Finance 301 1st Edition Lecture 9Outline of Last Lecture I. Monitoring the Impact of Monetary PolicyII. Global Monetary PolicyIII. Impact of the Crisis in Greece on European Monetary PolicyOutline of Current LectureIV. Money Market SecuritiesV. Treasury BillsVI. Yield on T-BillVII. T-Bill DiscountVIII. Commercial PaperIX. Negotiable Certificates of DepositX. Repurchase AgreementsXI. Federal FundsXII. Bankers AcceptanceXIII. RiskXIV. Globalization of money marketsXV.Current LectureI. Money Market Securitiesa. 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 banksc. Short termd. They are a liquid investment you are not going to loose money in most cases 99% are paide.II. Treasury Billsa. Money market security issued for a year or lessb. Also a 52 week billc. Treasury notes are between 2 and 10 year investmentd. Treasury bonds are over 10 yearse. The FED issues these, this is their debtf. 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 FEDh. HIGHLY LIQUID, mostly commercial and foreign investors invest China, Japani. Maturity matching- they're trying to make money on assets while they are paying off their liabilities similar to interest on your savings accountj. 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 debtk. Safety, sure return, cover cash flowl. 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-Billa.period) (holding investment theof days ofnumber price purchaseprice sellingwhere365nPPSPnPPPPSPYTIV. T-Bill Discounta.nParPPParYT360V. Commercial Papera. 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 backingc. 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 timed. 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 leverageg. 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 yieldj. Commercial paper pays higher k. Certificate of deposit- make it at a bank, pay low amountsl. Yield- Ycp = ((Par – PP)/PP x (360/n)m.VI. Negotiable Certificates of Deposita. Placementi. Some issuers place their NCDs directly; others use a correspondent institution that specializes in placing NCDs.b. Premiumi. Offer a premium above the T-bill yield in order to compensate for less liquidity and safety.c. Yieldi. 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.ii.P PPPSPYNCDinterest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 corporationf. Need CDS because they are a good investment to diversify with senior citizens like CDsVII. Repurchase Agreementsa. 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 supplyb. 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 flowc. From fed to corp to banks, huge marketd. Solve short term liquidity problemse. Placementi. 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 Crisisi. 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 collateralg. Estimating the Yieldi.nPPPPSP 360rate Repo VIII. Federal Fundsa. This rate is the rate banks loan to each other (federal funds rate)b. Discount rate is rate fed loans to banksc. Federal funds is rate at what banks lend to other banksd. FOMC- 0-0.025% federal funds rate they help by adding money to money supply e. This rate is higher than the T-bill ratef. 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 toomany 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 anyonel.IX. Bankers Acceptancea. 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 transactionse.i. examples- Investment between 2 banks , internationally because exporter and importer don’t know each otherii. Example importer in