Money Markets Flashcards
What is the money market?
A market for short-term securities that are highly liquid and close to being money
The term ‘money market’ is a misnomer as actual currency is not traded here.
What are the typical characteristics of money market securities?
- Sold in large denominations ($1,000,000 or more)
- Low default risk
- Mature in one year or less, often in less than 120 days
Why do we need money markets?
To handle short-term funding needs efficiently, leveraging banks’ information advantages while avoiding their regulatory costs.
What creates a cost advantage for money markets over banks?
- Reserve requirements create expenses for banks
- Regulations limit interest rates banks can offer, driving growth in money markets
What is one purpose of money markets?
To provide a place for warehousing surplus funds for short periods of time.
Who participates in money markets?
- U.S. Treasury Department
- Federal Reserve System
- Commercial banks
- Businesses
- Investment companies
- Finance companies
- Insurance companies
- Pension funds
- Individuals
- Money market mutual funds
What are Treasury Bills (T-bills)?
Short-term securities with maturities ranging from 28 days to 12 months, sold at a discount.
What is the discounting method in T-bills?
Investors pay less than face value, and the increase in price at maturity provides the return.
How are T-bills auctioned?
Auctioned weekly to dealers, accepting both competitive and noncompetitive bids.
What are Federal Funds?
Short-term funds transferred between financial institutions, typically for one day.
What are repurchase agreements?
Short-term collateralized loans where a firm sells Treasury securities and agrees to buy them back later.
What are negotiable certificates of deposit?
Bank-issued securities that document deposits, specifying interest rates and maturity dates.
What is commercial paper?
Unsecured promissory notes issued by corporations, maturing in no more than 270 days.
What are banker’s acceptances?
Orders to pay a specified amount on a given date, often used in international trade.
What are Eurodollars?
Dollar-denominated deposits held in foreign banks, crucial for international transactions.
What is the London Interbank Offer Rate (LIBOR)?
The rate offered for the sale of funds in the Eurodollar market.
What is the main advantage of Eurodollar deposits?
Higher returns compared to domestic dollar deposits due to fewer regulations.
What is liquidity in the context of money market securities?
The ease with which a security can be bought or sold in the market.
Fill in the blank: Treasury bills typically have maturities of _______.
[4, 13, 26, and 52 weeks]
True or False: Money markets provide high returns due to their low risk.
False
What role does the U.S. Treasury Department play in money markets?
Sells U.S. Treasury securities to fund the national debt.
What is the impact of regulations on bank interest rates?
Regulations limit the interest rates banks can offer, impacting their competitiveness.
What is the duration range for Eurodollar deposits?
30 to 180 days
Who are the primary holders of Eurodollar deposits?
Non-U.S. banks
What types of entities participate in money markets?
Businesses, governments, and banks
What is the typical maturity period for money market instruments?
1 day to 1 year
What is the risk level associated with money market instruments?
Low default probability
What is the primary purpose of money markets?
Used to ‘warehouse’ funds
Why are returns in money markets low?
Because of low risk and high liquidity
Who are the participants in money markets?
- U.S. Treasury
- Commercial banks
- Businesses
- Individuals (through mutual funds)
What are some examples of money market instruments?
- T-bills
- Fed funds
Who issues money market securities?
Ranging from the U.S. government to banks to large corporations
What is the range of maturity for money market securities?
As little as one day to as long as one year
How does secondary market liquidity vary for money market instruments?
Varies substantially
True or False: Money market instruments generally have high returns.
False
Fill in the blank: Money markets are characterized by _______ returns due to their low risk.
[low]
