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Chapter Nine

THE MONEY MARKETS

Part IV Financial Markets

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The Money Markets

Money market securities are usually sold in large denominations.

They have low default risk.

They mature in one year or less from their issue date.

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Interest Rates Available on Several Money Market Instruments

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Participants in Money Markets

U.S. Treasury Department

Federal Reserve System

Commercial Banks

Businesses

Investment and Securities Firms

Individuals (mostly through money market mutual funds)

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Money Market Instruments

Treasury Bills

Federal Funds

Repurchase Agreements

Negotiable Certificates of Deposit

Commercial Paper

Banker’s Acceptance

Eurodollars

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Results of a Treasury Auction

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Treasury Bill Rate and Inflation Rate, 1973-1995

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Federal Funds

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Negotiable Certificates of Deposit Comparing Interest Rates on CDs and T-bills

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Commercial PaperCompare Interest on Commercial Paper to Bank Prime Rate

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Advantages to Banker’s Acceptances

1. Exporter paid immediately.

2. Exporter shielded from foreign exchange risk.

3. Exporter does not have to assess the financial security of the importer.

4. Importer’s bank guarantees payment.

5. Crucial to international trade.

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Eurodollars

London interbank bid rate (LIBID)

The rate paid by banks buying funds

London interbank offer rate (LIBOR)The rate offered for sale of the funds

Time deposits with fixed maturities

Largest short term security in the world

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Interest Rates on Money Market Instruments

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Money Market Securities and Their Depth

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Money Market Mutual FundsOpen-end investment funds that invest only in

short-term securities.No fee for purchasing or redeeming shares.Minimum initial investment of $500 to $20,000.Check-writing privileges.

No fee for writing checksNo minimum check amount

Earn 0.5% to 1% higher return than interest earned on money in the bank.

Low risk of default, low rate of risk.Popular to small investors.

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Growth in Money Market Mutual Funds

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Money Market Fund Assets