Money Markets Shuyan Wu Yonsei GSIS Apr

Contents What are money markets? 1. Principal money market instruments 2. U.S. T-Bills & CP Question 3.

Money markets Common features  Markets for borrowing and lending at short maturities (one year or less)  Very large wholesale markets (large $ transactions)  Near zero default risk

Money Markets Structure of Financial Market

Principal Money Market Instruments

Money Rates

U.S. T-bills & CP U.S. Treasury bills:  Issued by the U.S. Department of the Treasury  Initial maturities: 4 weeks, 13 weeks (3 months), 26 weeks (6 months)  Discount payments: no periodic interest payments  Most liquid market  Exempt from state and local income taxes  Yield: Commercial Paper  Issued by major financial and non-financial corporations  Maturity: typically less than 270 days, mostly less than 90 days  Either a discount form or in interest-bearing form

Other Money market Instruments Negotiable Bank Certificates of Deposit: A debt instrument sold by a bank to depositors that pays annual interest, sold in secondary markets Banker’s Acceptances: A bank draft issued by a firm, payable at some future date, and guaranteed for a fee by the bank that stamps it “ accepted” Repurchase Agreements: Short-term loans for which T-Bills serve as collateral, an asset that the lender receives if the borrower does not pay back the loan Federal Funds: Overnight loans between banks of their deposits at the Federal Reserve

Question Credit Risk Taxes Liquidity The yield of T-bills is higher or lower than the yield of CP for the same maturity?