Money Markets Click to edit Master subtitle style

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What is Money Market?

A segment of the financial markets for assets involved in short-term borrowing and lending with original maturities of one year or shorter time frames.

What are the cool Money Market Instruments?

v v v v v

Treasury Bills Commercial Paper Bankers Acceptances Certificates of Deposit (CD) Repurchase Agreements 4/18/12

Treasury Bills

Issued by the U.S. Dept. of the Treasury. Treasury issues three types of securities : Bills (0-1), Notes (>2 but <10), Bonds (>10). is a discounted security. (NO TAXES ON THE INTEREST FOR STATE AND LOCAL) and Offer quotes on T-bills Price=F-D
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The

T-bill

Bids

D=Yd*F(t/360)

Commercial Paper

Short term unsecured promissory note issued by a corporation. alternative to bank borrowing. purpose is to provide short term funds for seasonal and working capital needs. Now, its used quite often in Bridge Financing. Act of 1933 over short term paper
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An

Original

Security Rolling

Issuers of Commercial Paper

Financial

and Non Financial companies . Captive Finance Companies Bank Related Finance Companies Independent Finance Companies

3 Types of Financial Companies

Directly Placed Vs Dealer Placed Paper Credit Supported Commercial Paper Asset-Backed Commercial Paper
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Certificates of Deposit

Acertificate of deposit is a promissory note issued by a bank.It is atime deposit that restricts holders from withdrawing funds on demand.Although it is still possible to withdraw the money, this action will oftenincur a penalty. Insured by the FDIC up to $100k. CDs issued by domestic bank Eurodollar CD- denominated in US dollars. Yankee CD- Foreign Bank with US Branch CD. Thrift CD- issued by savings and loan
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CDs are classified into 4 categories:

Bankers Acceptance
A

short-term credit investment created by a non-financial firm and guaranteed by a bank. to facilitate commercial trade transactions. Risk- Investors are exposed to the fact that neither the borrower nor the accepting bank will be able to pay.

Created Credit

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Repurchase Agreement
Sale of a Security with a commitment by the seller to buy the security back from the purchaser at a specified price and a determined date.
The

repurchase price should be greater than the original sale price, the difference effectively representing interest, sometimes called the repo rate Repo) Dollar interest= Dollar Principal x Repo Rate x (Repo Term/360) advantages to the borrower on the short term basis is that the rate is less than the cost of bank financing.
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(Reverse The

How does a credit risk occur in a repo?

Credit Risk Involved with Repos

Consider the follow scenario; The dealer fails to repurchase the government securities, thus you(lender) must keep the security within your portfolio. Now consider the increase in the interest rate, this will decrease the market value of your asset even less than the amount you loaned to the dealer.
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Federal Funds Market

Depository The

institutions are required to maintain reserves. reserves are held at their district FRB, which are called federal funds. is paid by the federal funds since the financial crises. institutions find themselves with fewer funds than required. So banks maintain FF desk managers to lend or borrow money. can either go into repos or
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Interest Some

Banks