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Money Markets FNCE 4070 Financial Markets and Institutions.

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Presentation on theme: "Money Markets FNCE 4070 Financial Markets and Institutions."— Presentation transcript:

1 Money Markets FNCE 4070 Financial Markets and Institutions

2 Definition Money Markets Defined 1.Money market securities are usually sold in large denominations ($1,000,000 or more) 2.They have low default risk 3.They mature in one year or less from their issue date, although most mature in less than 120 days

3 Why do Money Markets exist? Banks should be able to fulfill the needs of short term deposits and loans which the money market provides Banks are at a signifiant cost disadvantage – Highly regulated – Reserve Requirements

4 The purpose of Money Markets Investors in Money Market: Provides a place for warehousing surplus funds for short periods of time Borrowers from money market provide low-cost source of temporary funds Allows both to manage the timing of inflows and outflows efficiently.

5 Participants

6 Money Market Instruments ─Federal Funds ─Treasury Bills ─Commercial Paper ─Repurchase Agreements ─Negotiable Certificates of Deposit ─Eurodollars ─Banker’s Acceptance

7 Fed Funds vs T-Bills

8 Money Market Instruments: Commercial Paper Rates

9 Bruce Bent Reserve Fund The first -- calling the company to ask about the fund's holdings -- might seem daunting given the complexities of many of these portfolios. But in fact the request can test a company's responsiveness to its customers, observes Bruce Bent, who created the money fund 37 years ago. "A number of funds will say 'we don't give that out,'" said Bent, whose New York-based firm, The Reserve, has about $80 billion in money-fund assets, none of which, he adds, is exposed to subprime loans or SIVs. If the fund company isn't forthcoming, he says, "take your money out and say goodbye." A second warning flag, Bent points out, is a money fund that's consistently the top-yielding performer. "That gives you pause," he said. Ideally a fund would land in the top 25% of its peers. "If some guy is always the No. 1 fund, he's doing something that's inappropriate for a money fund," Bent said.

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