chapter 6 note - Omar M. Al Nasser, Ph.D., MBA. Visiting...

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1 | P a g e Omar M. Al Nasser, Ph.D., MBA. Visiting Assistant Professor of Finance School of Business Administration University of Houston-Victoria Email: alnassero@uhv.edu Chapter 6 Money Markets Outline Money Market Securities Treasury Bills Commercial Paper Negotiable Certificates of Deposit (NCDs) Repurchase Agreements Federal Funds Banker’s Acceptances Institutional Use of Money Markets Valuation of Money Market Securities Explaining Money Market Price Movements Efficiency of Money Market Securities Indicators of Future Money Market Security Prices Risk of Money Market Securities Credit Risk Measuring Risk Interaction among Money Market Yields Globalization of Money Markets Eurodollar Securities International Money Markets Performance of Foreign Money Market Securities
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2 | P a g e POINT/COUNTER-POINT: Should Firms Invest in Money Market Securities? POINT: No. Firms are supposed to use money in a manner that generates an adequate return to shareholders. Money market securities provide a return that is less than that required by shareholders. Thus, firms should not be using shareholder funds to invest in money market securities. If firms need liquidity, they can rely on the money markets for short-term borrowing. COUNTER-POINT: Yes. Firms need money markets for liquidity. If they do not hold any money market securities, they will frequently be forced to borrow to cover unanticipated cash needs. The lenders may charge higher risk premiums when lending so frequently to these firms. WHO IS CORRECT? Use the Internet to learn more about this issue. Offer your own opinion on this issue. ANSWER: Firms should not hold an excessive amount of money in the form of money market securities. But they should invest in money market securities so that they have access to funds before being forced to rely on short-term loans. Questions 1. Primary Market. Explain how the Treasury uses the primary market to obtain adequate funding. ANSWER: The Treasury issues Treasury bills through a weekly auction. Investors can submit competitive bids, where the Treasury will accept the highest bids first. Alternatively, investors can submit noncompetitive bids, which will automatically be accepted. The price to be paid by noncompetitive bidders is the weighted average price of accepted bids. 2. T-bill Auction. How can investors using the primary T-bill market be assured that their bid will be accepted? Why do large corporations typically make competitive bids rather than noncompetitive bids for T-bills? ANSWER: Noncompetitive bids in the Treasury auction ensure acceptance by the Treasury. Large corporations make competitive bids because noncompetitive bidders are limited to the size of noncompetitive bids.
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3 | P a g e 3. Secondary Market for T-bills. Describe the activity in the secondary T-bill market. How can this degree of activity benefit investors in T-bills? Why might a financial institution sometimes consider T-bills as a potential source of funds? ANSWER: The secondary market for Treasury bills is very active, which makes Treasury
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This note was uploaded on 09/21/2011 for the course FINANCE 3321 taught by Professor Jianjundu during the Fall '11 term at University of Houston-Victoria.

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chapter 6 note - Omar M. Al Nasser, Ph.D., MBA. Visiting...

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