Markfin MA2

• Money Markets


  Used to facilitate the transfer of short-term funds from individuals, corporations, or governments with excess funds to those with deficient funds
• Characteristics of money market securities


  • Sold in large denominations
  • Have low default risk
  • Mature in one year or less from their original issue date
• Money market transactions do not take place in any one particular location or building. Instead, traders usually arrange purchases and sales between participants over the phone and complete them electronically.
• Money market securities usually have an active secondary market, which makes them very flexible instruments to use to fill short-term financial needs.
• Purpose of Money Markets


  • Provide a low-cost source of funds to firms, the government, and intermediaries that need a short-term infusion of funds
  • Allow investors to "warehouse" surplus funds until they are needed
• Primary money market players


  • Treasury Department
  • Federal Reserve System
  • Commercial banks
  • Businesses
  • Investment and securities firms
  • Individuals
• Treasury Department's role


  • Always a demander of money market funds and never a supplier
  • Issues Treasury bills and other securities
• Federal Reserve's role


  • Holds vast quantities of Treasury securities that it sells or purchases to influence interest rates
  • Responsible for controlling the economy through open market operations
• Commercial banks' role


  • Hold a percentage of government securities second only to pension funds
  • Major issuers of negotiable certificates of deposit, bankers' acceptances, federal funds, and repurchase agreements
• Businesses' role


  Buy and sell securities in the money markets, usually limited to major corporations due to the large dollar amounts involved
• Investment and securities firms' role


  Large diversified brokerage firms that are active in the money markets, serving as "market makers" for money market securities
• Finance companies' role


  Raise funds in the money markets primarily by selling commercial paper, then lend the funds to consumers for the purchase of durable goods
• Insurance companies' role


  Maintain liquidity by investing in money market securities to meet unpredictable demands for funds
• Pension funds' role


  Invest a portion of their cash in the money markets to take advantage of investment opportunities in the stock or bond markets, while maintaining sufficient liquidity to meet their obligations
• Individuals' role


  Invest in money market instruments, such as money market mutual funds, to earn higher returns than on bank deposits
• Money Market Instruments


  • Treasury Bills
  • Eurodollars
  • Federal Funds
  • Repurchase Agreements
  • Negotiable Certificates of Deposit
  • Commercial Paper
  • Bankers' Acceptances

  
• Treasury Bills


  • Peso-denominated short-term fixed-income securities issued by the Republic of the Philippines
  • Investors earn yield from the increase in value between purchase and maturity
• Eurodollars


  Bank deposit liabilities denominated in U.S. dollars but not subject to U.S. banking regulations
• Federal Funds


  • Short-term funds transferred (loaned or borrowed) between financial institutions, usually for a period of one day
  • Used by banks to meet reserve requirements set by the Federal Reserve
• Repurchase Agreements (Repos)


  • Collateralized short-term loans, where a firm sells Treasury securities with an agreement to buy them back at a specified future date
  • Used by securities dealers to manage liquidity and take advantage of interest rate changes
  • Also used by the Federal Reserve to adjust bank reserves for monetary policy
• Negotiable Certificates of Deposit (CDs)


  • Bank-issued securities that document a deposit and specify the interest rate and maturity date
  • Can be bought and sold until maturity
• Commercial Paper


  • Unsecured promissory notes issued by corporations, maturing in no more than 270 days
  • Interest rate reflects the issuer's level of risk
• Bankers' Acceptances


  Orders to pay a specified amount of money to the bearer on a given date, used to finance goods that have not yet been transferred from the seller to the buyer
• Money market securities share many characteristics, such as liquidity, safety, and short maturities, but they all differ in some aspects.
• Money market instruments appear to move very closely together over time in terms of interest rates, due to their low risk and short term, as well as their deep markets.

  
• Bankerʼs acceptance


  A bank can intervene in a standoff between a buyer and seller by issuing a bankerʼs acceptance
• Bankerʼs acceptances are used to finance goods that have not yet been transferred from the seller to the buyer
• Money market securities


  • They share characteristics such as liquidity, safety, and short maturities
  • They all differ in some aspects
• Interest rates of money market instruments


  They appear to move very closely together over time
• Liquidity of a security


  How quickly, easily, and cheaply it can be converted into cash
• The depth of the secondary market where the security can be resold determines its liquidity
• Liquidity of securities


  • Treasury bills have an extensive and well-developed secondary market, so they can be converted into cash quickly and with little cost
  • There is no well-developed secondary market for commercial paper, so most holders hold the securities until maturity

  
• The depth of the secondary market is not as critical for money market securities as it is for long-term securities such as stocks and bonds
• Many investors desire liquidity intervention: They seek an intermediary to provide liquidity where it did not previously exist
• Pricing money market securities


  1. Determine the yield required

  2. Compute the present value of the future maturity value

  
• As interest rates rise


  The current price of the security will decrease
• Money market securities


  • Treasury Bills
  • Federal Funds
  • Repurchase Agreements
  • Negotiable Certificates of Deposits
  • Commercial Paper
  • Banker's Acceptance
  • Eurodollar deposits

  
• Bonds


  • Securities that represent a debt owed by the issuer to the investor
  • Obligate the issuer to pay a specified amount at a given date, generally with periodic interest payments
• Treasury securities

  • Treasury Bills
  • Treasury Notes
  • Treasury Bonds
• Treasury Inflation-Protected Securities (TIPS)


  Bonds with an interest rate that does not change, but the principal amount used to compute the interest payment does change based on the consumer price index