3 the role of the key players in the money markets

This preview shows page 30 - 32 out of 45 pages.

3. The role of the key players in the money markets should be emphasized. These are: commercial banks, the Federal Reserve System, Treasury Department, dealers and brokers, money market mutual funds, and nonfinancial corporations. It would be especially useful to discuss the role of primary government security dealers, as their role does not get coverage elsewhere in the text. Exhibit 7.8 may help better summarize the roles of different market participants in the money markets for you students. 4. Money market yields are computed differently from capital market yields. In particular, money market yields do not assume compound interest. 5. Discuss the characteristics of each of the money market instruments. They may differ by issuer, maturity, pricing methods (discount vs. add-on instruments), investor clienteles, default risk, and marketability. Make sure that your students understand how these differences are reflected in yields.
6. The close substitutability between money market instruments explains why interest rates on different money market instruments tend to move together over time. However, in a flight to quality yields on different instruments may change in opposite directions, as investors exit instruments they consider more risky and/or less liquid and invest in safest assets such as U.S. T- bills. Exhibit 7.9 may be used to make and “visualize” this point. 7. Reemphasize the importance of money markets to commercial banks for adjusting their liquidity position and as a source of funds. The U.S. money markets developed, to a great extent, as a regulatory avoidance movement of commercial banks. FIL 241: Chapter 8: Bond Markets Treasury Bonds and Notes: Similar to treasury bills in that they are issued by the treasury and are considered free of default risk; they differ from bills in that they are coupon issues (paying interest semiannually), redeemable at face value upon maturity, and have initial maturities greater than 1 year and no more than 10 years. Backed by the full faith and credit of the U.S. government. (Page 243-244) Treasury Auction Procedures: (Page 244) Determining Stop-Out Rate: Bidders are allocated the Treasury securities at the highest acceptable yield. This is known as the stop-out rate. Coupon Rate: The treasury accepts the best bids (lowest rates) until it sells all the notes or bonds that it has offered to sell. The coupon rate for an issue is set after the auction at the highest level at which the security trades below par, in incriminates of 12.5 basis points (one-eighth of one percent). Thus, newly issued notes and bonds trade very near par immediately after the auction. Bidder Allocations: All successful bidders are allocated the Treasury securities at the highest acceptable yield, known as the stop-out yield.

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture