Money Market Securities

Repo A contract to sell financial securities and then to buy back usually a short time later. The interest rate, repo rate, is fixed off of the forward rate curve and is a function of demand and supply of overnight funds. Assume a dealer wishes to buy a $20M bond issue and needs to borrow that amount for 10 days. The repo market will have a rate close to the fed funds and the money market rate. Assume that the rate is 22bp, what is the buy back value of the repo? Borrow $20M Repay 20M ( 1 + .0022 ) ^ ( 10 / 360 ) = 20M( 1.00022 )^( .027778 ) = 20M ( 1.000006 ) = $20,000,122.22 Repaid If the dealer (repo seller) can buy the bond and resale it in the market or to clients for more than the repayment amount, then the dealer can profit from the buying the bond issue. The buyer of the repo is giving cash in exchange for securities and so is the lender in the trade. Typical risks: credit, market, liquidity.

TBills Treasury Bills are bought and sold in the money market and as part of repo transactions, and are priced as discount securities and traded based on the supply and demand for safe returns. Typical risks: market, liquidity.

A TBill with a spot price (todays) of 99.9995 and a forward price of 100 (maturity) that is due in 1 day has a discount rate found by solving Spot = Forward ( 1 r X days / 360 ) 99.9995 = 100 ( 1 r X 1 / 360 ) = 99.9995 = 100 100r /360 = 99.9995 = 100 ( 1 r /360 ) = -.0005 = -100r / 360 = -.18 = -100 r = discount rate = 18bp or .18%

= 360 ( - .0005 ) = -100r = -0018 = r

Redoing the problem assuming the same prices but the TBill was due in 5 days: Spot = Forward ( 1 r X days / 360 ) 99.9995 = 100 ( 1 r X 5 / 360 ) 99.9995 = 100 ( 1 5r /360 ) 99.9995 = 100 500r / 360 = 360 ( -.0005 ) = -500r .00036 = r = -.0005 = -500r /360 = -.18 = -500r Discount rate = .00036 = 3.6bp = .036%

Doing the problem from the discount rate first: Assume a 1mo TBill has a discount rate of 22bp, what is the spot price? Spot = Forward ( 1 r X days / 360 ) Spot = 100 ( 1 - .0022 X 30 / 360 ) Spot = 100 ( .999817 ) = 99.981667 TBill quote

If the security has a $2,000,000 face or maturity value, then the value of the security is 99.981667% of 2M. Value = Quote X Face or $1,999,633 TBill security value.

The discount rate isnt the same as the TBills annual YTM, known as the bond equivalent yield. A quick conversion r X ( 365 / 360 ) = YTM ie 22bp X 365/360 = 22.3bp

TBill and Repo Problems 1. A dealer is comparing the rate of borrowing in the Tbill market to the repo market. The dealer sees that the repo market is lending at 30bp for 15 days and that the quote on a TBill maturing in 15 days is 99.98333. a. What is the discount rate on the TBill? b. What is the better market to borrow money from investors? c. Why would repo rates and TBill rates differ? d. What is the usual relationship between repo and TBill rates?

2. The dealer finds that the market for TBills has changed and now finds that repo rates are still 30bp but that TBills for 15 days are quoted at 99.99166. a. What is the discount rate on the TBill? b. What is the better market to borrow money from investors? c. How would you do that? 3. The discount rate for a TBill with 170 days until maturity is .60%. a. What is the quote of a TBill? b. What is the value of a TBill with a $10M face value? 4. The repo rate for 45 days is .50%. a. What would be the repayment value on a $30M repo borrowing? b. Is the borrower buying or selling the repo? Formulas: Spot = Forward ( 1 r X days / 360 )

Repay = Spot ( 1 + r )^(days/360)