1. Financial Institutions and Markets
Dr. Andrew L. H. Parkes
Day 6
“How do financial markets work?”
卜安吉

2. Chapter 9: Money Markets
Short-term
Low risk
Very Liquid
Therefore, they are SAFE and LIQUID – or CLOSE to being MONEY.
ALMOST – Money
Sept. 24, 2009
Financial Institutions & Markets, Ch. 9

3. Chapter 9: Money Markets
Sold in Large Amounts
Low DEFAULT risk
Less than 1 year to maturity
Most less than 120 days – so CLOSE to being MONEY.
6 month U.S. Treasury Bill rate
As of Dec. 12, 2008
Sept. 24, 2009
Financial Institutions & Markets, Ch. 9

4. Chapter 9: Money Markets
Prime Rate is top flat line
Federal Funds is the bottom flat line (notice the rate is almost zero)
These are really considered as MONEY.
Rate comparisons - NYT
Sept. 24, 2009
Financial Institutions & Markets, Ch. 9

5. CONSUMER MONEY RATES Tuesday, December 09, 2008
YIELD/RATE (%)
52-WEEK
CHANGE IN PCT. PTS
Interest Rate
Last
Wk Ago
High
Low
52-Wk
3-Yr
Federal-funds rate target
1.00
4.25
-3.25
-3.00
Prime rate*
4.00
7.25
Libor, 3-month
2.16
2.21
5.11
2.13
-2.95
-2.32
Money market, annual yield
2.37
2.40
3.54
2.25
-1.17
-0.35
Five-year CD, annual yield
3.71
3.83
4.48
3.23
-0.77
-0.80
30-year mortgage, fixed
5.83
5.81
6.61
5.36
-0.09
-0.03
15-year mortgage, fixed
5.54
5.60
6.22
4.91
0.02
0.08
Jumbo mortgages, $417,000-plus
7.03
7.22
7.89
6.49
0.17
0.88
Five-year adj mortage (ARM)
5.92
5.97
6.14
5.01
0.13
0.51
New-car loan, 48-month
6.80
6.83
7.14
6.45
-0.06
0.19
Home-equity loan, $30,000
5.44
5.15
6.88
4.64
-1.40
-0.60
* Base rate posted by 75% of the nation's largest banks.
   Source: Thomson Reuters, WSJ Market Data Group, Bankrate.com
Sept. 24, 2009
Financial Institutions & Markets, Ch. 9

6. U.S. Treasury (Bills) 1 Month - As of 9/23/2009
Sept. 24, 2009
Financial Institutions & Markets, Ch. 9

7. Why are Money Markets needed?
Banks have the information advantage – they can mediate asymmetric information between savers and borrowers
BUT MONEY MARKETS Have:
Less Regulation, and a
Cost Advantage
So banks only operate where the info advantage > reg costs
Top is Dec the bottom is Sept. 2009!!! Why different?!
Sept. 24, 2009
Financial Institutions & Markets, Ch. 9

8. Commercial Paper Rates 2007
Data as of December 13, 2007 Commercial Paper Rates and Outstanding Derived from data supplied by The Depository Trust & Clearing Corporation Posted December 14, Discount rates
Term
AA nonfinancial
A2/P2 nonfinancial
AA financial
AA asset-backed
1-day
4.20
4.51
4.21
4.70
7-day
4.22
4.62
4.16
15-day
4.18
4.65
5.51
30-day
5.63
4.37
6.06
60-day
4.19
5.39
4.82
5.98
90-day
4.17
5.37
4.94
5.60
Sept. 24, 2009
Financial Institutions & Markets, Ch. 9

9. Commercial Paper Rates, 2008
Data as of December 11, 2008 Commercial Paper Rates and Outstanding Derived from data supplied by The Depository Trust & Clearing Corporation Posted December 12, Discount rates
Term
AA nonfinancial
A2/P2 nonfinancial
AA financial
AA asset-backed
1-day
0.05
1.72
0.10
0.65
7-day
3.11
0.09
0.89
15-day
0.08
3.81
0.30
1.18
30-day
0.28
5.11
0.41
1.16
60-day
n.a.
5.28
0.78
90-day
1.29
Trade data insufficient to support calculation of the 60-day AA nonfinancial, 90-day AA nonfinancial, 90-day A2/P2 nonfinancial, 60-day AA financial, and 90-day AA financial rates for December 11, 2008.
Sept. 24, 2009
Financial Institutions & Markets, Ch. 9

10. Commercial Paper Rates, 2009
Data as of September 22, 2009 Commercial Paper Rates and Outstanding Derived from data supplied by The Depository Trust & Clearing Corporation Posted September 23, Discount rates
Term
AA nonfinancial
A2/P2 nonfinancial
AA financial
AA asset-backed
1-day
0.15
0.31
0.14
0.38
7-day
0.10
0.47
0.74
15-day
0.12
0.25
0.16
0.43
30-day
0.09
0.40
0.18
0.22
60-day
0.17
0.37
0.24
90-day
0.21
n.a.
0.29
Trade data insufficient to support calculation of the 90-day A2/P2 nonfinancial rate for September 22, 2009.
Back to “Normal” - almost
Sept. 24, 2009
Financial Institutions & Markets, Ch. 9

11. The Purpose of Money Markets
Place to Keep Cash (Funds) for a short time
Source for borrowers that just need funds for a short time period.
Place to earn a little on funds (cash) not in use (earning income) for a firm.
Quickly able to access these funds!
Graph source: WSJ
Sept. 24, 2009
Financial Institutions & Markets, Ch. 9

12. Fed Lost Control of Fed Funds Rate?
Take a look at the last few months and notice the “Target” rate – the rate the FOMC sets
NOW look at the “Daily” rate – the rate that Banks loan “Fed Funds” on the market
There is a VAST difference lately – not before!!! Most “Fed Watchers” worry about this – that the Fed has no control!
Sept. 24, 2009
Financial Institutions & Markets, Ch. 9

13. Financial Institutions & Markets, Ch. 9
Sept. 24, 2009
Financial Institutions & Markets, Ch. 9

14. Participants and Instruments
Are detailed very well in Mishkin’s Chapter 9 PowerPoint Slides.
See the PPT …
Commercial Paper
Sept. 24, 2009
Financial Institutions & Markets, Ch. 9