1. 082SIS52 Ryu Soo-hyun

2. Money Market  Money Market - Subsection of fixed income market - financial market for short-term borrowing & lending - provides very short-term liquid funding -where short-term obligations like Treasury Bills, Commercial Paper and Repurchase Agreements are traded -Compare to other investment : safe / lower returns  Money Market Instruments - debt instruments that are at the time of issuance have a maturity of 1year or less

3.  The Assets in Money Market Treasury Bills - Bid and offer quotes on treasury bills - The primary market for treasury bills Commercial Paper Certificate of Deposit (CD) Repurchase Agreement - Credit Risks - Participants in the market - Determination of the ‘Repo Rate’

4. objectives After my presentation, you will understand: What the money market is. What a Treasury bill is. What a repurchase agreement is and how it can be used to finance a security position. The factors that influence the interest rate on repurchase agreements.

5. 1. Treasury Bills (1) 3 types of Securities issued by U.S Department of Treasury * Bills – 1year or less (4weeks/ 3-months/ 6-months) ⇒ money market ! * Notes – more than 2years but no more than 10years * Bonds – more than 10years (2) Treasury Bill is Discount Security e.g e.g A investor bought 6-month Treasury Bill with a face value of $100,000 for $96,000 ⇒ here, $4,000 represents interest!

6. (2) Bid and Offer Quotes on Treasury Bill Y D = D/F × 360/t e.g) would be quoted 8.75% on a bank discount basis. D = $1 00,000 -$97,569 = $2,431 Y D = $2431/$100,000 × 360/100 = 8.75% Y D = yield on a bank discount basis (expressed as a decimal) D = dollar discount (Face Value – The Price) F = face value t = number of days remaining to maturity

8. (3) Shortcomings of quoted yield on a bank discount basis ① The measure is based on a face value rather than on the actual amount invested. ② Difficult to compare with Treasury note & bonds which pay interest on 365-day basis. ⇒ Solution ; CD equivalent yield (money market equivalent yield) = 360 Y D 360 – t(Y D ) e.g) 360 (.0875) 360-100 (.0875) => 8.97 %

9. 2. Repurchase Agreements (1) Key concept - Repurchase Agreement(Repo) : borrower(seller/cash receiver) sell securities for cash to a lender (buyer/cash provider) & agree to repurchase those securities at a later date for more cash. - Repo Rate is the difference between borrowed and paid back cash expressed as a percentage. - Reverse Repo is simply the same repurchase agreement from the buyer's viewpoint, not the seller's. - Overnight Repo (a loan for 1day) Term Repo (a loan for more than 1day)

10. (2)Advantage of using repo market - For sellers : the rate is less than the cost of bank financing - For buyers : it offers attractive yield on a short-term secured transaction that is highly liquid

11. (3) Credit Risks The seller may fail to repurchase the securities sold at the maturity The security may have lost value since the outset of the transaction as the security is subject to market movements To mitigate this credit risk, repos often are over-collateralized as well as being subject to daily mark- to-market margining. The buyer may keep the security, and liquidate the security in order to recover the cash lent

12. (4) Participants in the Market - Net sellers of collateral : Thrifts and Commercial bank - Net buyers of collateral : Money market funds, Bank trust department, Municipalities, Corporations - Matched Book : A dealer's account in which borrowing costs equal the interest earned on loans. - Repo Broker : When one cannot find a customer willing to do a repo transaction, he uses the service of Repo Broker - Federal Reserve : To implement monetary policy by purchasing or selling collateral.

13. (5) Determinants of the Repo Rate  Quality credit quality & liquidity, the repo rate  Term of the repo  Delivery requirement  Available of collateral difficulties to obtain, the repo rate

14. Thank you- ♡