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1. These are used to facilitate transfer of short-term funds from investors through the use of
money market securities.
2. T/F. Money market securities have a maturity of less than a year to more than a year.
3 & 4. Please list down two (2) examples of money market securities
An investor purchased a T-bill with a three-month (92-day) maturity and P1,000 par value for P992.
The money market security is held until maturity.
8. This involves one party selling to another with an agreement to repurchase the securities at a
specified date and price.
9. For a newly issued T-bill that is held to maturity, the yield will always be higher than the discount.
True or False.
10. A form of money market security that allows depositary institutions to lend or borrow short-
term funds from each other.
Money markets are used to facilitate the transfer of short-term funds from individuals, corporations, or
governments with excess funds to those with deficient funds. Even investors who focus on long-term
securities tend to hold some money market securities. Money markets enable financial market
participants to maintain liquidity.
Market price of Money Market Securities is computed based on the present value of all future cash
flows to be received.
The price that an investor will pay for a T-bill with a particular maturity depends on the investor’s
required rate of return on that T-bill.
Yield is a key factor when investors decide which money market security they will invest.
Yield is the investor’s required rate of return also called “investment rate”
Examples:
1. An investor is expecting a rate of return for 5% on money market placements within 92 days.
The par value of the money market security is P100. How much will the investor pay to acquire
this security?
2. T-bill with maturity of 182 days and par value of P1,200 was purchased at P1,045.
a. What is the annualized yield?
b. The discount rate for this debt security is?
3. Dina Corporation arranged a repurchase agreement where it purchased P100,000 and will sell
the securities back for P108,000 in 45 days. What is the repo rate?
Please study how to determine price and yield for money market securities.
1. Treasury Bills
2. The annualized discount rate on a money market instrument is 3.75%. The face value is
$200,000 and it matures in 51 days. What is its price? $198,520.83
3. The price of $8,000 face value commercial paper is $7,930. If the annualized yield is 4%, when
will the paper mature? 80.55 days
4. The price of 182-day commercial paper is $7,840. If the annualized investment rate is 4.093%
what will the paper pay at maturity? $8,000.01
Please study Chapter 7 Bond Markets for a Pre Test on Wednesday, 8 May 2019.
Pretest (Bond Markets) – 7 May 2019
Type Nature & Usage Parties Involved Risks How is price &
yield
computed?
Treasury Bills - Short term - Govt as the issuer - Lesser to no - Determining PV
MMIs issued by - Investors (banks, credit/default risk of future cash
govt to raise corporations, - Lesser liquidity flows to be
funds individuals) risk received
- Usually sold - Price that
through auction investor is
for willing to pay
- No interest depends on
investor’s
required return
Comm. Papers - Short term - Issuers can be - Credit/default risk - Price and yield is
MMIs issued by finance depends on the computed same
well-known, companies, bank issuer’s financial as T-bills but
credit-worthy holding condition and cash using 360 days
firms and is companies, flow (theoretically, CP
unsecured. insurance - Lesser liquidity yield will be
- Has credit risk; companies risk higher than TB
Investors will - Investors due to credit risk)
usually seek
credit rating
- Usually for
liquidity and/or
Invty/AR
financing
- No interest
NCD - Short term - Issuers can be large - Lesser liquidity - Price is usually
source of funds commercial & risk and credit set by the depos.
for commercial depositary inst. risk Inst.
banks & - Investors (e.g. - Higher interest - Yield includes
depositary inst. corporations and rate risk interest to be
- Returns are in money market received apart
the form of funds) from difference
interest plus any in purchase and
difference in selling price
selling price and
purchase price
Repurchase agr - one party sells - Banks, loan - Liquidity and - Yield is
securities with an associations, credit risk is difference
agreement to higher compared between original
repurchase at a money market to other Tbills, purchase price
spec. date & price funds, brokers CP and NCD and agreed
- more like a - Interest rate risk repurchase price
collateralized loan
Federal Funds - Involves - Banks and brokers - Credit risk and - Rates are usually
depositary inst. liquidity risks are controlled by Fed
Lending and higher Res.
borrowing from
each other
Bankers - A bank accepts - Banks and - Lesser
responsibility for exporters/importers credit/default
Acceptance
future payment risk between
- Common in int’l exporters and
trade importers
- Higher interest
rate and forex
risks
Discussion (Bond Valuation) – 8 May2019
Research at least three (3) debt securities existing in the Philippines and discuss the following for each
type of security:
a. Nature/description
b. Usage
c. Parties involved
d. Risks involved
e. How is it valued?
Receiving $1,000 today is worth more than $1,000 five years from now. Why?
Two factors impact whether an amount today is worth more than the same
amount in the future.
If an investor receives $1,000 today and can earn a rate of return 5% per year,
the $1,000 today is certainly worth more than receiving $1,000 five years from
now. If an investor waited five years for $1,000, there would be opportunity cost
or the investor would lose out on the rate of return for the five years.
Money not spent today could be expected to lose value in the future by some
implied annual rate, which could be inflation or the rate of return if the money was
invested. The present value formula discounts the future value to today's dollars
by factoring in the implied annual rate from either inflation or the rate of return
that could be achieved if a sum was invested.
In many scenarios, people would rather have a $1 today versus that same $1
tomorrow. Future value can relate to the future cash inflows from investing
today's money, or the future payment required to repay money borrowed today.
The discount rate is the sum of the time value and a relevant interest rate that
mathematically increases future value in nominal or absolute terms. Conversely,
the discount rate is used to work out future value in terms of present value,
allowing a lender or capital provider to settle on the fair amount of any future
earnings or obligations in relation to the present value of the capital. The word
"discount" refers to future value being discounted to present value.
The money market yield is also known as the CD-equivalent yield or bond
equivalent yield.
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Money Market
Money market investors receive compensation for lending funds to entities that
need to fulfill their short-term debt obligations. This compensation is typically in
the form of variable interest rates determined by the current interest rate in the
economy. Since money market securities are considered to have low default risk,
the money market yield will be lower than the yield on stocks and bonds but
higher than the interest rates on standard savings accounts.
Although interest rates are quoted annually, the quoted interest may actually be
compounded semi-annually, quarterly, monthly, or even daily. The money market
yield is calculated using the bond equivalent yield (BEY) based on a 360-day
year, which helps an investor compare the return of a bond that pays a coupon
on an annual basis with a bond that pays semi-annual, quarterly, or any other
coupons. The formula for the money market yield is:
For example, a T-bill with $100,000 face value is issued for $98,000 and due to
mature in 180 days. The money market yield is:
= 0.0204 x 2
= 0.0408, or 4.08%
The money market yield differs slightly from the bank discount yield, which is
computed on the face value, not the purchase price. However, the money market
yield can also be calculated using the bank discount yield as seen in this formula:
The bank discount rate is the required rate of return of a safe investment
guaranteed by the bank.
The bank discount rate method is the primary method used for calculating the
interest earned on non-coupon discount investments. It is important to note that
the bank discount rate factors in simple interest, not compound interest. In
addition, the bank discount rate is discounted relative to the par value, and not
relative to the purchase price. For example, assume a commercial paper matures
in 270 days with a face value of $1,000 and a purchase price of $970.
First, divide the difference between the purchase value and the par value by the
par value.
Next, divide 360 days by the number of days left to maturity. To simplify
calculations when determining the bank discount rate, a 360-day year is often
used.
360/270 = 1.33
Following our example above, the formula for calculating the bank discount rate
is:
Since the formula uses 360 days instead of 365 days or 366 days in a year, the
bank discount rate calculated will be lower than the actual yield you receive on
your short-term money market investment. The rate should, therefore, not be
used as an exact measurement of the yield that will be received.
Money Market
REVIEWED BY JAMES CHEN
https://www.investopedia.com/terms/m/moneymarket.asp
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Money Market
The U.S. government issues Treasury bills in the money market, and the bills
have maturities that range from a few days to one year. Only primary dealers can
buy them directly from the government; dealers trade them between themselves
and sell retail amounts to individual investors. State, county and municipal
governments also issue short-term notes.
In typical money market accounts, banks calculate interest for an account holder
on a daily basis and make a monthly credit to his or her account. Average
interest rates for money market accounts vary based on the amount deposited.
Typically, larger deposit amounts beget higher interest rates. For example,
interest rates for Jumbo money market accounts are high because they require a
larger deposit amount, such as $100,000.
Commercial Paper
https://www.investopedia.com/video/play/commercial-paper/