408exam2 - Midterm 2 (9, 13, 12, 10, 11, 6) Money markets-...

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Midterm 2 (9, 13, 12, 10, 11, 6) Money markets- currency not actually traded, short term with high liquidity, therefore they are close to being money the most liquid Microsoft 27 billion in short term securities to earn interest in money market Large denominations $1m or more Low default risk o Mature in one year or less from the issuance date o Short duration that measures interest rate risk o Advantage of money markets over banks is that banks are heavily regulated Reserve requirement Caps on what interest rates can pay out due to risk due to potential high interest rates Cost structure of banks T-bills traded in money market (no caps o Purpose Warehouse surplus funds for short periods Borrowers from money market provide low cost source of temporary funds Timing of inflows and outflows are not well synced and these markets are a way to solve these cash-timing problems o Participants Table 9.2 o T-bills have 28 day maturities through 12 month maturities discounting in may 2007, you pay $996.37 for a 28 day tbill. It is worth 1000 at maturity. What is its discount rate? o I discount = F-P/F * 360/n o 1000-996.37/1000 * 360/28= 4.665% annualized yield? o I-yt=f-p/p * 365/n o 1000-996.37/996.37 * 366/28 (leap year)
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t-bills auctioned to the dealers every Thursday competitive bid o so many but only at one price non-competitive o this many t-bills at whatever price non- competitive first then highest price and so on lowest bid that someone will get a security at and will charge that price rough correlation t-bill interest rate and inflation rate t-bill and federal funds rate closely correlated federal funds rate can change other rates o short term t-bills are usually risk free rate CDs Bank issued security that documents a deposit and specifies the interest rate and maturity Usually slightly above t-bill rate highly correlated with t-bill and federal funds rate Commercial paper Issued by corporations, unsecured Bankers acceptance An order to pay a specific amount to the bearer on a given date if specified conditions have been met, usually delivery of goods
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408exam2 - Midterm 2 (9, 13, 12, 10, 11, 6) Money markets-...

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