Chapter07 - CHAPTER 7 MONEY MARKETS Characteristics of...

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Unformatted text preview: CHAPTER 7 MONEY MARKETS Characteristics of Money Market Instruments 1. Maturity < 1 year; usually less than 120 days 2. Large denominations 3. Few high quality borrowers; low default risk; many diverse investors 4. Good marketability, especially in primary market 5. Informal market in New York City; dealer- broker made market 6. Payment made in “immediately available funds” – over Fed wire (Federal Funds) Role of the Money Market • Provides a safe liquid market for short term investors • Helps meet cash needs of businesses, financial institutions and governments • Indicator of economic conditions and Fed policy 1. U.S. Treasury Bills Characteristics: • Sold on a discount basis; no coupon; price<par value • Maturities up to one year • $10,000 minimum denomination in open market; $1,000 “Treasury Direct” program for small investors • Very low yields • Book Entry Securities – no physical T-Bill securities; only computer recorded securities Pricing Treasury Bills • Treasury Bills are priced on a bank discount basis P f- P 0 360 y d = x x 100% P f n y d = discount yield on an annualized basis P f = face value (amount paid to investor at maturity) P = Purchase price of the T-Bill n = Number of days to maturity The Wall Journal lists T-Bill yields on a bond equivalent basis where the discounted price is the denominator and 365 days is used as the annualizer. P f- P 0 365 y be = x x 100% P n y be = bond equivalent yield y be > y d • Can calculate price using y d or y be P = P f - [ y d x (n/360) x P f ] using y d P = P f / [ 1 + (y be x (n/365) ] using y be Auctioning New Treasury Bills • Weekly sale of U.S Treasury Bills of 3 and 6 month maturities; longer term bills sold monthly or quarterly • T-Bills are sold through an auction process using both competitive and non- competitive bids Competitive Bids...
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This note was uploaded on 03/24/2011 for the course FINA 409 taught by Professor John during the Spring '11 term at Ohio State.

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Chapter07 - CHAPTER 7 MONEY MARKETS Characteristics of...

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