introduction to money markets
TRANSCRIPT
INTRODUCTION TO MONEY MARKETSDR SHANTHA P YAHANPATH
MONEY MARKET SECURITIES
•Treasury Bills
•Commercial paper
•Negotiable certificates of deposits
•Repurchase agreements
•Federal funds
•Banker’s acceptances
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MONEY MARKET PARTICIPANTS
•Commercial banks
•Finance, industrial, and service companies
•Federal and state governments
•Money market mutual funds
•All other financial institutions (investing)
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TREASURY BILLS
• Issued to meet the short-term needs of
the U.S. government
•Attractive to investors • Minimal default risk—backed by Federal Government
• Excellent liquidity for investors
• Short-term maturity
• Very good secondary market
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COMPETITIVE BIDDING PROCESS
•Treasury bill auction (fill bids in amount determined by
Treasury borrowing needs)
• Bid process used to sell T-bills
• Bids submitted to Federal Reserve banks by the deadline
• Bid process
• Accepts highest bids
• Accepts bids until Treasury needs generated
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NON-COMPETITIVE BIDDING
• Treasury bill auction—noncompetitive bids
($1 million limit)
•May be used to make sure bid is accepted
• Price is the weighted average of the accepted competitive bids
• Investors do not know the price in advance so they submit cheque
for full par value
• After the auction, investor receives cheque from the Treasury
covering the difference between par and the actual price
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ESTIMATING T-BILL YIELD
•No coupon payments
• Par or face value received at maturity
• Yield at issue is the difference between the selling
price and par or face value adjusted for time
• If sold prior to maturity in secondary market
•Yield based on the difference between price
paid for T-bill and selling price adjusted for time
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T-BILL YIELD
Return on T-Bill (or Treasury Bill)
YT =S – P
P
365
n
YT = yield from investing in a T-bill
S = selling price
P = purchase price
n = number of days of the investment (holding
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COMMERCIAL PAPER
•Alternative to bank loan
•Dealer placed vs. directly placed
•Used only by well-known and creditworthy firms
•Unsecured
•Minimum denominations of $100,000
•Short-term debt instrument
•Not a large secondary market
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COMMERCIAL PAPER BACKED BY BANKS
•Bank line used if company loses credit
rating
•Bank lends to pay off commercial paper
•Bank charges fees for guaranteed line of
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NEGOTIABLE CERTIFICATE OF DEPOSIT
• Issued by large commercial banks
•Minimum denomination of $100,000 but $1
million more common
•Purchased by nonfinancial corporations or
money market funds
•Secondary markets supported by dealers in
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MONEY MARKET FUNDS
Funds that invests in money market securities:
• http://www.franklintempletonindia.com/en_IN/investor/investor-education/fund-
basics/money-market-funds
• https://www.vanguardinvestments.com.au/adviser/adv/investments/fund-
detail/funddetailVCPIF.jsp
• http://www.westpac.com.au/personal-banking/investments/read-up-on/cash-short-
term-securities-fund/
• http://www.sec.gov/spotlight/money-market.shtml
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SUMMARY
•Money market instruments meet the demand
for short-term funds
•Offer good liquidity
•Offer good security
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