Chapter 9 - Chapter 9 Money Markets Financial Markets Money...

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Chapter 9: Money Markets Financial Markets: Money Markets (MM) and Capital Markets This chapter explores the institutional features of the money markets. The money market is the market for debt securities issued with the original maturities of one year or less than one year (your text specifies less than one year – most others include one year) and a high degree of liquidity. They are usually sold in large denominations and have low default risk. The chapter shows why money markets are needed and their purpose to the government, firms, financial institutions, and individuals. The money market is an interim investment that provides a higher return than holding cash or money in the bank but less than what is usually expected from long term investments. There are several players in the money market which include the U.S. Treasury Department, the Federal Reserve, commercial banks, businesses, investment firms, and individuals. All participants work on both sides of the market except for the U.S. Treasury Department, which is always a demander and never a supplier of the money market securities. The participants use a variety of money market instruments to diversify their needs. The securities also have several characteristics that are similar and different. - MM facilitate the transfer of funds for short term periods - Reason for short term funds transfer: cash inflows and outflows are not fully synchronized (e.g., government spends funds each day, but most of its revenues occur in April, or banks may need funds to cover required reserves for a few hours only) - Holding cash: has return equal to the negative of inflation 3 basic attributes of MM instruments: 1. Large denomination – making almost impossible for individuals to invest directly in these securities 2. Low default risk – lenders need quick return of their cash so insist on low default (so only large banks, institutions and corporations issue these securities) 3. Original maturity of 1 year or less Also for most of these securities: they are zero-coupons Since banks exist to lend short term and accept short term deposits, why does MM exist? After
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This note was uploaded on 09/08/2010 for the course BUS 171A at San Jose State.

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Chapter 9 - Chapter 9 Money Markets Financial Markets Money...

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