Chapter 7Money Markets(金融市场学)

Money Market Securities
Federal Funds
Interbank lending and borrowing Federal funds rate usually slightly higher than Tbill 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

Exhibit 6.5
1 Purchase Order
Importer
5
Exporter
Shipment of Goods
L/C (Letter of Credit) Application
2
4
3
L/C
American Bank (Importer’s Bank)
7 Shipping Documents & Time Draft Draft Accepted (B/ACreated)

Money Market Securities

Treasury bills
Issued to meet the short-term needs of the U.S. government Attractive to investors

default risk—backed by Federal Government Excellent liquidity for investors
Minimal


Short-term maturity Very good secondary market
Money Market Securities
Competitive Bidding

Treasury bill auction (fill bids in amount determined by Treasury borrowing needs)
Money Market Securities
Noncompetitive Bidding

Treasury bill auction—noncompetitive 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

Money Market Securities

Estimating repurchase agreement yields
SP – PP
Repo Rate =
PP

360
n
Repo Rate = Yield on the repurchase agreement SP = Selling price PP = Purchase price n = number of days to maturity
SP – PP
YT =
PP

365
n
YT = The annualized yield from investing in a T-bill SP = Selling price PP = Purchase price n = number of days of the investment (holding period)
Money Market Securities
Commercial Paper
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


NCD premiums

Rate above T-bill rate to compensate for lower liquidity and safety
Money Market Securities
Repurchase Agreements
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
CHAPTER
7
Money Markets
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

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
Money Market Securities

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
Money Market Securities

Calculating T-Bill Annualized Yield
Money Market Securities

T-bill yield for a newly issued security
Par – PP
T-bill discount =
PP

360
nBaidu Nhomakorabea
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
Japanese Bank (Exporter’s Bank)
Shipping Documents & Time Draft 6
L/C Notification
Money Market Securities
Bankers Acceptance
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

Money Market Securities

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

Money Market Securities

Estimating commercial paper yields
Par – PP
YCP =
PP

360
n
YCP = Commercial paper yield Par = Face value at maturity PP = Purchase price n = number of days to maturity

Money Market Securities
Treasury Bills Commercial paper Negotiable certificates of deposits Repurchase agreements Federal funds Banker’s acceptances
Money Market Securities
Negotiable Certificates of Deposit (NCD)
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
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

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