Tài liệu Thị trường tài chính và các định chế tài chính_ Chapter 06 ppt

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Chapter 6
Money Markets
Financial Markets and Institutions, 7e, Jeff Madura
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.
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Chapter Outline

Money market securities

Institutional use of money markets

Valuation of money market securities

Risk of money market securities

Interaction among money market yields

Globalization of money markets
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Money Market Securities

Money market securities:

Have maturities within one year

Are issued by corporations and governments to
obtain short-term funds

Are commonly purchased by corporations and
government agencies that have funds available for a

short-term period

Provide liquidity to investors
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Money Market Securities (cont’d)

Treasury bills:

Are issued by the U.S. Treasury

Are sold weekly through an auction

Have a par value of $1,000

Are attractive to investors because they are backed by
the federal government and are free of default risk

Are liquid

Can be sold in the secondary market through
government security dealers
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Money Market Securities (cont’d)

Treasury bills (cont’d)

Investors in Treasury bills

Depository institutions because T-bills can be easily
liquidated


Other financial institutions in case cash outflows exceed
cash inflows

Individuals with substantial savings for liquidity purposes

Corporations to have easy access to funding for
unanticipated(dung truoc, huong truoc) expenses
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Money Market Securities (cont’d)

Treasury bills (cont’d)

Pricing Treasury bills

The price is dependent on the investor’s required rate of
return:

Treasury bills do not pay interest

To price a T-bill with a maturity less than one year, the
annualized return can be reduced by the fraction of the
year in which funds would be invested
n
m
kP )1/(Par +=
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Computing the Price of a
Treasury Bill
A one-year Treasury bill has a par value of

$10,000. Investors require a return of 8 percent
on the T-bill. What is the price investors would
be willing to pay for this T-bill?
259,9$
)08.1/(000,10$
)1/(Par
=
=
+=
n
m
kP
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Money Market Securities (cont’d)

Treasury bills (cont’d)

Treasury bill auction

Investors submit bids on T-bill applications for the maturity of
their choice

Applications can be obtained from a Federal Reserve district
or branch bank

Financial institutions can submit their bids using the Treasury
Automated Auction Processing System (TAAPS-Link)

Institutions must set up an account with the Treasury


Payments to the Treasury are withdrawn electronically from the
account

Payments received from the Treasury are deposited into the
account
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Money Market Securities (cont’d)

Treasury bills (cont’d)

Treasury bill auction (cont’d)

Weekly auctions include 13-week and 26-week T-bills

4-week T-bills are offered when the Treasury anticipates a
short-term cash deficiency

Cash management bills are also occasionally offered

Investors can submit competitive or noncompetitive bids

The bids of noncompetitive bidders are accepted

The highest competitive bids are accepted

Any bids below the cutoff are not accepted

Since 1998, the lowest competitive bid is the price applied to
all competitive and noncompetitive bids
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Money Market Securities (cont’d)

Treasury bills (cont’d)

Estimating the yield

T-bills are sold at a discount from par value

The yield is influenced by the difference between the
selling price and the purchase price

If a newly-issued T-bill is purchased and held until
maturity, the yield is based on the difference between par
value and the purchase price
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Money Market Securities (cont’d)

Treasury bills (cont’d)

Estimating the yield (cont’d)

The annualized yield is:

Estimating the T-bill discount

The discount represents the percent discount of the
purchase price from par value for newly-issued T-bills:
nPP
PPSP
Y

T
365
×
−
=
n
PP 360
Par
Par
discount bill-T ×
−
=
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Computing the Yield of a
Treasury Bill
An investor purchases a 91-day T-bill for $9,782. If
the T-bill is held to maturity, what is the yield
the investor would earn?
%94.8
91
365
782,9
782,9000,10
365
=
×
−
=
×
−

=
nPP
PPSP
Y
T
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Estimating the T-Bill Discount
Using the information from the previous example,
what is the T-bill discount?
%62.8
91
360
000,10
782,9000,10
360
Par
Par
discount bill-T
=
×
−
=
×
−
=
n
PP
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Money Market Securities (cont’d)


Commercial paper:

Is a short-term debt instrument issued by well-known,
creditworthy firms

Is typically unsecured

Is issued to provide liquidity to finance a firm’s investment in
inventory and accounts receivable

Is an alternative to short-term bank loans

Has a minimum denomination of $100,000

Has a typical maturity between 20 and 270 days

Is issued by financial institutions such as finance companies and
bank holding companies

Has no active secondary market

Is typically not purchased directly by individual investors
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Money Market Securities (cont’d)

Commercial paper (cont’d)

Ratings

The risk of default depends on the issuer’s financial condition

and cash flow

Commercial paper rating serves as an indicator of the
potential risk of default

Corporations can more easily place commercial paper that is
assigned a top-tier rating

Junk commercial paper is rated low or not rated at all
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Money Market Securities (cont’d)

Commercial paper (cont’d)

Volume of commercial paper:

Has increased substantially over time

Is commonly reduced during recessionary periods

Placement

Some firms place commercial paper directly with investors

Most firms rely on commercial paper dealers to sell it

Some firms (such as finance companies) create in-house
departments to place commercial paper
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Money Market Securities (cont’d)


Commercial paper (cont’d)

Backing commercial paper

Issuers typically maintain a backup line of credit

Allows the company the right to borrow a specified maximum
amount of funds over a specified period of time

Involves a fee in the form of a direct percentage or in the form
of required compensating balances

Estimating the yield

The yield on commercial paper is slightly higher than on a T-
bill

The nominal return is the difference between the price paid
and the par value
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Estimating the Commercial
Paper Yield
An investor purchases 120-day commercial paper
with a par value of $300,000 for a price of
$289,000. What is the annualized commercial
paper yield?
%42.11
120
360

289,000
289,000- 300,000
=
×=
cp
Y
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Money Market Securities (cont’d)

Commercial paper (cont’d)

The commercial paper yield curve:

Illustrates the yield offered on commercial paper at various
maturities

Is typically established for a maturity range from 0 to 90 days

Is important because it may influence the maturity that is
used by firms that issue CP

Is similar to the short-term range of the Treasury yield curve

Is affected by short-term interest rate expectations

Is similar to the yield curve on other money market
instruments
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Money Market Securities (cont’d)


Negotiable certificates of deposit (NCDs):

Are issued by large commercial banks and other
depository institutions as a short-term source of funds

Have a minimum denomination of $100,000

Are often purchased by nonfinancial corporations

Are sometimes purchased by money market funds

Have a typical maturity between two weeks and one
year

Have a secondary market
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Money Market Securities (cont’d)

Negotiable certificates of deposit (NCDs)
(cont’d)

Placement

Directly

Through a correspondent institution

Through securities dealers

Premium


NCDs offer a premium above the T-bill yield to compensate
for less liquidity and safety

Premiums are generally higher during recessionary periods
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Money Market Securities (cont’d)

Negotiable certificates of deposit (NCDs)
(cont’d)

Yield

NCDs provide a return in the form of interest and the
difference between the price at which the NCD was
redeemed or sold and the purchase price

If investors purchase a NCD and hold it until maturity, their
annualized yield is the interest rate
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Money Market Securities (cont’d)

Repurchase agreements

One party sells securities to another with an agreement to
repurchase them at a specified date and price

Essentially a loan backed by securities

A reverse repo refers to the purchase of securities by one party

from another with an agreement to sell them

Bank, S&Ls, and money market funds often participate in repos

Transactions amounts are usually for $10 million or more

Common maturities are from 1 day to 15 days and for one,
three, and six months

There is no secondary market for repos
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Money Market Securities (cont’d)

Repurchase agreements (cont’d)

Placement

Repo transactions are negotiated through a
telecommunications network with dealers and repo brokers

When a borrowing firm can find a counterparty to a repo
transaction, it avoids the transaction fee

Some companies use in-house departments

Estimating the yield

The repo yield is determined by the difference between the
initial selling price and the repurchase price, annualized with
a 360-day year

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Estimating the Repo Yield
An investor initially purchased securities at a price
of $9,913,314, with an agreement to sell them
back at a price of $10,000,000 at the end of a
90-day period. What is the repo rate?
%50.3
90
360
9,913,314
314,913,9000,000,10
360
rate Repo
=
×
−
=
×
−
=
nPP
PPSP