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Question and Problem Answers

Chapter 11 - Money Market Instruments

2 11 - 1:
A. The bid is 1.68. Thus we would be able to sell the $100,000 T-Bill for $99,864.67

B. The ask is 1.67. Thus we would pay $99,865.47 for a $100,000 T-Bill.

This means that you can buy the T-Bill from the bond dealer for $99,865.47 and then sell it right back to him for
$99,864.67. The difference, 80¢, represents the dealer’s profit. He buys low and sells high.

C. When the T-Bill matures March 7, 2009 it pays $100,000. This means I earned $134.53 over 29 days.

29 days March 7, 2009

$99,865.47 $100,000.00
$134.53
earned

D. The money market yield is 1.6723%

E. The straight yield is 1.6955%

F. For T-Bills of 182 days or less the straight yield equals the ask yield. Thus the ask yield is 1.6955% or 1.70%
2 FINANCIAL MARKETS ... AND THE INSTRUMENTS THAT TRADE IN THEM

2 11 - 2:
A. The bid is 1.80. Thus we would sell the $500,000 T-Bill for

B. The ask is 1.79. Thus we would pay $98,950.86 for a $500,000 T-Bill.

C. When the T-Bill matures September 5 , 2002 it pays $500,000.00 This means I earned $5,245.69 over 211 days.

211 days September 5, 2009

$494,754.31 $500,000.00
$5,245.69 earned

D. The money market yield is 1.8090%

E. The straight yield is 1.8341%

F. For T-Bills of 183 days or more we calculate the ask yield. Thus the ask yield is 1.83%
 CHAPTER 11 - MONEY MARKET INSTRUMENTS 3

2 11 - 3:
A. The Bank of Arabia credits to Saudi Oil's account $119,350,000.00.

B. $119,350,000.00

C. We borrow $119,350,000.

D. To borrow $119,350,000 we must reverse out at least $119,648,375. [$119,350 * (1.0025)] in Treasuries. The dealer
requires a margin to insure against simultaneous default and decrease in the value of the securities held as collateral.
If interest rates increase and the value of the treasury securities decline below $119,350,000 then the collateral is no
longer sufficient to cover the loan in case of default. The margin (haircut) allows for some movement in the interest
rates before this happens.

E. Each 150 day $100,000 T-Bill has a market price of $98,541.67

We need to reverse out 1,215 T-Bills to cover the repo.

F. The repo matures with accrued interest of $621,614.58

The 150 day T-Bills are now reversed back in as 90 day T-Bills at a market value of $98,682.50 each.
4 FINANCIAL MARKETS ... AND THE INSTRUMENTS THAT TRADE IN THEM

Cash Account Securities Account

day 1 Bankers' Acceptance - $119,350,000.00 BA + $119,350,000.00
Repo out + $119,350,000.00 1,215 * 150 day T-Bills - $119,728,129.10
day 60 B.A. matures + $120,000,000.00 BA - $120,000,000.00
Repo matures principal - $119,350,000.00 1,215 * 90 day T-Bills + $120,658,612.50
interest - $621,614.58
Profit + $28,385.42

Note that the profit resulting from an increase in the value of the T-Bills accrues to your decision to invest in T-Bills;
it has nothing to do with your decision to invest in the Bankers' Acceptance. (You would have earned the same had
you kept these T-Bills in your office safe.) Thus the profit on this transaction is $28,385.42

2 11 - 4:
(C) Commercial Paper is issued at less than 270 days to avoid registration with the SEC.

2 11 - 5:
(C)

2 11 - 6:
(B) Although Eurodollars can finance imports and exports, they are not money-market instruments.

2 11 - 7:
(A) The prime rate is the base rate on corporate loans at large US money center commercial banks.

2 11 - 8:
(B) The federal funds rate is applied to reserves traded among commercial banks for overnight use in amounts of $1
million or more
 CHAPTER 11 - MONEY MARKET INSTRUMENTS 5

2 11 - 9:
(C) The discount rate is the charge on loans to depository institutions by the New York Federal Reserve Bank

2 11 - 10:
(D) The call money rate is the charge on loans to brokers on stock exchange collateral.

ELISABETH OLTHETEN AND KEVIN G. WASPI

©2006 Not to be transmitted, copied, or distributed without express written permission from the authors.