Financial Markets and Institutions: Chapter 6

Chapter 6 Money Markets: describe the features of the most popular money market securities, explain how money markets are used by institutional investors, explain the valuation and risk of money market securities, explain how money markets have become globally integrated.
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Financial Markets and Institutions: Chapter 6 FinancialMarketsandInstitutions Abridged10thEdition by Jeff Madura © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.1 Part 3 Debt Security Markets2 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 6 Money Markets ChapterObjectives ■ describethefeaturesofthemostpopularmoney marketsecurities ■ explainhowmoneymarketsareusedbyinstitutional investors ■ explainthevaluationandriskofmoneymarket securities ■ explainhowmoneymarketshavebecomeglobally integrated © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.3 Money Market Securities 1. Moneymarketsecuritiesaredebtsecuritieswithamaturityof oneyearorless. 2. Issuedintheprimarymarketthroughatelecommunications networkbytheTreasury,corporations,andfinancial intermediariesthatwishtoobtainshorttermfinancing. 3. Arecommonlypurchasedbyhouseholds,corporations,and governmentsthathavefundsavailableforashorttimeperiod. 4. Canbesoldinthesecondarymarketandareliquid.4 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Money Market Securities Themorepopularmoneymarketsecuritiesare: § Treasurybills(Tbills) § Commercialpaper § Negotiablecertificatesofdeposit § Repurchaseagreements § Federalfunds § Banker’sacceptances5 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Exhibit 6.1 How Money Markets Facilitate the Flow of Funds6 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Treasury Bills n IssuedwhentheU.S.governmentneedstoborrowfunds. n TheTreasuryissuesTbillswith4week,13week,and26week maturitiesonaweeklybasis. n Theparvalue(amountreceivedbyinvestorsatmaturity)ofT billswashistoricallyaminimumof$10,000,butnowitis $1,000andmultiplesof$1,000. n Aresoldatadiscountfromparvalue,andthegainisthe differencebetweenparvalueandthepricepaid n Backedbythefederalgovernmentandarevirtuallyfreeof credit(default)risk. n Highlyliquid,duetoshortmaturityandstrongsecondary market.7 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Treasury Bills 1. InvestorsinTreasuryBills a. Depositoryinstitutionsretainaportionoftheirfundsinassets thatcanbeeasilyliquidatedtoaccommodatewithdrawals. b. OtherfinancialinstitutionsinvestinTbillsincasecashoutflows exceedcashinflows. c. Individualswithsubstantialsavingsinvestindirectlythrough moneymarketfunds. d. CorporationsinvestinTbillstocoverunanticipatedexpenses. .8 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passw ...