Ch6_ Money Markets

# Ch6_ Money Markets - Financial Markets and Institutions...

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Unformatted text preview: Financial Markets and Institutions Chapter 6 Money Markets Financial Markets and Institutions Money Market Securities Money market securities: Have maturities within one year Are issued by corporations and governments to obtain short-term funds Are commonly purchased by corporations and government agencies that have funds available for a short-term period Provide liquidity to investors Financial Markets and Institutions Money Market Securities (contd) Treasury bills: Are issued by the U.S. Treasury Are sold weekly through an auction Have a par value of \$1,000 Are attractive to investors because they are backed by the federal government and are free of default risk Financial Markets and Institutions Money Market Securities (contd) Treasury bills (contd) Pricing Treasury bills The price is dependent on the investors required rate of return: Treasury bills do not pay interest 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 k P ) 1 /( Par + = Financial Markets and Institutions Computing the Price of a Treasury Bill A one-year Treasury bill has a par value of \$10,000. Investors require a return of 8 percent on the T-bill. What is the price investors would be willing to pay for this T- ?bill 259 , 9 \$ ) 08 . 1 /( 000 , 10 \$ ) 1 /( Par = = + = n m k P Financial Markets and Institutions Money Market Securities (contd) Treasury bills (contd) Estimating the yield T-bills are sold at a discount from par value The yield is based on the difference between par value (or sell price) and the purchase price New issue hold until maturity Sold prior to maturity Financial Markets and Institutions Money Market Securities (contd) Treasury bills (contd) Estimating the yield (contd) The annualized yield is:...
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## This document was uploaded on 08/05/2011.

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Ch6_ Money Markets - Financial Markets and Institutions...

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