430Chap005 - 5-1Money MarketsMoney MarketsMoney markets...

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Unformatted text preview: 5-1Money MarketsMoney MarketsMoney markets involve debt instrumentswith original maturities of one year or lessMoney market debtissued by high-quality (i.e., low default risk) economic units that require short-term fundspurchased by those that have excess short-term fundslittle or no chance of loss of principallow rates of returnMost money market instruments have active secondary markets to provide liquidityMoney markets involve debt instrumentswith original maturities of one year or lessMoney market debtissued by high-quality (i.e., low default risk) economic units that require short-term fundspurchased by those that have excess short-term fundslittle or no chance of loss of principallow rates of returnMost money market instruments have active secondary markets to provide liquidity5-2Money Market Yields Money Market Yields Money market securities use special rate quoting conventions:Discount yields (idy): Interest rate is quoted on an annual basis assuming a 360 day year as a percent of redemption price or face valueSingle payment yields (ispy): Interest rate is quoted on an annual basis assuming a 360 day year as a percent of purchase priceBoth may be converted to a bond equivalent yield (ibey) for comparison with bondsMoney market securities use special rate quoting conventions:Discount yields (idy): Interest rate is quoted on an annual basis assuming a 360 day year as a percent of redemption price or face valueSingle payment yields (ispy): Interest rate is quoted on an annual basis assuming a 360 day year as a percent of purchase priceBoth may be converted to a bond equivalent yield (ibey) for comparison with bonds5-3Money Market YieldsMoney Market YieldsTreasury bills and commercial paper rates are quoted as discount yieldsDiscount yields (idy) use a 360-day yearPf= the face value of the securityP= the discount price of the securityh= the number of days until maturityTreasury bills and commercial paper rates are quoted as discount yieldsDiscount yields (idy) use a 360-day yearPf= the face value of the securityP= the discount price of the securityh= the number of days until maturityhPPPiffdy360)(-=5-4Money Market YieldsMoney Market YieldsCompare discount securities to bonds with bond equivalent yields (ibey)Convert bond equivalent yields into effective annual returns (EAR)Compare discount securities to bonds with bond equivalent yields (ibey)Convert bond equivalent yields into effective annual returns (EAR)hPPPifbey365)(-=1/3651/365-+=hbeyhiEAR5-5Money Market YieldsMoney Market YieldsNegotiable (or jumbo) CDs and fed funds are money market securities that pay interest only at maturity. These usesingle-payment yields (ispy) Negotiable (or jumbo) CDs and fed funds are money market securities that pay interest only at maturity. These usesingle-payment yields (ispy) hPPPifspy360)(-=5-6Sample Calculations of Money...
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This note was uploaded on 02/16/2012 for the course BUSINESS 331 taught by Professor Rhee during the Spring '12 term at Strayer.

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430Chap005 - 5-1Money MarketsMoney MarketsMoney markets...

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