Exam 2 Money Markets

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What is the minimum amount to invest in commercial paper?

$100,000

What is the minimum price for negotiable certificates of deposit?

$100,000

What is the maturity on treasury bills?

13 weeks, 26 weeks, 1 year

Treasury Bills

Issued when the U.S. government needs to borrow funds

Types of rating systems

Moody's Investors Service, Standard & Poor's Corporation, and Fitch Investor Service

Who issues commercial paper?

bank holding companies, finance companies, other companies

How is it different from a capital market?

capital markets are securities with longer than one year.

level of secondary market for bankers acceptance?

high

What is the par value for treasury bills?

minimum of $1,000

level of secondary market for negotiable certificates of deposit?

moderate

level of secondary market for federal funds

no secondary market

yield for negotiable certificates of deposit

provide a return in the form of interest along with the difference between the price at which the NCD is redeemed (or sold in the secondary market) and the purchase price.

What are common maturities for repurchase agreements?

1 day to 15 days and for one, three, and six months.

common maturity for commercial paper

1 to 270 days

common maturity for federal funds

1 to 7 days

Maturity for bank acceptances?

30 to 270 days

common maturity for bank acceptances

30 to 270 days

Negotiable Certificates of Deposit

Certificates issued by large commercial banks and other depository institutions as a short-term source of funds.

How are repurchased agreements traded?

Dealers and repo brokers act as financial intermediaries to create repos for firms with deficient or excess funds, receiving a commission for their services

Treasury Bills

Default risk free, interest rate risk, Active secondary market

Risk Premiums among Money Market Securities

During periods of heightened uncertainty, investors shift from risky money market securities to Treasury securities in a flight to quality.

A reverse repo

is the purchase of securities by one party with an agreement to sell them.

Who issues negotiable certificates of deposit?

large banks and savings deposits

What's the primary motivation for investing in money market instruments?

liquidity

level of secondary market for commercial paper?

low

Impact of the Credit Crisis- commercial paper

no longer issued by firms because of concerns that other firms might default and could no longer rely on the commercial paper market for short-term funding.

level of secondary market for repurchasing agreements?

no secondary market

Will you get rich investing in money market instruments?

no the interest rates are low.

How long do maturities last on negotiable certificates of deposit?

range from two weeks to one year.

Repurchase Agreements

represents a loan backed by the securities. one party sells securities to another with an agreement to buy back the securities at a specified date and price.

November 2008

the Fed began to purchase commercial paper issued by highly rated firms to increase liquidity in the commercial paper market.

Where are bank acceptances traded?

the primary and secondary market

Where are repurchasing agreements traded?

through a telecommunications network.

How is commercial paper sold?

through investors and dealers

Why do firms issue commercial paper?

to provide liquidity or to finance a firm's investment in inventory and accounts receivable.

relationship between default risk and price of premiums

vary inversely with economic conditions

are negotiable certificates of deposit liquid?

yes, there is some liquidity because they have a secondary market

Backing Commercial Paper

backed by assets of the issuer and offer lower yield than unsecured commercial paper

Treasury Bill Auction

competitive and non competitive bidding online

Ratings

Serves as an indicator of the potential risk of default.

What are the major characteristics of MM instruments?

Short-Term Maturity, High Quality Issues, Good Liquidity

Commercial Paper

Short-term debt instrument issued by well-known, creditworthy firms and is typically unsecured.

Money market mutual funds

An investment whose objective is to earn interest for shareholders while maintaining a net asset value (NAV) of $1 per share. The portfolio is comprised of short-term (less than one year) securities representing high-quality, liquid debt and monetary instruments. Investors can purchase shares through mutual funds, brokerage firms and banks.

What are types of money market securities?

Treasury Bills, Commercial Paper, Negotiable Certificates Of Deposits, Repurchase Agreements, Federal Funds, Banker's Acceptances

Premium for negotiable certificates of deposit

above the T-bill yield in order to compensate for less liquidity and safety.

What is the money market?

debt securities with a maturity of one year or less

What are the risks of Treasury bills?

default risk

common investors in federal funds

depository institutions

Pricing of commercial paper

does not pay interest and is priced at a discount from par value.

common investors in bank acceptances

firms

common investors in commercial paper

firms

common investors in negotiable certificates of deposits

firms

common investors in repurchase agreements

firms and financial institutions

The Emergency Economic Stabilization Act of 2008

helped to stabilize the money markets

level of secondary market for treasury bills?

high

The yield on commercial paper is..

higher than the yield on a T-bill with the same maturity because of credit risk and less liquidity.

Are treasury bills liquid?

highly liquid, due to short maturity and strong secondary market.

common investors in treasury bills

households, firms, and financial institutions


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