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13
Repos and Reverses
Repurchase agreements (repos, or RPs) is a form of short-term, usually overnight, borrowing.
The dealer sells government securities to an investor on an overnight basis, with an agreement to buy back those securities the next day at a slightly higher price. A reverse repo: the dealer finds an investor holding government securities and buys them, agreeing to sell them back at a specified higher price on a future date. The repos in China is up to 182 days, often used in open market operation.
Money market instruments: short-term, marketable, liquid, low-risk debt securities.
Also called cash equivalents, or cash for short.
Capital market instruments: longer-term and riskier securities.
12
Eurodollars
Eurodollars are dollar-denominated deposits at foreign banks or foreign branches of American banks (not necessary be in European banks).
14
The LIBOR Market
The London Interbank Offered Rate (LIBOR) is the rate at which large banks in London are willing to lend money among themselves.
8
Treasury Bills
Bid (asked) yield = the interest rate calculated based on the bid (asked) price.
The yield is the bill’s discount rate from par value, annualized based on a 360-day year, and then reported as a percentage of par value. (Bankdiscount method) Ex: A t-bill with $10,000 par value, days to maturity = 90 days, and bid yield=4.91%. What is the bid price? 4.91%*(90/360)=1.2275% Bid price = 10,000*(1-0.012275)=$9,877.25
4
Treasury Bills
T-bills are highly liquid, i.e. they are easily converted to cash and sold at low transaction cost and with not much price risk. T-bills are issued with initial maturities of 28, 91, 182, or 364 days. The minimum denominations is $wenku.baidu.com00. The income earned on T-bills is exempt from all state and local taxes, another characteristic distinguishing bills from other money market instruments.
It is tied to different currencies, such as US dollar, British pounds, yen, euros, and so on. EURIBOR (European Interbank Offered Rate) at which banks in the euro zone are willing to lend euros among themselves.
16
Figure 2.3 The Spread between 3-month CD and Treasury Bill Rates
3
Treasury Bills
US T-bills are the most marketable of all money market instruments.
The government raises money by selling bills to the public. Investors buy the bills at a discount from the stated maturity value. At the bill’s maturity, the holder receives from the government a payment equal to the face value of the bill.
Firms also issue Eurodollar bonds, which are dollar-denominated bonds outside the US. Yankee bond is a bond denominated in U.S. dollars that is publicly issued in the U.S. by foreign banks and corporations. Panda bond is a Chinese RMB-denominated bond from a non-Chinese issuer, sold in China.
This rate has become the premier short-term interest rate quoted in the European money market, and serves as a reference rate for a wide range of transactions.
15
Yields on Money Market Instruments
Money market instruments are not risk-free. They promise yields greater than those on default-free T-bills.
The spread increased with economic crises, such as oil price shocks and subprime crisis in 2007.
Bid price = 10,000*[1-0.045*(6/360)] = 9,992.5 Asked price = 10,000*[1-0.0449*(6/360)] = 9,992.517 Ask yield = [(10,000/9,992.517)-1]*(365/6) = 0.0456 (= 4.56%)
7
Treasury Bills
Change = the difference between the present day’s listed bid and the preceding day’s bid, in hundredths of a percentage point.
Ex: If the current bid = 4.91%, and CHG=-0.01 means that the discount rate of return on the previous day’s bid was 4.92%.
Ask yield = the yield for an investor who buys the bill for the asked price and holds it until maturity (T-bill’s bond-equivalent yield).
Ask yield = (10,000/9877.25)-1=0.0124 – for 90 days 1.24%*(365/90)=5.03% – for a 365-day year.
5
Figure 2.2 Treasury Bill Yields
6
Treasury Bills
Asked price = the price you would have to pay to buy a T-bill from a securities dealer. Bid price= the price you would receive if you wanted to sell a bill to a dealer. Bid price is slightly lower than the asked price. Bid-asked spread = Asked price-bid price, i.e. the dealer’s source of profit.
Includes longer-term bond markets, equity markets, and the derivative markets for options and futures.
2
The Money Market Instruments
Treasury bills Certificates of Deposits Commercial Paper Bankers Acceptances Eurodollars Repurchase Agreements (RPs) and Reverse RPs Brokers’ Calls Federal Funds LIBOR Market
Class 1
Asset Classes and Financial Instruments
Alice Ouyang
1
Major Classes of Financial Assets or Securities
Financial markets are traditionally segmented into money markets and capital markets.
10
Figure 2.2 Treasury Bill Yields
11
Example
A t-bill with DTM=6 days, bid yield=4.5%, and asked yield= 4.49%, what are the bid and asked prices, and ask yield (assumed that the par-value = $10,000)?
9
Treasury Bills
If a T-bill’s days to maturity = 90 days, parvalue=$10,000, asked yield=4.9%, what are the asked prices of this t-bill?
Asked price =10,000*[1-0.0491*(90/360)]=$9877.5
Repos and Reverses
Repurchase agreements (repos, or RPs) is a form of short-term, usually overnight, borrowing.
The dealer sells government securities to an investor on an overnight basis, with an agreement to buy back those securities the next day at a slightly higher price. A reverse repo: the dealer finds an investor holding government securities and buys them, agreeing to sell them back at a specified higher price on a future date. The repos in China is up to 182 days, often used in open market operation.
Money market instruments: short-term, marketable, liquid, low-risk debt securities.
Also called cash equivalents, or cash for short.
Capital market instruments: longer-term and riskier securities.
12
Eurodollars
Eurodollars are dollar-denominated deposits at foreign banks or foreign branches of American banks (not necessary be in European banks).
14
The LIBOR Market
The London Interbank Offered Rate (LIBOR) is the rate at which large banks in London are willing to lend money among themselves.
8
Treasury Bills
Bid (asked) yield = the interest rate calculated based on the bid (asked) price.
The yield is the bill’s discount rate from par value, annualized based on a 360-day year, and then reported as a percentage of par value. (Bankdiscount method) Ex: A t-bill with $10,000 par value, days to maturity = 90 days, and bid yield=4.91%. What is the bid price? 4.91%*(90/360)=1.2275% Bid price = 10,000*(1-0.012275)=$9,877.25
4
Treasury Bills
T-bills are highly liquid, i.e. they are easily converted to cash and sold at low transaction cost and with not much price risk. T-bills are issued with initial maturities of 28, 91, 182, or 364 days. The minimum denominations is $wenku.baidu.com00. The income earned on T-bills is exempt from all state and local taxes, another characteristic distinguishing bills from other money market instruments.
It is tied to different currencies, such as US dollar, British pounds, yen, euros, and so on. EURIBOR (European Interbank Offered Rate) at which banks in the euro zone are willing to lend euros among themselves.
16
Figure 2.3 The Spread between 3-month CD and Treasury Bill Rates
3
Treasury Bills
US T-bills are the most marketable of all money market instruments.
The government raises money by selling bills to the public. Investors buy the bills at a discount from the stated maturity value. At the bill’s maturity, the holder receives from the government a payment equal to the face value of the bill.
Firms also issue Eurodollar bonds, which are dollar-denominated bonds outside the US. Yankee bond is a bond denominated in U.S. dollars that is publicly issued in the U.S. by foreign banks and corporations. Panda bond is a Chinese RMB-denominated bond from a non-Chinese issuer, sold in China.
This rate has become the premier short-term interest rate quoted in the European money market, and serves as a reference rate for a wide range of transactions.
15
Yields on Money Market Instruments
Money market instruments are not risk-free. They promise yields greater than those on default-free T-bills.
The spread increased with economic crises, such as oil price shocks and subprime crisis in 2007.
Bid price = 10,000*[1-0.045*(6/360)] = 9,992.5 Asked price = 10,000*[1-0.0449*(6/360)] = 9,992.517 Ask yield = [(10,000/9,992.517)-1]*(365/6) = 0.0456 (= 4.56%)
7
Treasury Bills
Change = the difference between the present day’s listed bid and the preceding day’s bid, in hundredths of a percentage point.
Ex: If the current bid = 4.91%, and CHG=-0.01 means that the discount rate of return on the previous day’s bid was 4.92%.
Ask yield = the yield for an investor who buys the bill for the asked price and holds it until maturity (T-bill’s bond-equivalent yield).
Ask yield = (10,000/9877.25)-1=0.0124 – for 90 days 1.24%*(365/90)=5.03% – for a 365-day year.
5
Figure 2.2 Treasury Bill Yields
6
Treasury Bills
Asked price = the price you would have to pay to buy a T-bill from a securities dealer. Bid price= the price you would receive if you wanted to sell a bill to a dealer. Bid price is slightly lower than the asked price. Bid-asked spread = Asked price-bid price, i.e. the dealer’s source of profit.
Includes longer-term bond markets, equity markets, and the derivative markets for options and futures.
2
The Money Market Instruments
Treasury bills Certificates of Deposits Commercial Paper Bankers Acceptances Eurodollars Repurchase Agreements (RPs) and Reverse RPs Brokers’ Calls Federal Funds LIBOR Market
Class 1
Asset Classes and Financial Instruments
Alice Ouyang
1
Major Classes of Financial Assets or Securities
Financial markets are traditionally segmented into money markets and capital markets.
10
Figure 2.2 Treasury Bill Yields
11
Example
A t-bill with DTM=6 days, bid yield=4.5%, and asked yield= 4.49%, what are the bid and asked prices, and ask yield (assumed that the par-value = $10,000)?
9
Treasury Bills
If a T-bill’s days to maturity = 90 days, parvalue=$10,000, asked yield=4.9%, what are the asked prices of this t-bill?
Asked price =10,000*[1-0.0491*(90/360)]=$9877.5