Money Market Instruments

Trearsy bill

(T-bills) industry that the treasury used to fund the short term needs of the US government

federal fund

Banks borrowing money from other banks

Negotiable certificates of deposit CD's

Bigger banks can have CD's that can be sold or traded

Commercial paper (CP)

Corporate Debt: Very high rated companies short term, very low rates Only a back corporation can give out CP's

Treasury Bills and commercial rates are quoted as a discount yields

Discount yields (id) use a 360-day year Pf = the face value of the security P0 = the discount price of the security n = the number of days until maturity

Money market securities use special rate quoting conventions

Discount yields (id): Interest rate is quoted on an annual basis assuming a 360 day year as a percent of redemption price or face value Single payment yields (isp): Interest rate is quoted on an annual basis assuming a 360 day year as a percent of purchase price Exactly the same besides the denominator

Money Market Participants

EVERY ONE is Borrower and Lender The U.S. Treasury The Federal Reserve Commercial banks Money market mutual funds Brokers and dealers Corporations Other financial institutions Individuals

Treasury Bill

Highly liquid to sell in the secondary markets virtually default risk free --> Very wealthy, and big corporations

Money Market Debt

Issued by high quality (low default risk) economic units that require short term funds purchased by economic units that have excess short term funds little or no chance of principal loss low rates of return

Bill, Notes and Bonds (Treasury)

Means one year or less

Money Market Instruments

Original maturities of one year or less Do not have collateral attached to them (active secondary markets to provide liquidity--> can be traded)

Repurchase agreements (RPs*) (Repos)

The only difference between the fed fund/RPs* is that when the bank gives out money they use the money as collateral (They swap money for collateral)

International Money Markets

U.S. dollars held outside the U.S. are tracked among multinational banks in the Eurodollar market The rate offered for sale on Eurodollar funds is the London Interbank Offered Rate (LIBOR) Eurodollar Certificates of Deposit are U.S. dollar-denominated CDs held in foreign banks Eurocommercial paper (Euro-CP) is issued in Europe and can be in local currencies or U.S. dollars

Negotiable certificate of deposit (CD's)

is a bank issued time deposit that specifies the interest rate and maturity date -Bear instruments and salable in the secondary markets Range form 100,000 to 10 million 1 million is most common

Repurchase agreement

is the sale of a security with an agreement to buy the security back for set price in the future are short-term collateralized loans (typical collateral is U.S. Treasury securities) Similar to a fed fund loan, but collateralized Funds may be transferred over FedWire system If collateralized by risky assets, the repo may involve a 'haircut'

Commercial Paper

is unsecured short term corporate debt issued to raise short term funds (Eg: working capital) Generally sold in large denominations (EG: 100,000 to 1 million ) maturities between 1 and 270 days NO secondary Markets