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Lecture2 - Lecture 2 Money and Bond Markets ECON435...

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1 Lecture 2: Money and Bond Markets ECON435: Financial Markets and the Macroeconomy Anton Korinek Spring 2011 Fixed-Income Securities guarantee repayment of principal = = face value = par value pay a specified “coupon rate” (interest rate) or are sold at a discount maturity date: when the payment is due Even though promised repayment is “fixed,” there is still bankruptcy risk Money Markets Treasury bills Certificates of Deposits Commercial Paper Repurchase Agreements (repos) Federal Funds Eurodollars Bankers’ Acceptances Money Markets very short-term: 1 day up to 1 year often called “cash-equivalent” or “cash” provides funding for day-to-day operations highly liquid : can be traded relatively low risk for lender (depending on issuer) rollover risk for issuer Treasury Bills (T-bills) day-to-day financing for US federal government considered the safest way to invest issued at maturities of 28, 91, 182 days face value between $100 and $100,000 trades at a discount using the bank-discount method exempt from local and state taxes bid-ask spread: difference between asked price: price at which you can buy from a dealer bid price: price at which you can sell to a dealer dealer earns the difference Federal Funds “Fed(eral) funds” = deposits of banks with the Federal Reserve Bank
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