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Money Markets Money Market Instruments. Chapter 11: Money Market Instruments © Oltheten & Waspi 2012 Money Market Instruments  Treasury Bills  Commercial.

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Presentation on theme: "Money Markets Money Market Instruments. Chapter 11: Money Market Instruments © Oltheten & Waspi 2012 Money Market Instruments  Treasury Bills  Commercial."— Presentation transcript:

1 Money Markets Money Market Instruments

2 Chapter 11: Money Market Instruments © Oltheten & Waspi 2012 Money Market Instruments  Treasury Bills  Commercial Paper  Bankers Acceptances  Certificates of Deposit  Federal Funds  Repurchase Agreements

3 Chapter 11: Money Market Instruments Money Market Instruments PricingIssuerCharacteristic Treasury Bills Discount Paper US Treasury “Full Faith and Credit” of the US Government Commercial Paper Corporations Short term corporate debt Bankers Acceptance Banks Finances self-liquidating transaction involving non-US entity Certificate of Deposit Interest at Maturity Borrowing by banks from investors Federal Funds Borrowing by Banks from other banks Repurchase Agreement Money Market Dealers Borrowing with financial assets as collateral in order to lend at a higher rate: “Pawnshop Model” © Oltheten & Waspi 2012

4 Chapter 11: Money Market Instruments Treasury Bills © Oltheten & Waspi 2012

5 Chapter 11: Money Market Instruments © Oltheten & Waspi 2012 Primary Market  Treasury Bills are auctioned on a regular calendar basis.  4 week every Tuesday at 1pm  13 week every Monday at 1pm  26 week every Monday at 1pm  52 week Bills discontinued in March 2001  Each is for settlement on Thursday  Which is why Treasury Bills mature every Thursday.

6 Chapter 11: Money Market Instruments © Oltheten & Waspi 2012 Treasury Bills  Characteristics  Debt of the US Department of the Treasury  Discount Paper  Primary Market  Auction call  Secondary Market  OTC  On/Off the run

7 Chapter 11: Money Market Instruments Commercial Paper © Oltheten & Waspi 2012

8 Chapter 11: Money Market Instruments © Oltheten & Waspi 2012 Commercial Paper  Characteristics  Issued by Corporations  Discount Paper  < 270 days (average is 30 days) base of the yield curve

9 Chapter 11: Money Market Instruments © Oltheten & Waspi 2012 Commercial Paper  Characteristics  Issued by Corporations  Discount Paper  < 270 days (average is 30 days)  Primary Market  Directly placed/Dealer placed  Secondary Market  None

10 Chapter 11: Money Market Instruments Bankers Acceptance © Oltheten & Waspi 2012

11 Chapter 11: Money Market Instruments © Oltheten & Waspi 2012 Bankers Acceptance  Issued by Banks to finance a specific self- liquidating commercial transaction  Generally involves at least one non-US entity  Discount Paper

12 Chapter 11: Money Market Instruments Commercial Transaction © Oltheten & Waspi 2012 Cambridge Instruments Involving a 60 day waiting period

13 Chapter 11: Money Market Instruments BA: Goods Shipped © Oltheten & Waspi 2012 Shipping Papers (dated: September 15, 2012)

14 Chapter 11: Money Market Instruments Bankers Acceptances © Oltheten & Waspi 2012 New York Computer Imports Cambridge Instruments Who has to wait 60 days? Barclays Bank JP Morgan Chase JPM Accepts at 3.0% There’s an investor out there somewhere.

15 Chapter 11: Money Market Instruments Bankers Acceptances © Oltheten & Waspi 2012 New York Computer Imports Cambridge Instruments Barclays Bank JP Morgan Chase

16 Chapter 11: Money Market Instruments Bankers Acceptance © Oltheten & Waspi 2012 Bankers Acceptance JP Morgan Chase $4,000,000 Due November 14, 2012 Price Tag: $_______

17 Chapter 11: Money Market Instruments BA: Maturity © Oltheten & Waspi 2012 New York Computer Imports Cambridge Instruments Barclays Bank JP Morgan Chase Investor

18 Chapter 11: Money Market Instruments Money Market Instruments PricingIssuerCharacteristic Treasury Bills Discount Paper US Treasury “Full Faith and Credit” of the US Government Commercial Paper Corporations Short term corporate debt Bankers Acceptance Banks Finances self-liquidating transaction involving non-US entity Certificate of Deposit Interest at Maturity Borrowing by banks from investors Federal Funds Borrowing by Banks from other banks Repurchase Agreement Money Market Dealers Borrowing with financial assets as collateral in order to lend at a higher rate: “Pawnshop Model” © Oltheten & Waspi 2012

19 Chapter 11: Money Market Instruments Certificates of Deposit © Oltheten & Waspi 2012

20 Chapter 11: Money Market Instruments © Oltheten & Waspi 2012 Bank Transactions  Initial Deposit of $1m Assets:Liabilities Cash: Reserve: $900, $100, Deposit:$1,000, Assets:$1,000,000.00Liabilities:$1,000,000.00

21 Chapter 11: Money Market Instruments © Oltheten & Waspi 2012 Bank Transactions  Loan of $900,000 AssetsLiabilities Cash: Loans: Reserve: $810, $900, $190, Deposits:$1,000, $900, Assets:$1,900,000.00Liabilities:$1,900,000,00

22 Chapter 11: Money Market Instruments © Oltheten & Waspi 2012 Bank Transactions  Loan of $810,000 AssetsLiabilities Cash: Loans: Reserve: $729, $1,710, $271, Deposits:$1,000, $900, $810, Assets:$2,710,000.00Liabilities:$2,710,000,00

23 Chapter 11: Money Market Instruments © Oltheten & Waspi 2012 Bank Transactions  Loan of $729,000 AssetsLiabilities Cash: Loans: Reserve: $656, $2,439, $343, Deposits:$1,000, $900, $810, $729, Assets:$3,439,000.00Liabilities:$3,439,000,00

24 Chapter 11: Money Market Instruments © Oltheten & Waspi 2012 Certificates of Deposit  Eventually AssetsLiabilities Cash: Loans: Reserve: $0.00 $9,000, $1,000, Deposits:$1,000, $900, $810, $729, $656, ….. Assets:$10,000,000.00Liabilities:$10,000,000,00

25 Chapter 11: Money Market Instruments Federal Funds © Oltheten & Waspi 2012

26 Chapter 11: Money Market Instruments © Oltheten & Waspi 2012 Federal Funds  Borrowing and Lending of Bank Reserves on deposit with the Federal Reserve  Interest at Maturity Overnight money

27 Chapter 11: Money Market Instruments Money Market Instruments PricingIssuerCharacteristic Treasury Bills Discount Paper US Treasury “Full Faith and Credit” of the US Government Commercial Paper Corporations Short term corporate debt Bankers Acceptance Banks Finances self-liquidating transaction involving non-US entity Certificate of Deposit Interest at Maturity Borrowing by banks from investors Federal Funds Borrowing by Banks from other banks Repurchase Agreement Money Market Dealers Borrowing with financial assets as collateral in order to lend at a higher rate: “Pawnshop Model” © Oltheten & Waspi 2012

28 Chapter 11: Money Market Instruments Repurchase Agreements © Oltheten & Waspi 2012

29 Chapter 11: Money Market Instruments © Oltheten & Waspi 2012 Repurchase Agreements  Simultaneous Sale and Repurchase of Collateral to facilitate a loan  Interest at maturity  Pawnshop Model sell collateral $1,000,000. Buy back collateral 60 days at 3½%

30 Chapter 11: Money Market Instruments © Oltheten & Waspi 2012 Question: 11-1  Bankers Acceptance financed through a Repurchase Agreement on T-Bills.

31 Money Markets II


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