Chapter 3: Markets and Instruments (The Money Market) Flashcards
are the most marketable of all money market instruments.
T-Bills
represent the simplest form of borrowing: The government raises money by selling bills to the public.
T-bills
include short-term, marketable, liquid, low-risk debt securities.
Money market instruments
sometimes are called cash equivalents, or just cash for short.
Money market instruments
include longer-term and riskier securities.
Capital Markets
are much more diverse than those found within the money market.
Capital Market
is subdivided into segments: longer-term bond markets, equity markets, and the derivative markets for options and futures.
Capital market
is a subsector of the fixed-income market. It consists of very short-term debt securities that usually are highly marketable.
Money Market
are easily accessible to small investors.
Money market funds
pool the resources of many investors and purchase a wide variety of money market securities on their behalf.
Mutual Funds
T-bills with initial maturities of 91 days or 182 days are issued _________; Offerings of 52 week bills are made _________.
Weekly; monthly
an order for a given quantity of bills at a specific offered price. The order is filled only if the bid is high enough relative to other bids to be accepted, then the bidder gets the order at the bid price.
competitive Bid
an unconditional offer to purchase bills at the average price of the successful competitive bids.
Noncompetitive bid
Competitive bidders face two dangers:
- They may bid too high and overpay for the bills or
- Bid too low and be shut out of the auction.
_____________________ by contrast, pay the average price for the issue, and all ________________ are accepted up to a maximum of $1 million per bid.
Noncompetitive bidders; noncompetitive bids
In recent years, noncompetitive bids have absorbed between ______________ of the total auction.
10% and 25%
are highly liquid or are easily converted to cash and sold at low transaction cost and with not much price risk.
T-bills
True or False
Individuals can purchase T-bills directly at auction or on the secondary market from a government securities dealer.
True
True or false
The income earned on T-bills is not exempt from all state and local taxes, another characteristic distinguishing bills from other money market instruments.
False
is a time deposit with a bank.
Certificate of Deposits
issued in denominations greater than $100,000 are usually negotiable, however; that is, they can be sold to another investor if the owner needs to cash in the certificate before its maturity date.
Certificate of Deposits
Are short-term unsecured debt notes issued by large and well-known companies rather than borrow directly from banks.
Commercial Paper
Are very often backed by a bank line of credit, which gives the borrower access to cash that can be used (if needed) to pay off the paper at maturity.
commercial paper
Have maturities that range from less than one, two months, and up to 270 days; longer maturities would require registration with the Securities and Exchange Commission and so are almost never issued.
Commercial Paper
The failure to meet the terms of a contract, such as failure to make interest or principal payments when due on a loan.
Default
starts as an order to a bank by a bank’s customer to pay a sum of money at a future date, typically within six months. At this stage, it is similar to a postdated check.
Banker’s acceptance
are dollar-denominated deposits at foreign banks or foreign branches of American banks.`
Eurodollars
Dealers in government securities use repurchase agreements, ” as a form of short-term, usually overnight, borrowing.
Repos
The dealer sells government securities to an investor on an overnight basis, with an agreement to buy back those securities the next day at a slightly higher price. The increase in the price is the overnight interest. The dealer thus takes out a one-day loan from the investor, and the securities serve as collateral.
Repos
is essentially an identical transaction, except that the term of the implicit loan can be 30 days or more.
Term Repor
is the mirror image of a repo. Here, the dealer finds an investor holding government securities and buys them, agreeing to sell them back at a specified higher price on a future date.
Reverse Repo
Individuals who buy stocks on margin borrow part of the funds to pay for the stocks from their broker.
Brokers’ Calls
