Chapter 6: The Money Market

Money Market & Money Market Securities (5)

1. Short-term debt market. (Short = maturities less than 1 year).

2. Used to finance short-term needs for funds (payroll, inventory).

3. Issued by the U.S. Treasury, corporations, and financial institutions needing short-term financing.

4. Purchased by households, corporations, and others who want short-term, interest-bearing investments.

5. Can easily be sold in the secondary market to provide liquidity to investors.

Treasury Bills (T-Bills) (6)

1. Issued by the U.S. Government.

2. Maturities of 4, 13, and 26 weeks, and 1 year.

3. Investors include banks and other financial institutions, individuals, and corporations.

4. Are a safe short-term parking place for excess cash needed in the future.

5. Are free of default risk and are very liquid.

6. Are sold at discount from their par value.

Commercial Paper (7)

1. Issued by credit-worthy firms, usually unsecured.

2. Normally used to finance current assets like inventory.

3. Placed either with investors or commercial paper dealers who find investors for issuers.

4. Normal denomination = $100,000

5. Maturities range from several weeks to 270 days.

6. Involves low credit risk.

7. Sold at discount from par value.

Negotiable Certificates of Deposits (NCDs) (4)

1. Issued by commercial banks and other large depository institutions to raise short-term funds.

2. Minimum denomination of $100,000 with maturities ranging from weeks to one year.

3. Active in a secondary market, providing liquidity to investors.

4. Pay interest on the par value. (Sold at par).

Repurchase Agreements (Repos) (4)

1. Entity raising money sells securities to investors with an agreement to repurchase the securities for a specified price.

2. This amounts to a loan with the securities serving as collateral.

3. A very large market with large denominations of $10 million or more.

4. Maturities range from overnight to about 6 months.

Federal Funds (4)

1. Market for inter-bank lending of excess reserves to those who need them.

2. Rate is slightly higher than the T-bill rate.

3. The Fed adjusts reserves through open market operations to influence this rate.

4. Brokers match up financial institutions with excess reserves to lend them to institutions that need to borrow them.

Bankers Acceptance (3)

1. Often an international trade transaction where the importer’s bank guarantees the future payment to the exporting firm.

2. The exporter then has a safe claim, but will often sell it at a discount to obtain cash right away.

3. Is now a tradeable security.