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Chapter 5

Chapter 5. Money Market Instruments. Money Market Instruments. United States treasury bills Federal funds Repurchase agreements Commercial paper Prime rate Bankers acceptances Bank certificates of deposit Eurocurrency certificates of deposit Money market funds. Repurchase Agreements.

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Chapter 5

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  1. Chapter 5 Money Market Instruments

  2. Money Market Instruments • United States treasury bills • Federal funds • Repurchase agreements • Commercial paper • Prime rate • Bankers acceptances • Bank certificates of deposit • Eurocurrency certificates of deposit • Money market funds

  3. Repurchase Agreements Financing Needs of a Bond Dealer Points in time 2:00 p.m. 5:00 p.m. 9:00 a.m. January 15 January 15 January 16 Dealer buys Dealer sells Dealer repurchases $450 million $400 million $400 million and of bonds of bonds as pays overnight repo interest

  4. Bankers’ Acceptances US money market Bankers’ acceptance $ Pays in future US retailer US bank Goods $ Foreign producer Foreign bank $

  5. Money Market Funds 5%Deposit Bank 7.5% Loans $ $ Individuals and businesses Large CDs Borrowers $ Money market mutual funds $ $ Commercial paper 7% Deposit 6.9% Fee = 0.10%

  6. Quoting rates on a discount basis • Let the number of days until maturity be t. • The price is P. • The face value is par. • The discount rate is d.

  7. Money Market Cash Flows Points in time 0 t days -P +par

  8. Use of the discount rate suffers from two problems: a 360 day year and the rate being a fraction of par, instead of a fraction of the amount lent, P.

  9. Add-On Rate: a

  10. Bond Equivalent Yield: r

  11. Semi-annual yield: i Annual yield: y

  12. Comparing Money Market Rates Discount rate (d): Add-on rate (a): Bond equivalent yield (r):

  13. Semiannual yield to maturity (i): Annual yield to maturity (y):

  14. Add-on rate (a): Bond equivalent yield (r):

  15. Semiannual yield to maturity (i): Annual yield to maturity (y):

  16. Comparing Money Market Rates Rates Semiannual yield Annual yield Bond equivalent yield Add-on rate Discount rate Days 91.25 182.5

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