ch 6 - 1 CHAPTER 6 Money Markets 2 Money Market Securities...

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Unformatted text preview: 1 CHAPTER 6 Money Markets 2 Money Market Securities Treasury Bills Commercial Paper Negotiable Certificates of Deposit Repurchase Agreements Federal Funds Bankers Acceptance 3 Treasury Bills Are issued by the U.S. Treasury Sold in auction format Have a par value of $1,000 and multiples of $1,000 free of default risk Can be sold in the secondary market through government security dealers 4 Pricing T-Bills Treasury bills do not pay interest Sold at a discount from face value To price a T-bill with a maturity less than one year, the annualized return can be reduced by the fraction of the year in which funds would be invested n m r Par P ) 1 /( + = 5 Pricing T-Bills A one-year Treasury bill has a par value of $1,000. Investors require a return of 8% on the T-bill. What is the price investors would be willing to pay for this T- bill? 93 . 925 $ ) 08 . 1 /( 1000 $ ) 1 /( Par = = + = n m r P 6 Treasury Bill Yields Annualized T-bill yield: n PP PP SP Y T 365 - = 7 Treasury Bill Yields An investor purchases a 91-day T-bill for $9,782. If the T-bill is held to maturity, what is the yield the investor would earn? % 94 . 8 91 365 782 , 9 782 , 9 000 , 10 365 = - = - = n PP PP SP Y T 8 T-bill discount The discount represents the percent discount of the purchase price from par value for newly-issued T-bills n PP 360 Par Par discount bill- T - = 9...
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ch 6 - 1 CHAPTER 6 Money Markets 2 Money Market Securities...

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