit
check for full par value
After the auction, investor receives check from the
Treasury covering the difference between par and the
actual price
Noncompetitive Bidding
Estimating T-bill yield
No coupon payments
Par or face value received at maturity
Yield at issue is the difference between the selling
price and par or face value adjusted for time
If sold prior to maturity in secondary market
Yield based on the difference between price paid for
T-bill and selling price adjusted for time

Calculating T-Bill Annualized Yield

Y
T

SP PP
PP
365
n
Y
T
= The annualized yield from investing in a T-bill

SP = Selling price
PP = Purchase price
n = number of days of the investment (holding period)
=
T-bill yield for a newly issued security

Par PP
PP
360
n
T-bill discount

= percent discount of the purchase price from par
Par = Face value of the T-bills at maturity
PP = Purchase price
n = number of days to maturity
T-bill discount =


Short-term debt instrument
Alternative to bank loan
Dealer placed vs. directly placed
Used only by well-known and creditworthy firms
Unsecured
Minimum denominations of $100,000
Not a large secondary market
Commercial Paper
Commercial paper backed by bank lines of
credit
Bank line used if company loses credit rating
Bank lends to pay off commercial paper
Bank charges fees for guaranteed line of credit
Estimating commercial paper yields
Y
CP

Par PP
PP
360
n
Y
CP
= Commercial paper yield
Par = Face value at maturity
PP = Purchase price
=


Issued by large commercial banks
Minimum denomination of $100,000 but $1
million more common
Purchased by nonfinancial corporations or money
market funds
Secondary markets supported by dealers in
security
Negotiable Certificates of Deposit (NCD)
NCD placement
Direct placement
Use a correspondent institution specializing in
placement
Sell to securities dealers who resell
Sell direct to investors at a higher price
NCD premiums
Rate above T-bill rate to compensate for lower
liquidity and safety

Sell a security with the agreement to repurchase it
at a specified date and price
Borrower defaults, lender has security
Reverse repo name for transaction from lender
Negotiated over telecommunications network
Dealers and brokers used or direct placement
No secondary market
Repurchase Agreements
Estimating repurchase agreement yields
Repo Rate
SP PP
PP
360
n
Repo Rate

= Yield on the repurchase agreement
SP = Selling price
PP = Purchase price
=


Interbank lending and borrowing
Federal funds rate usually slightly higher than T-
bill rate
Fed district bank debits and credits accounts for
purchase (borrowing) and sale (lending)
Federal funds brokers may match up buyers and
sellers using telecommunications network
Usually $5 million or more
Federal Funds
Exhibit 6.5
a
1
Purchase Order
Shipment of Goods
5
L/C 3
Shipping Documents & T ime Draft
Draft Accepted (B/A Created)
7
Japanese Bank
(Exporters Bank)
American Bank
(Importers Bank)
Importer Exporter
2
L
/
C

(
L
e
t
t
e
r

o
f

C
r
e
d
i
t
)

A
p
p
l
i
c
a
t
i
o
n

4
L
/
C

N
o
t
i
f
i
c
a
t
i
o
n

6
S
h
i
p
p
i
n
g

D
o
c
u
m
e
n
t
s

&

T
i
m
e

D
r
a
f
t


A bank takes responsibility for a future payment
of trade bill of exchange
Used mostly in international transactions
Exporters send goods to a foreign destination and
want payment assurance before sending
Bank stamps a time draft from the importer
ACCEPTED and obligates the bank to make good
on the payment at a specific time
Bankers Acceptance

Exporter can hold until the date or sell before
maturity
If sold to get the cash before maturity, price
received is a discount from drafts total
Return is based on calculations for other discount
securities
Similar to the commercial paper example
Bankers Acceptance
Major Participants in Money Market
Participants
Commercial banks
Finance, industrial, and service companies
Federal and state governments
Money market mutual funds
All other financial institutions (investing)
Short-term investing for income and liquidity
Short-term financing for short and permanent needs
Large transaction size and telecommunication
network

Valuation of Money Market Securities
Present value of future cash flows at maturity
(zero coupon)
Value (price) inversely related to discount rate
or yield
Money market security prices more stable than
longer term bonds
Yields = risk-free rate + default risk premium
Exhibit 6.7
a
International
Economic
Conditions
U.S.
Fiscal
Policy
Issuers
Industry
Conditions
Risk
Premium
of Issuer
Short-T erm
Risk-Free
Interest
Rate
(T -bill Rate)
Issuers
Unique
Conditions
U.S.
Monetary
Policy
U.S.
Economic
Conditions
Required Return
on the Money
Market Security
Price of the
Money Market
Security
Interaction Among Money Market
Yields
Securities are close investment substitutes
Investors trade to maintain yield differentials
T-Bill is the benchmark yield in money market
Yield changes in T-bills quickly impacts other
securities via dealer trading
Yield differentials determined by risk
differences between securities
Default risk premiums vary inversely with
economic conditions
Globalization of Money Markets
Money market rates vary by country
Segmented markets
Tax differences
Estimated exchange rates
Government barriers to capital flows
Deregulation Improves Financial Integration
Capital Flows To Highest Rate of Return
Eurodollar deposits and Euronotes
Dollar deposits in banks outside the U.S.
Increased because of international trade growth
and U.S. trade deficits over time
No reserve requirements at banks outside U.S.
Eurodollar Loans
Channel funds to other multinationals that need
short-term financing

Euro-commercial paper
Issued without the backing of a banking syndicate
Maturity tailored to investors
Dealers that place paper create a secondary market
Rates range between 50 and 100 basis points
above the LIBOR rate

Performance of international securities
Effective yield for international securities has
two components
The yield earned on the investment denominated
in the currency of the investment
The exchange rate effect
Performance of international securities
Yield for an international investment
Y
f

SP
f
PP
f

PP
f

Y
f

= Foreign investments yield
SP
f
= Investments foreign currency selling price
PP
f
= Investments foreign currency purchase
=
The exchange rate effect (%S) measures the
percentage change in the spot during the
investment period

% S measures the expected percent change in
the currency
Currency appreciated, % S is positive and adds to net
yield
Currency depreciated, % S is negative and reduces net
yield
1 1 1 ) % ( ) ( S Y Y
f e
Chapter Concepts Summary
Surplus units channel investments to securities
issued by deficit units
Debt securities markets
Money Market
Capital Market
Money market securities
Short-term
High quality
Very good liquidity

Money Market Instruments

Diunggah oleh

Informasi Dokumen

Judul Asli

Hak Cipta

Format Tersedia

Bagikan dokumen Ini

Bagikan atau Tanam Dokumen

Opsi Berbagi

Apakah menurut Anda dokumen ini bermanfaat?

Apakah konten ini tidak pantas?

Hak Cipta:

Format Tersedia

Money Market Instruments

Diunggah oleh

Hak Cipta:

Format Tersedia

Financial Markets

Anda mungkin juga menyukai