CHAPTER 11 (322)

what purpose initially motivated Merrill Lynch to offer money market mutual funds to its customers?

Merrill Lynch initially felt is could better service its regular customers by making it easier to buy and sell securities from an account held at the brokerage house. The brokerage could offer a market interest rate on these funds by investing them in the money markets.

distinguish between competitive bidding and non-competitive bidding for treasury securities

a treasury auction will sell a certain face amount of securities. the non-competitive bids will all settle at the yield dictated by the auction. thus, the face amount of non-competitive bids are removed from the total amount to be auctioned by competitive bid. the competitive bids are ranked according to yield and the auction is settled at the lowest yield for which there are enough bids at a lower yield to clear the remaining auction amount. winning competitive and non-competitive bids are settled at this yield.

why are banker;s acceptances so popular for international transactions?

banker's acceptances substitute the credit worthiness of a bank for that of a business. when a company sells a product to a company it is unfamiliar with, it often prefers to have the promise of a bank that payment will be made.

why do banks not eliminate the need for money markets?

banks have higher costs than the money market owing to the need to maintain reserve requirements. the lower cost structure of the money markets, coupled with the economies of scale resulting from high volume and large-denomination securities, allows for higher interest rates.

why do businesses use the money market?

businesses both invest and borrow in the money markets. they borrow to meet short-term cash flow needs, often by issuing commercial paper. they invest in all types of money market securities as an alternative to holding idle cash balances

what characteristics define the money markets?

can be characterized as having securities that trade in one year or less, are one of large denomination, and are very liquid

who issues federal funds, and what is the usual purpose of these funds?

federal funds are sold by banks to other banks. they're used to invest excess reserves and to raise reserves is a bank is short

what motivates regulators to impose interest ceilings on bank savings accounts? what effect did this eventually have on the money markets?

following the great depression, regulators were primarily concerned with stopping banks from failing. by removing interest-rate competition, bank risk was substantially reduced. the problem with these regulations was that when market interest rates rose above the established interest-rate ceiling, investors withdrew their funds from banks.

who issues commercial paper and for what purpose?

large businesses with very good credit standings sell commercial paper to raise short term funds. the most common use of these funds is to extend short term funds. the most common use of these funds is to extend short-term loans to customers for the purchase of the firm;s products.

why are more funds from property and casualty insurance companies than funds from life insurance companies invested in the money markets?

life insurance companies can invest for the long term because the timing for their liabilities is known with reasonable accuracy. property and casualty insurance companies cannot predict the natural disasters that cause large payouts on policies.

distinguish between a term security and a demand security.

term securities have a specific maturity date. demand securities can be redeemed at any time. a six-month certificate of deposit is a term security. a checking account is a demand security.

why does the US government use the money market?

the US government sells large numbers of securities in the money markets to support government spending. over the past several decades, the government has spent more each year than it has received in tax revenues. it makes up the difference by borrowing. part of what it borrows comes from the money markets.

is a treasury bond issued 29 years ago with 6 months remaining before it matures a money market instrument?

the bond would not be considered a money market security because money market securities have an original maturity of less than a year.

does the federal reserve directly set the federal funds interest rate? how does the fed influence this rate?

the federal reserve cannot directly set the federal funds rate of interest. it can influence the interest rate by adding funds to or withdrawing reserves from the economy.

which of the money market securities is the most liquid and considered the most risk-free? why?

treasury bills are usually viewed as the most liquid and least risky of securities because they're backed by the strength of the US government and trade in extremely large volumes