1 Money market Debt instruments with original maturity of one year or less Issued by economic agents requiring shortterm funds Purchased by economic agents with excess shortterm funds Once issued trade in active secondary markets ID: 1029693
Download Presentation The PPT/PDF document "Chapter 5 Money market Dr. Lakshmi Kalya..." is the property of its rightful owner. Permission is granted to download and print the materials on this web site for personal, non-commercial use only, and to display it on your personal computer provided you do not modify the materials and that you retain all copyright notices contained in the materials. By downloading content from our website, you accept the terms of this agreement.
1. Chapter 5Money marketDr. Lakshmi Kalyanaraman1
2. Money marketDebt instruments with original maturity of one year or lessIssued by economic agents requiring short-term fundsPurchased by economic agents with excess short-term fundsOnce issued, trade in active secondary marketsDr. Lakshmi Kalyanaraman2
3. Money marketExcessive cash holdings involve opportunity costCash gets zero interestMoney market instrument provides an investment opportunity that generates a higher rate of interest than holding cash.Dr. Lakshmi Kalyanaraman3
4. Money market instruments Sold in large denominations Prohibitive for individual investorsIndividuals invest indirectly through money market mutual funds Dr. Lakshmi Kalyanaraman4
5. Money market instruments Issued by high quality borrowersLow default riskDefault risk is late or non-payment of principal or interestDr. Lakshmi Kalyanaraman5
6. Money market instruments Original maturity of one year or lessDr. Lakshmi Kalyanaraman6
7. Yields on money market securitiesDr. Lakshmi Kalyanaraman7
8. Bond equivalent yieldsQuoted nominal or stated rate earned on an investment over a one-year period. Does not consider the effects of compounding of interest during a less than one year investment horizon.Is the rate used to calculate the present value of an investmentDr. Lakshmi Kalyanaraman8
9. Bond equivalent yieldsCompare discount securities to U.S. Treasury bonds with bond equivalent yields (ibey)Pf = Face valueP0 = Purchase price of the securityh = Number of days until maturityDr. Lakshmi Kalyanaraman9
10. Effective annual returnBond equivalent rate does not consider the effects of compoundingIf interest is paid more than once year, true annual rate earned is effective annual return on an investmentBond equivalent yield on money market securities with a maturity of less than one year can be converted to an EARDr. Lakshmi Kalyanaraman10
11. Effective annual returnDr. Lakshmi Kalyanaraman11
12. Discount yieldsSome money market instruments are bought and sold on a discount basis (e.g., Treasury bills and commercial paper) P0 is the purchase price at a discount from its face value at time 0Pf is the face value received at maturityDr. Lakshmi Kalyanaraman12
13. Money market yieldsPf = Face valueP0 = Purchase price of the securityh = Number of days until maturityFor discount yields, use 360 days Dr. Lakshmi Kalyanaraman13
14. Comparison of discount yields and bond equivalent yieldsIbey = idy (Pf/P0) (365/360)Dr. Lakshmi Kalyanaraman14
15. Single payment yieldsSome money market securities, e.g. jumbo CDs and fed funds) pay interest only once during their lives , at maturityAt maturity investor gets interest + maturitySingle payment yield assumes 360 daysDr. Lakshmi Kalyanaraman15
16. Single payment yieldsibey = ispy (365/360)Dr. Lakshmi Kalyanaraman16
17. Money market securitiesDr. Lakshmi Kalyanaraman17
18. Treasury billsShort-term obligation issued by governmentTo cover current government budget deficit and to refinance maturing government debtOriginal maturities are 13 weeks or 26 weeksDenominations of multiples of $1,000 Default risk-free often referred to as risk-free assetDr. Lakshmi Kalyanaraman18
19. Treasury billsDiscount securityZero-coupon securityReturn is the difference between the purchase price and the face value received at maturityDr. Lakshmi Kalyanaraman19
20. Federal fundsShort-term funds transferred between financial institutions, usually for a period of one dayFederal funds rate is the interest rate for borrowing federal fundsDr. Lakshmi Kalyanaraman20
21. Repurchase agreementsAn agreement involving sale of securities by one party to another with a promise to repurchase the securities at a specified price and on a specified dateDr. Lakshmi Kalyanaraman21
22. Reverse repurchase agreementAn agreement involving the purchase of securities by one party from another with the promise to sell them backHaircut: Collateral is valued at slightly less than the market valueReflects the risk of the underlyingSpecific to securityDr. Lakshmi Kalyanaraman22
23. Commercial paperAn unsecured short-term promissory note issued by a company to raise short-term cash, often to finance working capitalGenerally not actively traded as unsecuredCredit ratings are obtainedDr. Lakshmi Kalyanaraman23
24. Negotiable certificates of depositA bank-issuedFixed maturityInterest-bearing time deposit That specifiesAn interest rate and maturity dateIs negotiableDenominations range from $100,000 to $10 million.Dr. Lakshmi Kalyanaraman24
25. Negotiable certificates of depositBearer instrument:An instrument in which the holder at maturity receives the principal and interest.Dr. Lakshmi Kalyanaraman25
26. Banker’s acceptancesA time draft payable to a seller of goods, with payment guaranteed by a bankDr. Lakshmi Kalyanaraman26
27. Comparison of money market securitiesCommon features:Large denominationsLow default riskShort maturitiesDifferences:LiquidityDr. Lakshmi Kalyanaraman27
28. Money market participantsGovernmentCentral bankCommercial banksMoney market mutual fundsBrokers and dealersCorporationsOther financial institutions like insurance companiesIndividualsDr. Lakshmi Kalyanaraman28
29. Class problemsDr. Lakshmi Kalyanaraman291, 3, 2, 10
30. Home workDr. Lakshmi Kalyanaraman304, 5, 8, 11, 12