Part IV Financial Markets Chapter Eight The Money Markets.

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  • Slide 1
  • Slide 2
  • Part IV Financial Markets
  • Slide 3
  • Chapter Eight The Money Markets
  • Slide 4
  • Slide 84 The Money Markets Money Markets Defined 1.Money market securities are usually sold in large denominations 2.They have low default risk 3.They mature in one year or less from their issue date
  • Slide 5
  • Slide 85 Purpose of Money Markets Investors in Money Market: Provides a place for warehousing surplus funds for short periods of time Borrowers from money market provide low-cost source of temporary funds
  • Slide 6
  • Slide 86 Interest Rates Available on Several Money Market Instruments
  • Slide 7
  • Slide 87 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)
  • Slide 8
  • Slide 88 Money Market Instruments Treasury Bills Federal Funds Repurchase Agreements Negotiable Certificates of Deposit Commercial Paper Bankers Acceptance Eurodollars
  • Slide 9
  • Slide 89 Treasury Bills 1.Short-term borrowings of the federal government 2.Usually sold at discount
  • Slide 10
  • Slide 810 Discounting Example You pay $9850 for a 91-day T-bill. It is worth $10,000 at maturity. What is its annualized yield? (1)
  • Slide 11
  • Slide 811 Results of a Treasury Auction
  • Slide 12
  • Slide 812 Figure 8-1: Treasury Bill Interest Rate and the Inflation Rate, January 1973January 2002 Current inflation statistics ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt
  • Slide 13
  • Slide 813 Federal Funds Short-term funds transferred (loaned or borrowed) between financial institutions, usually for a period of one day
  • Slide 14
  • Slide 814 Federal Funds Figure 8.2: Federal Funds and Treasury Bill Interest Rates, January 1990January 2002
  • Slide 15
  • Slide 815 Negotiable Certificates of Deposit A bank-issued security that documents a deposit and specifies the interest rate and the maturity date Denominations range from $100,000 to $10 million
  • Slide 16
  • Slide 816 Negotiable Certificates of Deposit Comparing Interest on CDs and T-bills Figure 8.3: Interest Rates on Negotiable Certificates of Deposit and on Treasury Bills, January 1990January 2002
  • Slide 17
  • Slide 817 Commercial Paper Unsecured promissory notes, issued by corporations, that mature in no more than 270 days
  • Slide 18
  • Slide 818 Figure 8.4: Return on Commercial Paper and the Prime Rate, January 1990January 2002 Commercial Paper Comparing Interest on Commercial Paper to Bank Prime Rate
  • Slide 19
  • Slide 819 Bankers Acceptances An order to pay a specified amount to the bearer on a given date if specified conditions have been met, usually delivery of promised goods
  • Slide 20
  • Slide 820 Advantages to Bankers 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.Importers bank guarantees payment 5.Crucial to international trade
  • Slide 21
  • Slide 821 Eurodollars Dollar denominated deposits held in foreign banks
  • Slide 22
  • Slide 822 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
  • Slide 23
  • Slide 823 Figure 8-6: Interest Rates on Money Market Securities, 19902002 Interest rates on money market instruments http://www.federalreserve.gov/releases http://www.federalreserve.gov/releases
  • Slide 24
  • Slide 824 Money Market Securities and Their Depth
  • Slide 25
  • Slide 825 Money Market Mutual Funds Open-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 checks No 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
  • Slide 26
  • Slide 826 Growth in Money Market Mutual Funds Figure 8.7: Net Assets of Money Market Mutual Funds, 19752000
  • Slide 27
  • Slide 827 Money Market Fund Assets Figure 8.8: Average Distribution of Money Market Fund Assets, 2001

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