Debt and money ch 6

• Money market securities

Short-term debt with maturity 1 year or less

• Money market securities primary market issuance

Telecommunications network, US Treasury

• Money market securities liquidity

Are quite liquid, can be sold in secondary market

• Examples of money market securities

T-Bills, Commercial paper, NCDs, BAs, repos, FFs

• Credit risk of T-Bills

Backed by Federal Government, virtual default risk free

• Liquidity of T-Bills

High liquidity due to short term

• Commercial Paper definition

Issued by financially strong firms

• Minimum denomination of Commercial Paper

$100,000

• Major investors in commercial paper

Money Market Mutual Funds

• Credit risk of Commercial Paper

Affected by issuer's financial condition, cash flow

• Negotiable certificates of deposit (NCDs)

Issued by commercial banks as a short-term source of funds

• Maturities on NCDs

Normally from 2 weeks to one year

• Yield on NCDs formula

("SP" -"PP" +"Interest" )/"PP"

• Repurchase Agreements (repos)

Party sells securities and agrees to repurchase

• Reverse repos

Party buys securities and agrees to sell back

• Fed Funds Rate

Rate set by the Federal Reserve at which banks borrow money from each other

• Banker's acceptance (BA) definition

Firm's bank accepts responsibility for payment

• BAs typical use

International trade transactions

• Secondary market for BAs existence

Exporters sell BA at a discount before payment date

• Risk of money market securities

Based on credit risk and liquidity risk

• Eurodollar Deposits and Euro Notes

US dollars deposited in European banks

• Eurodollar CDs definition

Large dollar deposits accepted by European banks

• Important attribute of Eurodollar CDs

Not subject to US reserve requirements

• European banks lending capacity

Can lend out 100% of the dollar deposits that they receive

• Effective Yield (Y_e) on International Money Market securities formula

(1+Y_f )(1+%" change in " S)-1

• LIBOR (London Interbank Offered Rate)

Most widely used benchmark for interest rates

• LIBOR Scandal

Banks were falsely manipulating interest rates to profit from trades

• Current administrator of LIBOR

Intercontinental Exchange (ICE)

• US Treasury replacement for LIBOR

Fed's Secured Overnight Financing Rate (SOFR)

• Replacement of LIBOR with SOFR timeline

Transition away from LIBOR is expected to occur sometime after 2021