Money Markets

Question 1

What are the 5 knowledge objectives of Money Markets?

Answer 1

MM Yields,
6 MM Types,
Comparison of Types,
MM Participants,
'Euro-dollar' markets.

Question 2

What are 6 types of MM Security?

Answer 2

Treasury Bill,
Fed Fund,
Repo agreements,
Commercial Paper,
NCD's,
Bankers Acceptances.

Question 3

Why participate in the Money Market?

Answer 3

Helps Cash-Flow management by allowing flexible borrowing/lending in the SR (up to one year)

Question 4

How many repayments do MM securities generally make?

Answer 4

Only one, due to short term nature.

Question 5

What are 2 types of repayment techniques?

Answer 5

Single payment securities,

Discount instruments

Question 6

Single payment securities???

Answer 6

Add interest payment to face value when instrument matures.

e.g. £100 face value with 2% interest … £102 is paid on maturity

Question 7

Discount instruments???

Answer 7

Repay only face value. Although initially sold at a discount (like T-bills) to give the investor a return.

e.g. £100 face value, sold to investor at £98 … On maturity at face value the investor gains a return of £2

Question 8

Are yields of Single payment and Discounts instruments directly comparable?

Answer 8

No, quotations convention differences prevent this

Question 9

What are the key differences between money markets and bond markets?

Answer 9

Only high-quality entities participate, lowering default risk

Short maturity, lowering price/liquidity risk

Question 10

Treasury Bills, What kind of returns payment? Trading? Issuer?

Answer 10

Discount
Actively traded
U.S./UK Treasury

Question 11

Federal Funds, what kind of returns payment? Trading? Issuer?

Answer 11

Single payment
Secondary markets have not developed due to short term nature
Commercial Banks

Question 12

Repo agreements, what kind of returns payment? Trading? Issuer?

Answer 12

Single interest payment
Secondary markets have not developed due to short term nature
Central banks, Comm. banks, brokers and dealers, other FI’s

Question 13

Commercial Paper, what kind of returns payment? Trading? Issuer?

Answer 13

Discount
Held to maturity as there is no secondary market
Commercial banks, other FI’s, Corporations

Question 14

Negotiable Certificates of Deposits (CD), what kind of returns payment? Trading? Issuer?

Answer 14

Single interest payment
Not actively traded due to ‘buy and hold’ strategies
Commercial banks

Question 15

Banker’s Acceptances, what kind returns payment? Trading? Issuer?

Answer 15

Discount
Not actively traded due to ‘buy and hold’ strategies
Commercial banks

Question 16

What are Eurodollar markets?

Answer 16

Dollar-denominated deposits and money market instruments held and traded outside the US

Question 17

How did the Euro dollar come into bieng?

Answer 17

After US regulations in 1963 limited the funds that multinationals could borrow in the US. They borrowed dollars abroad instead.

Question 18

What rate is paid on Eurodollar deposits?

Answer 18

The London Interbank Offered Rate (LIBOR). This is closely related to the US Fed Funds Rate.

Question 19

What do Money Market instruments allow?

Answer 19

This allows Institutions to meet their short-term cash flow needs