Exam 2 Money Markets
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