1. Characteristics of Taxable Securities Money Market Investments Highly liquid instruments which mature within one year that are issued by governments and large corporations Very low risk as they are issued by well-known borrowers and a active secondary market exists Banks purchase money market instruments in order to meet liquidity and pledging requirements and earn a reasonable return

2. Money Market Investments 1-Repurchase Agreements (Repos) -A loan between two parties, with one typically either a securities dealer or commercial bank - The lender or investor buys securities from the borrower and, agrees to sell the securities back at a later date at an agreed-upon price plus interest - The minimum denomination is generally $1 million, with maturities ranging from one day to one year -The rate on one-day repos is referred to as the overnight repo rate and is quoted on an add-on basis assuming a 360-day year - $ Interest = Par Value x Repo Rate x Days/360

3. Money Market Investments Treasury Bills Marketable obligations of the U.S. Treasury that carry original maturities of one year or less They exist only in book-entry form, with the investor simply holding a dated receipt. Investors can purchase bills in denominations as small as $1,000, but most transactions involve much larger amounts

4. Money Market Investments Treasury Bills Each week the Treasury auctions bills with 13-week and 26- week maturities Investors submit either competitive or noncompetitive bids With a competitive bid, the purchaser indicates the maturity amount of bills desired and the discount price offered Non-competitive.bidders indicate only how much they want to acquire

5. Money Market Investments Treasury Bills Treasury bills are purchased on a discount basis, so the investor’s income equals price estimation. -The Treasury bill discount rate is quoted in terms of a 360-day year: Where DR = Discount Rate FV = Face Value P = Purchase Price N = Number of Days to Maturity Notice: treasury bill differ from Treasury Notes and Bonds Treasury Notes and Bonds classified long term debt instruments. Notes have a maturity of 1 - 10 years Bonds have a maturity greater than 10 years Bill : have a maturity of one year or less

6. Money Market Investments Treasury Bills Example: A bank purchases $1 million in face value of 26- week (182-day) bills at $990,390. What is the discount rate? The discount rate is:

7. Money Market Investments Certificates of Deposit -Dollar-denominated deposits issued by U.S. banks in the United States. -Fixed maturities ranging from 7 days to several years. -Pay yields above Treasury bills. Interest is quoted on an add-on basis, assuming a 360-day year.

8. Money Market Investments Commercial Paper - Unsecured promissory notes issued by corporations -Revenue from commercial paper used to finance short-term working capital needs -The issuers are typically the highest quality firms - Minimum denomination is $10,000 -Maturities range from 3 to 270 days -Interest rates are fixed and quoted on a discount basis -Small banks purchase large amounts of commercial paper as investments

9. Money Market Investments Bankers Acceptances A draft drawn on a bank by firms that typically are importer or exporters of goods Has a fixed maturity, typically up to nine months Priced as a discount instrument like T-bills

10. Long term debt securities Banks invest in long term debt securities primarily to obtain higher interest. Long term debt securities classified into three 1- Trading account securities, 2- available for sale 3- held to maturity securities.

11. Capital Market Investments 1- Treasury Notes and Bonds - Issuer is federal government. -It has a lack credit risk. There are three basic types of marketable treasury securities. 1- Bill, have of one year or less. 2- Notes have a maturity of 1 - 10 years Notes are available in minimum denominations of $10000 in either registered or bearer form. 3- Bonds have a maturity greater than 10 years Most pay semi-annual coupons Some are zeros. Sold via closed auctions

12. Capital Market Investments 2- Agency Bond Securities Issuer is government agencies -The amount of outstanding securities that is not a direct obligation of the treasury but it involves federal guarantee has increased rapidly in recent years. Yields on securities bonds are generally higher than yields on treasury securities of similar maturities. Credit quality of agency bond nearly equal to that of treasury securities. All agency securities are subject to federal income tax, but most of them are exempt from state and local income tax. Some Agency securities are callable

13. 3- State and local government bonds Issuer is Government agencies. - the increasing demand of state and local government for funds has resulting in a rapidly growing market for state and local securities. - the interest payments on this type used to be exempt from income tax (federal and state ).

14. Capital Market Investments 4- Revenue Bonds Issuer is state and local government Bonds backed by revenues from specific projects or tax sources. Commercial banks buy revenue debt because it held two characteristics : 1- it have several maturities 2- the 1982 tax equity and fiscal responsibility Act (TEFRA)allowed deduction for only 85 percent of the interest used to buy state and local securities.

15. Capital Market Investments 5- Corporate Bonds Issuer is Business. - A corporate bond is an obligation (usually long term ) of private corporation. -A private corporation is subject to the vicissitudes (rapidly changes) of a market economy -The credit risk assumed by purchaser of corporate bonds.

16. Capital Market Investments 6- Mortgage backed securities Capital Issuer is Consumers (packaged ) -interest bearing -long term debt. It has low credit risk Fairly stable prepayment rates

17. Notice : p.281 Capital Market Investments 7- derivatives