Week 3: Money Markets

Question 1

What are Banker’s acceptances

Answer 1

Orders to pay specified amount to bearer upon completion of conditions

Question 2

What is commercial paper?

Answer 2

Short-term debt, unsecured (no collateral)

Question 3

What is the formula for finding the discount rate of a T-bill?

Answer 3

(FV-P)/FV * (360/n)

Question 4

What are T-Bills?

Answer 4

Treasury-issued bonds with a specified interest rate and maturity date.

Question 5

What are Eurodollars, why do they still grow?

Answer 5

Currency deposited in countries other than its own. They are not under the same regulations as domestic banks

Question 6

How do banks make profit from giving out loans and paying interest on deposits?

Answer 6

The longer the time to maturity, the higher the interest rate. Banks use the interest earned from long-term loans to pay for the interest earned on shorter-term deposits. The difference between the loan’s and deposit’s interest rate is the profit that the bank makes.

Question 7

Explain Treasury-Bill Auctions

Answer 7

Treasury chooses Competitive bills until all bonds are sold, for the price of the accepted bid with the highest yield. Then all non-competitive bids are also accepted for that price.

Question 8

Who participates in the money market?

Answer 8

• Treasury department
• Federal Reserve
• Commercial banks
• Businesses
• Individuals
• Insurance companies
• Finance Companies

Question 9

Why are money markets more advantageous than banks?

Answer 9

Banks have regulations on reserve requirements, interest rates, and depend on informational advantage vs regulatory costs when setting interest rates.

Question 10

What are Federal Funds?

Answer 10

Funds transferred between financial institutions to meet reserve requirements

Question 11

What are money market securities?

Answer 11

Short-term, highly liquid securities

Question 12

Name 5 money market instruments:

Answer 12

1. Treasury Bills
2. Negotiable Certificates of Deposits
3. Repo Agreements
4. Federal Funds
   5.Eurodollars
   6.Banker’s acceptances

Question 13

What are Negotiable Certificates of Deposit?

Answer 13

Bank issued securities that document deposits and specify the interest rate & the maturity date

Question 14

What is the formula for finding the annualized yield of a T-bill?

investment rate

Answer 14

(FV-P)/P * (365/n)

FV = value at maturity
P = Price
n = days for maturity