Money Markets

Question 1

Characteristics of money markets securities

Answer 1

• Maturity <1 year
• High maturities
• Low price volatility
• Lower yield

Question 2

Characteristics of T-bills

Answer 2

• Issued by the government
• Denominations of multiples of 100
• Virtually no risk, so low returns
• Used as an open market monetary policy tool

Question 3

Characteristics of Fed funds

Answer 3

• Maturity: usually 1 day
• Between correspondent banks
• Exposed to fed funds interest rate
• No collateral as payment guarantee

Question 4

Characteristics of repurchase agreement

Answer 4

• ” I have a lot of assets and want to raise money quickly” –> when I sell assets and then promise to buy them back in the future
• Inverse repo: buyers perspective
• 3rd party repo: have an intermediate
• T-bills are used as collateral = low yield

Question 5

Characteristics of Commercial papers

Answer 5

Raising money straight from investors instead of going to the bank because the i is higher and more complicated

• Usually of $100,000
• Maturity =< 270 days
• It is issued by firms that have a high credit worthiness or, on the contrary, the firm will have attached to it a bank’s acceptance
• It can be done directly to the investors = saves on broker fee, BUT company has to find investors. Or can get a broker who will charge a fee but will sell the securities

Question 6

Characteristics of Negotiable certificates of deposit (CD)

Answer 6

Bank-issued time deposit that specifies an i and a maturity date, but can be traded in secondary markets. However, the bank sells them to investors who most likely will keep them until maturity. So, the primary market is active, but the secondary isn’t.

Question 7

Characteristics of Bankers acceptance

Answer 7

It is mostly done with international trades when both companies don’t have much trust between themselves. It is done for assets that are yet to be shipped.
In case I need money fast I can always sell it before maturity.
Low risk & i

Question 8

A repo is essentially a collaterized….?

Answer 8

Fed funds

Question 9

What is the difference between competitive and non-competitive bidding for t-bills?

Answer 9

Competitive = lowest bid is chosen because governments want to borrow at the lowest price as possible. Thus, investors are guaranteed a maximum price
Non-competitive = a quantity is chosen

Question 10

Do Stock splits change the divisor in a price-weighted index but do not result in any net change in the divisor of a value-weighted index?

Answer 10

yes