C5 Money Market

Question 1

Money Market

Answer 1

Money market is a place where issuers go to obtain short term financing, typically less than 1 year. Corporations, municipalities and the US government will all use the money market to obtain short term financing.

Money market instruments are highly liquid fixed income securities issued by governments and corporation with high credit ratings. Because of the short term maturities and high quality of the issuers, money market instruments are considered very safe.

Question 2

Corporate Money Markey Instruments

Answer 2

• Banker’s acceptances
• Negotiable Certificate of Deposits
• Commercial Paper
• Federal Funds Loans
• Repurchase Agreements
• Reverse repurchase agreements

Question 3

Banker’s acceptances (BA)

Answer 3

Used mostly to facilitate foreign trade. Like a postdated check or line of credit. Issued by a bank it is a time draft that will be paid on the due date. Date ranges are 1 day to 270 days (9 months)

Question 4

Negotiable Certificate of Deposits (CD)

Answer 4

Like regular CD’s except they can be traded on the open market.

Fixed income with a maturity ranging from 30 days to 10 years or more. The minimum amount for a negotiable CD is $100,000. Many Negotiable CDs are issued in amounts exceeding $1,000,000 but the FDIC only insures the first $250,000

Question 5

Commercial Paper

Answer 5

Issued by largest and most creditworthy corporations that need short term money for working capital or to meet cash needs for seasonal business cycles. Usually issued in book entry form.

Unsecured promissory note or IOU. Issued at a discount

Maturity 1 days to 270 days (9 months). If longer it would need registration.

Two types, Direct and Dealer

• Direct – Sold from issuing corporation directly to investors
• Dealer – Sold to a broker/dealer who resells it to investors.

Question 6

Federal Funds Loans

Answer 6

Loans between two large banks for short time periods. Typically amounts of $1,000,000 or more. These loans can be exchanged in the money market between investors.

Question 7

Repurchase Agreements

Answer 7

A fully collateralized loan between a dealer and a large institutional investor. Usually collateralized with US government securities. The borrower (Seller) agrees to repurchase the securities from the lender at a slightly higher rate. The difference represents the lenders interest charge.

Reverse repurchase agreements - The same as repurchase agreement, but they are initiated by the institutional investor. The borrower is the institution, not the dealer.

Two types - Fixed and open

• Fixed – Specified date for repurchase
• Open - Date of repurchase not fixed, becomes a demand note that is callable.

Question 8

Government Monet Market Instruments

Answer 8

• Treasury Bills
• Treasury and Agency securities with less than one year remaining
• Short-term discount notes issued by government agencies

Question 9

Municipal Money Market Instruments

Answer 9

• Bond Anticipation Notes
• Tax anticipation Notes
• Revenue Anticipation Notes
• Tax and Revenue Anticipation Notes
• Tax-Exempt Commercial paper

Question 10

International Money Market Instruments

Answer 10

Often large institutions will place US dollars in foreign accounts to earn higher interest rates. These dollars held outside the US are called Eurodollars. The accounts are known as a Eurodollar Deposit. They have maturities up to 180 days and are traded between large European Banks and institutions in a similar manner to federal funds notes in the US.

Question 11

Key Interest Rates

Answer 11

• Discount Rate – The rate the Federal Reserve Bank charges on loans to member banks. Borrowing this way is discouraged, and the rate is most symbolic and used to set other rates.
• Federal Funds Rate – The rate that member banks charge each other for overnight loans. Widely watched rate to track short term interest.
• Broker Call Rate – The rate that banks chargers brokers to finance customer margin purchases
• Prime Rate – The rate banks charge their largest and most creditworthy corporate customers on loans. Important for consumer spending since most credit card are tied to this rate. IE Prime + 3%. Used to be times to adjustable rate mortgages, but most mortgages are now tied to Treasury notes.
• London Interbank Offered Rate (LIBOR) – most widely used measure of short term interest rates around the world. Similar to US Federal funds rate. Set by British Bankers association in a variety of currencies including Euros, US Dollars and Yen.