Lesson 5 Money markets and bond markets

Lesson 5 Money markets and bond markets - Money markets and...

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Money markets and bond markets
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When firms (and governments) want to borrow in a form different from a bank loan, where do they go? Capital markets Money markets
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Money markets For funds with maturity <1 year Quoting of price By yield By discount In both cases the convenient way of pricing them is expressing a risk premium: basis points (in jargon, ‘ticks’) above the benchmark
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Money markets The discount market Treasury bills (d) * Local authority/utility bills (d) * Commercial bills (d) * The market for commercial paper (d) * The certificate of deposits market (y) * The interbank market (y) Money market deposits (y) Repurchase agreements (y) *Instruments are traded in the secondary market
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Who goes to the money market for funds Entities needing large amounts of short-term cash (governments – national and local, corporations) Does anybody else care about the money market? Yes! Money markets are the space which central banks use to exercise monetary policy and hence, to fine tune the economy!
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The discount market (T-bills, local authority/utility bills, commercial bills)
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What is it? Bills issued with short term maturity (usually 1, 3, 6, sometimes 12 months) No interest Does not make sense to pay out over such short periods Securities issued at a discount to maturity value Rate of discount (d) = (maturity value (M) – price (P))/M* period to redemption (N)
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Example For a 3 month (1/4 of a year) bill issued with a maturity value 250,000 and issued at 240,000: d=(250,000 – 240,000)/250,000*0.25) = 16% Note: as the bill approaches maturity, the return on it increases. This is offset by the rise in the price of the bill as it approaches maturity
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Commercial paper market
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The commercial paper market
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Lesson 5 Money markets and bond markets - Money markets and...

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