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1、Part IV Financial Markets Chapter 9 The Money Markets The Money Markets Defined Why Do We Need Money Markets?Cost Advantages The Purpose of the Money Markets Who Participates in the Money Markets?U.S.Treasury Department Federal Reserve System Commercial Banks Businesses Investment and Securities Fir
2、ms Individuals Money Market Instruments Treasury Bills Case:Discounting the Price of Treasury Securities to Pay the Interest Mini Case:Treasury Bill Auctions Go Haywire Federal Funds Repurchase Agreements Negotiable Certificates of Deposit Commercial Paper Bankers Acceptances Eurodollars Comparing M
3、oney Market Securities Interest Rates Liquidity How Money Market Securities are Valued Following the Financial News:Money Market Rates This chapter explores the institutional features of the money markets.The money market is the market for debt securities issued with the original maturities of less
4、than one year and a high degree of liquidity.They are usually sold in large denominations and have low default risk.The chapter shows why money markets are needed and their purpose to the government,firms,financial institutions,and individuals.The money market is an interim investment that provides
5、a higher return than holding cash or money in the bank but less than what is usually expected from long term investments.Chapter 9 The Money Markets 47 There are several players in the money market which include the U.S.Treasury Department,the Federal Reserve,commercial banks,businesses,investment f
6、irms,and individuals.All participants work on both sides of the market except for the U.S.Treasury Department,which is always a demander and never a supplier of the money market.The participants use a variety of money market instruments to diversify their needs.This section shows that most of these
7、securities are short term and low risk.Point out to students the international aspect of the use of Eurodollars so they get a broader view of securities around the world.The securities also have several characteristics that are similar and different.Discuss with the students the characteristics of i
8、nterest rates,maturity,and liquidity.The final section deals with how money market securities are valued.1.The money markets can be characterized as having securities that trade in one year or less,are of large denomination,and are very liquid.2.Money market securities have an original maturity of l
9、ess than one year,so the bond would not be considered a money market security.3.Banks have higher costs than the money market owing to the need to maintain reserve requirements.The lower cost structure of the money markets,coupled with the economies of scale resulting from high volume and large-deno
10、mination securities,allows for higher interest rates.4.Term securities have a specific maturity date.Demand securities can be redeemed at any time.A six month certificate of deposit is a term security.A checking account is a demand security.5.Following the Great Depression,regulators were primarily
11、concerned with stopping banks from failing.By removing interest-rate competition,bank risk was substantially reduced.The problem with these regulations was that when market interest rates rose above the established interest-rate ceiling,investors withdrew their funds from banks.6.The U.S.government
12、sells large numbers of securities in the money markets to support government spending.Over the past several decades,the government has spent more each year than it has received in tax revenues.It makes up the difference by borrowing.Part of what it borrows comes from the money markets.7.Businesses b
13、oth invest and borrow in the money markets.They borrow to meet short-term cash flow needs,often by issuing commercial paper.They invest in all types of money market securities as an alternative to holding idle cash balances.8.Merrill Lynch initially felt that it could better service its regular cust
14、omers by making it easier to buy and sell securities from an account held at the brokerage house.The brokerage could offer a market interest rate on these funds by investing them in the money markets.9.Life insurance companies can invest for the long term because the timing for their liabilities is
15、known with reasonable accuracy.Property and casualty insurance companies cannot predict the natural disasters that cause large payouts on policies.10.Treasury bills are usually viewed as the most liquid and least risky of securities because they are backed by the strength of the U.S.government and t
16、rade in extremely large volumes.48 Mishkin/Eakins Financial Markets and Institutions,Sixth Edition 11.In competitive bidding for securities,buyers submit bids.A noncompetitive bidder accepts the average of the rate paid by the competitive bidders.12.Federal funds are sold by banks to other banks.The
17、y are used to invest excess reserves and to raise reserves if a bank is short.13.The Federal Reserve cannot directly set the federal funds rate of interest.It can influence the interest rate by adding funds to or withdrawing reserves from the economy.14.Large businesses with very good credit standin
18、gs sell commercial paper to raise short-term funds.The most common use of these funds it to extend short-term loans to customers for the purchase of the firms products.15.Bankers acceptances substitute the creditworthiness of a bank for that of a business.When a company sells a product to a company
19、it is unfamiliar with,it often prefers to have the promise of a bank that payment will be made.1.What would be your annualized discount rate%and our annualized investment rate%on the purchase of a 182-day Treasury bill for$4,925 that pays$5,000 at maturity?Solution:Discount Rate$5,000$4,9253600.0296
20、72.967%$5,000182 Investment Rate$5,000$4,9253650.030543.054%$4,925182 2.What is the annualized discount rate%and your annualized investment rate%on a Treasury bill that you purchase for$9,940 that will mature in 91 days for$10,000?Solution:Discount Rate$10,000$9,9403600.02374 2.374%$10,00091 Investm
21、ent Rate$10,000$9,9403650.024212.421%$9,94091 3.If you want to earn an annualized discount rate of 3.5%,what is the most you can pay for a 91-day Treasury bill that pays$5,000 at maturity?Solution:$5,000360.035$5,00091A$5,00044.24A$4,955.76A 4.What is the annualized discount rate%and investment rate
22、%on a Treasury bill that you purchase for$9,900 that will mature in 91 days for$10,000?Solution:Discount Rate$10,000$9,9003600.03956 3.956%$10,00091 Chapter 9 The Money Markets 49 Investment Rate$10,000$9,9003650.040524.052%$9,90091 50 Mishkin/Eakins Financial Markets and Institutions,Sixth Edition
23、5.The price of 182-day commercial paper is$7,840.If the annualized investment rate is 4.093%,what will the paper pay at maturity?Solution:Let B what will be paid at maturity($7,840)/($7,840)(365/182)0.04093($7,840)/($7,840)2.00550.04093($7,840)2.0055320.89$7,840160$8,000BBBBBB 6.How much would you p
24、ay for a Treasury bill that matures in 182 days and pays$10,000 if you require a 1.8%discount rate?Solution:Let C What you would pay ($10,000)/($10,000)(360/182)0.018($10,000)/($10,000)1.9780.018($10,000)0.018$10,0001.978$10,00091$9,909CCCCC 7.The price of$8,000 face value commercial paper is$7,930.
25、If the annualized discount rate is 4%,when will the paper mature?If the annualized investment rate%is 4%,when will the paper mature?Solution:Let N when the paper matures ($8,000$7,930)/$8,000)(360/)0.04($70/$8,000)(360/)0.04($0.00875)(360/)0.04(360/)0.04(1/$0.00875)(360/)4.57142978.7579daysNNNNNN In
26、vestment Rate:($8,000$7,930)/($7,930)(365/)0.04($70/$7,930)(365/)0.04(365/)0.04(1/0.008827)365/4.5315580.5581daysNNNNN 8.How much would you pay for a Treasury bill that matures in one year and pays$10,000 if you require a 3%discount rate?Solution:Let C What you would pay$10,000)/($10,000)(360/182)0.
27、03($10,000)/($10,000)0.03(182/360)$10,000151.67$9,848.33CCCC Chapter 9 The Money Markets 51 9.The annualized discount rate on a particular money market instrument is 3.75%.The face value is$200,000 and it matures in 51 days.What is its price?What would be the price if it had 71 days to maturity?Solu
28、tion:Let B the price with 51 days to maturity ($200,000)/($200,000)(360/51)0.0375($200,000)(360/51)0.0375$200,000($200,000)(360/51)$7,500($200,000)$7,500(51/360)$200,000$1,062.5$198,937.5BBBBBB If 71 days to maturity then B$198,520.83 10.The annualized yield is 3%for 91-day commercial paper and 3.5%
29、for 182-days commercial paper.What is the expected 91-day commercial paper rate 91 days from now?Solution:Let A the expected 91 day rate,91 days from now Assume that the 182 day rate is the average of the current 91 day rate and the expected 91 day rate.(3)/23.5374AAA 11.In a Treasury auction of$2.1
30、 billion par value 91-day T-bills,the following bids were submitted:Bidder Bid Amount Price 1$500 million$0.9940 2$750 million$0.9901 3$1.5 billion$0.9925 4$1 billion$0.9936 5$600 million$0.9939 If only these competitive bids are received,who will receive T-bills,in what quantity,and at what price?B
31、idders 1,4,and 5 will receive T-bills in the amount requested all at.9936.12.If the Treasury also received$750 million in non-competitive bids,who will receive T-bills,in what quantity,and at what price?Solution:All competitive bids are accepted at the highest yield paid to competitive bids.Thus,all$750 million will be accepted at.9936.