Econ173A_topic3.2

Econ173A_topic3.2 - osed-End nds nit Inv. Trusts TFs edge...

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osed-End nds anaged vestment ompanies ther Funds nit Inv. Trusts TFs edge Funds EITs ivate Equity pen-End utual” Funds oney Mkt ond, stock ctor Ec 173A FINANCIAL SECURITIES II p. 1 Ec 173A – FINANCIAL MARKETS LECTURE NOTES Foster, UCSD 13:14:40 TOPIC 3.2 – FINANCIAL SECURITIES II D. Money Market Instruments 1. Introduction: a) Money market −− trading in short-term (24 hrs – 1 yr) interest-bearing debt securities. 1) Market is broad and wide, making the securities very liquid. 2) Contrast with fixed income capital market, which deals in longer term bonds and notes. b) Participants. 1) Investors (lenders) are individuals, business, banks and govts that have temporarily idle cash balances that could earn some interest, including accounts holding govt tax receipts. 2) Borrowers (issuers of money market securities) are business, banks and govts with seasonal or SR run cash shortages. 3) Small investors can buy shares in money market mutual funds (MMMFs). 4) Cash balances arising in individual investor security brokerage accounts are typically placed in money market funds to earn short-term rates of return until the balances are withdrawn or reinvested. 2. U.S. Treasury Bills: a) T-Bills. 1) Issued by US Treasury. Bills with maturities of 91 and 182 days are auctioned weekly; bills with 52 week-maturities are auctioned monthly. 2) Par value = $10,000 (perhaps lower now). 3) Pure discount (no coupon interest). 4) Individual investors buy new issues at auction with competitive or non-competitive bids, or trade on secondary market thru specialized govt securities dealers. 5) Short maturity, complete liquidity, and no default risk make T-bills as safe as any financial security in the world. Treasury Bills ( WSJ Online , 1/16/07) M ATURITY D AYS TO M AT . B ID A SK A SK Y LD Mar 22 07 Jul 12 07 64 176 4.9 6 4.9 5 4.9 5 4.9 4 5.06 5.13 b) T-bill listings. 1) Bid, asked, and yield figures are in straight percent. 2) Bid/ask prices are based on a 360-day financial year. If B = bid discount, A = ask discount, and n = days to maturity, then:
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Ec 173A FINANCIAL SECURITIES II p. 2 3) Asked yield is the “bond-equivalent yield” r bey , an annualized YTM based on the asking price and a 365 (or 366) day year: 4) Example -- T-bill maturing in 64 days: You sell at P b = [1 − 0.0496 (64/360)] × 10,000 = $9,911.82. You buy at P a = [1 − 0.0495 (64/360)] × 10,000 = $9,912.00 Asked Yield r bey = (10,000/9912 − 1) × 365/64 = 0.0506 = 5.06%. c) The annualized yield on T-bills is often used, along with LIBOR, as a benchmark “risk- free” rate (r f ). MONEY RATES ( WSJ , 6/17/2008) Prime Rates Commercial Paper U.S. Canada 5.0 0 4.7 5 30 - 44 day 255 - 270 day 2.20 3.10 Overnight RPs Libor U.S. 2.2 0 Six month 3.66 U.S. Govt Rates Eurodollars Discount Fed. Funds
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Econ173A_topic3.2 - osed-End nds nit Inv. Trusts TFs edge...

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