1. Money Market Instruments

2. n money market instruments are defined as debt instruments with a maturity of one year or less. Money Markets serve important functions: n Transfer Funds (savers to borrowers) n Serves as a pricing benchmark n Facilitates monetary policy by allowing the FRB to control inflation by buying and selling money market instruments

3. Types of Instruments n Method of payment of interest –Interest bearing vs. Discount Instruments n Currency Denominations –US Dollar vs. Non-USD Instruments n Issuance Market –United States vs. the Euro Markets n Structure –Fixed-Rate vs. Floating-Rate n Nationality of Borrower –Domestic vs. Foreign

4. Interest-Bearing vs. Discount Instruments n Interest-Bearing –Referred to as Coupon Bearing –The investor pays face value and at maturity received face value plus interest. n Discount Instruments –Purchased at a discount from face value; upon maturity the investor receives full face value rather than interest.

5. Types of Interest-Bearing Instruments n Negotiable Certificates of Deposits (CDs) –Issued by banks to raise short-term money. –Negotiable CDs are issued as securities (versus CDs which are a form of deposit at retail banks). –No deposit insurance. –Typical maturity one to twelve months.

6. Types of Interest-Bearing Instruments n Three Types of CDs issued in USD: –Domestic CD: issued by a US bank in the US for local markets. –Foreign or Yankee CD: issued by a foreign bank in the US. –Eurodollar CD: issued by a large US or foreign bank in the Euro market (an off- shore market primarily located in London).

7. Types of Interest-Bearing Instruments n Floating-Rate CD: securities issued with a 3 to 5 year maturity have coupons that change (or float) based on a spread over a benchmarked reference rate.

8. Types of Interest-Bearing Instruments n Federal Funds Market –Controlled by the Federal Reserve. –Provides overnight liquidity solutions. –The Fed requires that all depositories keep reserves on-hand in their Federal Reserve account. –Non-Collateralized.

9. Types of Interest-Bearing Instruments n Repurchase Agreements –Institutions can also borrow/invest using repurchase argeements or in the repo market. –Typically overnight investments –Collateralized.

10. Types of Interest-Bearing Instruments n Interbank Markets –Bank-to-Bank borrowing. –Highly developed interbank market within the Euro market. –LIBOR: London Interbank Offered Rate –Unregulated Market (since it is off-shore).

11. Types of Discount Instruments n Treasury Bills –US government issues: n Three- and six-month T-Bills weekly n Twelve month T-Bills monthly –Three-month bill is known as the risk-free rate. –Issued through an auction processes: n Competitive bid (indicates price bidder is willing to pay). n Non-Competitive bid (indicates the average price bidders are willing to pay).

12. Types of Discount Instruments n Commercial Paper –Short-term debt instrument issued by corporations. –Issued on a discount basis in maturities ranging from one to 270 days. n Securities in this maturity range are exempt from SEC registration requirements. –Global CP markets.

13. Types of Discount Instruments n Bankers Acceptances –Form of short-term bank borrowing created by facilitating import/export transactions. –Bank provides a letter of credit to an exporter n LC guarantees payment at the end of a set periods for goods that they have exported. –Bank sells this commitment in the money market (making it into a security) and creating a bankers acceptance.

14. Types of Discount Instruments ExporterBankImporter LC LC guarantees payment to Exporter Bank assumes risk from Importer Goods received Payment Recd Payment Recd LC