Fin 3323 Chpt 5 Money Markets

Activity in money markets increased significantly in the late 1970s and early 1980s because

- rising short-term interest rates
- regulations that limited what banks could pay for deposits.

Money Market securities are:

- short-term
- low risk
- very liquid

The banking industry

- should have an efficiency advantage in gathering info that should eliminate the need for the money markets
- exists primarily to mediate the asymmetric information problem between saver-lenders and borrower-spenders
- subject to more regulations and gov

In situations where the asymmetric information problem is not severe:

the money markets have a distinct cost advantage over banks in providing short-term funds

Brokerage firms that offered money market security accounts in the 1970s had a cost advantage over banks in attracting funds because the brokerage firms

- were subject to deposit reserve requirements
- were not subject to deposit interest rate ceilings

Money Markets

Markets that trade debt securities or instruments with maturities of less than one year
- not all commercial banks deal for their customers in the secondary market
- used extensively by businesses both to warehouse surplus funds and to raise short-term fu

most influential participant in the U.S. Money Market

- the Federal Reserve

The primary function of large diversified brokerage firms in the money market is to

make a market for money market securities by maintaining an inventory form which to buy or sell

Finance Companies rase funds in the money market by selling

Commercial Paper

Finance companies play a unique role in money markets by

giving consumers indirect access to money markets

Money market instruments issued by the U.S. Treasury are called..

Treasury Bills

Treasury auctions 91-day and 182-day treasury bills once a week. it auctions 52 week bills..

once a month

Treasury Bills

- The market for Treasury Bills is extremely deep and liquid
- Occasionally, investors find that earnings on T-Bills do not compensate then for changes in purchasing power due to inflation

a competitive bid for a treasury bill is successful when..

- when you pay more than if you had submitted a noncompetitive bid

a noncompetitive bid for a treasury bill is successful when..

- you pay the same as other successful noncompetitive bidders

Federal Funds

Short-term funds transferred between financial institutions, usually for a period of one day
- actually have nothing to do with the federal government
- provide banks with an immediate infusion of reserves should they be short
- usually overnight investme

The Fed can influence the federal funds interest rate by adjusting the level of reserves available to banks in the system. The Fed can..

- Lower the federal funds interest rate by adding reserves
- raise the federal funds interest rate by removing reserves
- remove reserves by selling securities

The Federal Reserve can influence the federal funds interest rate by..

buying securities which adds reserves, thereby lowering the federal funds rate.

The Fed can lower the federal funds interest by

buying securities, thereby adding reserves

If the Fed wants to lower the federal funds interest rate, it will..

add reserves to the banking system by buying securities

If the Fed wants to raise the federal funds interest rate, it will

sell securities to remove reserves from the banking system

Government securities dealers frequently engage in repos to

- manage liquidity
- take advantage of anticipated changes in interest rates
-lend or borrow for a day or two with what is essentially a collateralized loan

Repos

- usually low risk loans
- usually collateralized with Treasury Securities
- Low interest rate loans

Negotiable certificate of deposit

- a bank-issued, fixed maturity;
- interest bearing time deposit that specifies an interest rate
- maturity date and is negotiable
- can be bought and sold until maturity
- is a bearer instrument, meaning whoever holds the certificate at maturity receives

Commercial Paper Securities

An unsecured short-term promissory note issued by a company to raise short-term cash, often to finance working capital requirements
- are issued only by the largest and most creditworthy corporations , as they are unsecured
- carry an interest rate that v

Banker's Acceptance

A time draft payable to a seller of goods, with payment guaranteed by a bank
- used to finance goods that have not yet been transferred from seller to the buyers
- an order to pay a specified amount of money to the bearer on a given date
- can be bought a

Eurodollar Market

The market where Eurodollars trade
Eurodollars:
- are time deposits with fixed maturities and are, therefore somewhat illiquid
-offer the borrower a lower interest rate than can be received in the domestic market

Money Market Securities

- the interest rates on all money market instruments move very closely together over time
- The secondary market for Treasury Bills is extensive and well developed
- There is no well-developed secondary market for commercial paper

Money market mutual funds

are funds that aggregate money from a group of small investors and invest in money market instruments
- have grown enormously popular since their inception in the early 1970s
- received flood of funds in the early 1980s as depositors withdrew their funds

Money market mutual funds

- Commercial paper is by far the largest component of these funds
- Although investors know that MMMFs are not investors a higher return than is available from banks

Money Market securities are short-term instruments with an original maturity of less than one year

TRUE

Money Market securities include:

- Treasury Bills
- Commercial Paper
- Federal funds
- Repurchase agreements
- negotiable certificates of deposit
- banker's acceptance
- Eurodollars

The term money markets is actually a misnomer, b/c liquid securities are traded in these market rather than money

FALSE

Money markets are referred to as a retail markets because small individual investors are the primary buyers of money market securities

FALSE

The U.S. Treasury Dept. is the single most influential participant in the U.S. Money market

FALSE

Banks are unusual participants in the money market b/c they buy, but do not sell, money market instruments

FALSE

Money markets are used extensively by businesses both to warehouse surplus funds and to raise short-term funds.

TRUE

The market for U.S. Treasury Bills is a shallow market b/c so few individual investors buy t-bills

FALSE

T-Bill is not an investment to be used for anything but temporary storage of excess funds because it barely keeps up with inflation

TRUE

The main purpose for federal funds is to provide banks with an immediate infusion of reserves should they be short

TRUE

The Fed can influence the federal funds rate by adjusting the level of reserves in the banking system

TRUE

Commercial Paper securities are unsecured promissory notes, issued by corporations, that mature in no more than 270 days

TRUE

A banker's acceptance is an order to pay a specified amount of money to the bearer on given date. Banker's acceptances have been used since the twelfth century

TRUE

Interest rates on banker's acceptances are low because the risk of default is very low

TRUE

Opportunity Cost

The forgone interest cost from holding the cash balances when they are recieved

Default risk

the risk of late or nonpayment of principal or interest

Treasury Bills

Short-term obligations of the U.S. government issued to cover government budget deficits and to refinance maturing government debt.

Treasury bill auctions

the formal process by which the U.S. Treasury sells new issues of Treasury Bills

Federal fund Rate

The interest rate for borrowing federal funds

Correspondent Banks

Banks with reciprocal accounts and agreements

repurchase agreement

an agreement involving the sale of securities by one party to another with a promise to repurchase the securities at a specified price and on a specified date

Reverse repurchasing agreement

an agreement involving the purchase of securities by one party from another with the promise to sell them back

Bearer Instrument

an instrument in which the holder at maturity receives the principle and interest

London Interbank Offered Rate (LIBOR)

the rate paid on Eurodollars

Eurodollar CDs

Dollar-denominated deposits in non-U.S. banks

Eurocommercial Paper

Eurosecurities issued in Europe by dealers of commercial paper without involving a bank

Activity in money markets increased significantly in the late 1970s and early 1980s because

=- rising Short-term interest Rates
- regulations that limited what banks could pay for deposits.

Money Market securities are:

=- Short-term
- low risk
- very Liquid

The banking industry

=- should have an efficiency advantage in Gathering info that should eliminate the need for the money markets
- exists primarily To mediate the asymmetric information problem between saver-Lenders and borrower-spenders
- subject To more regulations and gov

In situations where the asymmetric information problem is not severe:

the money markets have a distinct cost advantage over banks in providing short-term funds

Brokerage firms that offered money market security accounts in the 1970s had a cost advantage over banks in attracting funds because the brokerage firms

=- were subject To deposit Reserve requirements
- were not subject To deposit interest rate ceilings

Money Markets

Markets that trade debt securities or instruments with maturities of less than one year
- not all commercial banks deal for their customers in the secondary market
- used extensively by businesses both to warehouse surplus funds and to raise short-term fu

most influential participant in the U.S. Money Market

=- the federal Reserve

The primary function of large diversified brokerage firms in the money market is to

make a market for money market securities by maintaining an inventory form which to buy or sell

Finance Companies rase funds in the money market by selling

Commercial Paper

Finance companies play a unique role in money markets by

giving consumers indirect access to money markets

Money market instruments issued by the U.S. Treasury are called..

Treasury Bills

Treasury auctions 91-day and 182-day treasury bills once a week. it auctions 52 week bills..

once a month

Treasury Bills

=- the market for Treasury bills Is extremely deep and Liquid
- Occasionally, investors find that Earnings on T-bills do not compensate then for changes in Purchasing power due To inflation

a competitive bid for a treasury bill is successful when..

=- when you pay more than if you had submitted a noncompetitive bid

a noncompetitive bid for a treasury bill is successful when..

=- you pay the same as other successful noncompetitive bidders

Federal Funds

Short-term funds transferred between financial institutions, usually for a period of one day
- actually have nothing to do with the federal government
- provide banks with an immediate infusion of reserves should they be short
- usually overnight investme

The Fed can influence the federal funds interest rate by adjusting the level of reserves available to banks in the system. The Fed can..

=- lower the federal funds interest rate by adding reserves
- raise the federal funds interest rate by removing reserves
- remove reserves by selling Securities

The Federal Reserve can influence the federal funds interest rate by..

buying securities which adds reserves, thereby lowering the federal funds rate.

The Fed can lower the federal funds interest by

buying securities, thereby adding reserves

If the Fed wants to lower the federal funds interest rate, it will..

add reserves to the banking system by buying securities

If the Fed wants to raise the federal funds interest rate, it will

sell securities to remove reserves from the banking system

Government securities dealers frequently engage in repos to

=- manage liquidity
- take advantage of anticipated changes in interest Rates
-lend or borrow for a day or two with what Is essentially a collateralized loan

Repos

=- Usually low risk loans
- Usually collateralized with Treasury Securities
- low interest rate loans

Negotiable certificate of deposit

- a bank-issued, fixed maturity;
- interest bearing time deposit that specifies an interest rate
- maturity date and is negotiable
- can be bought and sold until maturity
- is a bearer instrument, meaning whoever holds the certificate at maturity receives

Commercial Paper Securities

An unsecured short-term promissory note issued by a company to raise short-term cash, often to finance working capital requirements
- are issued only by the largest and most creditworthy corporations , as they are unsecured
- carry an interest rate that v

Banker's Acceptance

A time draft payable to a seller of goods, with payment guaranteed by a bank
- used to finance goods that have not yet been transferred from seller to the buyers
- an order to pay a specified amount of money to the bearer on a given date
- can be bought a

Eurodollar Market

The market where Eurodollars trade
Eurodollars:
- are time deposits with fixed maturities and are, therefore somewhat illiquid
-offer the borrower a lower interest rate than can be received in the domestic market

Money Market Securities

=- the interest Rates on all money market instruments move very closely together over time
- the secondary market for Treasury bills Is extensive and well developed
- there Is no well-developed secondary market for commercial paper

Money market mutual funds

are funds that aggregate money from a group of small investors and invest in money market instruments
- have grown enormously popular since their inception in the early 1970s
- received flood of funds in the early 1980s as depositors withdrew their funds

Money market mutual funds

=- commercial paper Is by far the largest component of these funds
- Although investors know that MMMFs are not investors a higher return than Is available from banks

Money Market securities are short-term instruments with an original maturity of less than one year

TRUE

Money Market securities include:

- Treasury Bills
- Commercial Paper
- Federal funds
- Repurchase agreements
- negotiable certificates of deposit
- banker's acceptance
- Eurodollars

The term money markets is actually a misnomer, b/c liquid securities are traded in these market rather than money

FALSE

Money markets are referred to as a retail markets because small individual investors are the primary buyers of money market securities

FALSE

The U.S. Treasury Dept. is the single most influential participant in the U.S. Money market

FALSE

Banks are unusual participants in the money market b/c they buy, but do not sell, money market instruments

FALSE

Money markets are used extensively by businesses both to warehouse surplus funds and to raise short-term funds.

TRUE

The market for U.S. Treasury Bills is a shallow market b/c so few individual investors buy t-bills

FALSE

T-Bill is not an investment to be used for anything but temporary storage of excess funds because it barely keeps up with inflation

TRUE

The main purpose for federal funds is to provide banks with an immediate infusion of reserves should they be short

TRUE

The Fed can influence the federal funds rate by adjusting the level of reserves in the banking system

TRUE

Commercial Paper securities are unsecured promissory notes, issued by corporations, that mature in no more than 270 days

TRUE

A banker's acceptance is an order to pay a specified amount of money to the bearer on given date. Banker's acceptances have been used since the twelfth century

TRUE

Interest rates on banker's acceptances are low because the risk of default is very low

TRUE

Opportunity Cost

The forgone interest cost from holding the cash balances when they are recieved

Default risk

the risk of late or nonpayment of principal or interest

Treasury Bills

Short-term obligations of the U.S. government issued to cover government budget deficits and to refinance maturing government debt.

Treasury bill auctions

the formal process by which the U.S. Treasury sells new issues of Treasury Bills

Federal fund Rate

The interest rate for borrowing federal funds

Correspondent Banks

Banks with reciprocal accounts and agreements

repurchase agreement

an agreement involving the sale of securities by one party to another with a promise to repurchase the securities at a specified price and on a specified date

Reverse repurchasing agreement

an agreement involving the purchase of securities by one party from another with the promise to sell them back

Bearer Instrument

an instrument in which the holder at maturity receives the principle and interest

London Interbank Offered Rate (LIBOR)

the rate paid on Eurodollars

Eurodollar CDs

Dollar-denominated deposits in non-U.S. banks

Eurocommercial Paper

Eurosecurities issued in Europe by dealers of commercial paper without involving a bank