Finance 301 1st Edition Lecture 9 Outline of Last Lecture I Monitoring the Impact of Monetary Policy II Global Monetary Policy III Impact of the Crisis in Greece on European Monetary Policy Outline of Current Lecture IV Money Market Securities V Treasury Bills VI Yield on T Bill VII T Bill Discount VIII Commercial Paper IX Negotiable Certificates of Deposit X Repurchase Agreements XI Federal Funds XII Bankers Acceptance XIII Risk XIV Globalization of money markets XV Current Lecture I Money Market Securities a Market securities mature less than a year it tells you that the yield is very small They are a huge investment tool because you can put a lot of money in it and sill make a lot of money diversifies risk companies risk adverse investors Large corps and organizations invest in these sometimes senior citizens invest for safe investment b Primary market issued by investment brokers and commercial banks c Short term d They are a liquid investment you are not going to loose money in most cases 99 are paid e II Treasury Bills a Money market security issued for a year or less b Also a 52 week bill c Treasury notes are between 2 and 10 year investment d Treasury bonds are over 10 years e The FED issues these this is their debt f If you are making 5 dollars in interest you give them 9555 then they give you 1000 back g They are free from default risk because it is backed by the FED h HIGHLY LIQUID mostly commercial and foreign investors invest China Japan i Maturity matching they re trying to make money on assets while they are paying off their liabilities similar to interest on your savings account j This cash flow issue occurs because banks can lend out all their money and get more from the government they may take on too much debt k Safety sure return cover cash flow l treasury bill auction is Once every 2 weeks m Competitive 1 000 or more bid on interest rates I want to get paid 1 1 5 2 3 40 billion in bids 2 everyone gets paid high bid below 2 cause it gets cut off at 2 n Noncompetitive 5 million we will take whatever interest rate you pay They just give you any interest rate such as 2 You would do this because you are going to get paid for sure this way III Yield on T Bill SP PP 365 PP n where SP selling price PP purchase price YT a n number of days of the investment holding period IV T Bill Discount Par PP 360 YT Par n a V Commercial Paper a Huge form of debt for corporations very short term note basically 270 days or less Big companies are borrowing company to cover things like inventory and cash flow or other debts b Unsecured no assets backing c 270 days or less don t have to report to the SEC saves a lot of paperwork if they borrow for a short period of time d S P Moodys and FITCH established ratings grades commercial paper default risk about 99 e First companies that defaulted Fannie Mae Leiman Brothers Citigroup Countrywide bought out by bank of america AIG f Borrowing money to invest financial leverage g General motors goes to securities firm like merill lynch I need 500 million they go to pension funds and investors and ask them to buy it h Not traded on an exchange its over the phone over the counter trade i Some are secured and some are unsecured unsecured pays the higher yield j Commercial paper pays higher k Certificate of deposit make it at a bank pay low amounts l Yield Ycp Par PP PP x 360 n m VI Negotiable Certificates of Deposit a Placement i Some issuers place their NCDs directly others use a correspondent institution that specializes in placing NCDs b Premium i Offer a premium above the T bill yield in order to compensate for less liquidity and safety c Yield i Provide a return in the form of interest along with the difference between the price at which the NCD is redeemed or sold in the secondary market and the purchase price YNCD ii SP PP interest PP d Investment of the bank A CD works by you plan for a certain amount of time and you get a yield on it e Short term investment many of them are a year or less NCD period is the amount of money have to be at least 100 000 can be sold to investors NCD with corporation f VII Need CDS because they are a good investment to diversify with senior citizens like CDs Repurchase Agreements a Fed uses them we buy them temporarily and they buy or sell them back quickly can be overnight or up to 2 weeks they are trying to temporarily increase the money supply b 2 they participate in repos because they solve liquidity issues this says that theyre low on cash they may need to borow money for a short time before they get cash flow c From fed to corp to banks huge market d Solve short term liquidity problems e Placement i Negotiated through a telecommunications network ii Dealers and repo brokers act as financial intermediaries to create repos for firms with deficient or excess funds receiving a commission for their services f Impact of the Credit Crisis i Many financial institutions that relied on the market for funding were not able to obtain funds ii Investors became more concerned about the securities that were posted as collateral g Estimating the Yield Repo rate i VIII SP PP 360 PP n Federal Funds a This rate is the rate banks loan to each other federal funds rate b Discount rate is rate fed loans to banks c Federal funds is rate at what banks lend to other banks d FOMC 0 0 025 federal funds rate they help by adding money to money supply e This rate is higher than the T bill rate f The most active participants are commercial banks because they loan more money than anyone else g Some banks run out of money and others don t because they give out too many loans where people live h Treasury rate government borrows from investors 01 i Federal funds rate banks borrow from each other 25 j Discount rate banks borrow from federal government 5 k examples fed can borrow cheaper from anyone l IX Bankers Acceptance a Indicates that a bank accepts responsibility for a future payment for a customer b Commonly used for international trade transactions c Because acceptances are often discounted and sold by the exporting firm prior to maturity an active secondary market exists d Money market investment usually done for international transactions e i examples Investment between 2 banks internationally because exporter and importer don t know each other ii Example importer in US from exporter in Japan 1 Walmart 1 billion on electronics from Sony in Japan Need this investment because they don t want to ship goods to each other without …