Financial Institutions and Markets Dr. Andrew L. H. Parkes Day 6 “How do financial markets work?” 卜安吉

Chapter 9: Money Markets Short-term Low risk Very Liquid Therefore, they are SAFE and LIQUID – or CLOSE to being MONEY. ALMOST – Money Sept. 24, 2009 Financial Institutions & Markets, Ch. 9

Chapter 9: Money Markets Sold in Large Amounts Low DEFAULT risk Less than 1 year to maturity Most less than 120 days – so CLOSE to being MONEY. 6 month U.S. Treasury Bill rate As of Dec. 12, 2008 Sept. 24, 2009 Financial Institutions & Markets, Ch. 9

Chapter 9: Money Markets Prime Rate is top flat line Federal Funds is the bottom flat line (notice the rate is almost zero) These are really considered as MONEY. Rate comparisons - NYT http://markets.on.nytimes.com/research/markets/bonds/bonds.asp Sept. 24, 2009 Financial Institutions & Markets, Ch. 9

CONSUMER MONEY RATES Tuesday, December 09, 2008   YIELD/RATE (%) 52-WEEK CHANGE IN PCT. PTS Interest Rate Last Wk Ago High Low 52-Wk 3-Yr Federal-funds rate target 1.00 4.25 -3.25 -3.00 Prime rate* 4.00 7.25 Libor, 3-month 2.16 2.21 5.11 2.13 -2.95 -2.32 Money market, annual yield 2.37 2.40 3.54 2.25 -1.17 -0.35 Five-year CD, annual yield 3.71 3.83 4.48 3.23 -0.77 -0.80 30-year mortgage, fixed 5.83 5.81 6.61 5.36 -0.09 -0.03 15-year mortgage, fixed 5.54 5.60 6.22 4.91 0.02 0.08 Jumbo mortgages, $417,000-plus 7.03 7.22 7.89 6.49 0.17 0.88 Five-year adj mortage (ARM) 5.92 5.97 6.14 5.01 0.13 0.51 New-car loan, 48-month 6.80 6.83 7.14 6.45 -0.06 0.19 Home-equity loan, $30,000 5.44 5.15 6.88 4.64 -1.40 -0.60 * Base rate posted by 75% of the nation's largest banks.    Source: Thomson Reuters, WSJ Market Data Group, Bankrate.com http://online.wsj.com/mdc/public/page/marketsdata.html Sept. 24, 2009 Financial Institutions & Markets, Ch. 9

U.S. Treasury (Bills) 1 Month - As of 9/23/2009 Sept. 24, 2009 Financial Institutions & Markets, Ch. 9 http://online.wsj.com/mdc/public/npage/2_3050.html?rnd=7055&sid=1224035&page=bond

Why are Money Markets needed? Banks have the information advantage – they can mediate asymmetric information between savers and borrowers BUT MONEY MARKETS Have: Less Regulation, and a Cost Advantage So banks only operate where the info advantage > reg costs Top is Dec. 2008 the bottom is Sept. 2009!!! Why different?! http://www.federalreserve.gov/releases/cp/yieldcurve.gif Sept. 24, 2009 Financial Institutions & Markets, Ch. 9

Commercial Paper Rates 2007 Data as of December 13, 2007 Commercial Paper Rates and Outstanding Derived from data supplied by The Depository Trust & Clearing Corporation Posted December 14, 2007 Discount rates Term AA nonfinancial A2/P2 nonfinancial AA financial AA asset-backed 1-day 4.20 4.51 4.21 4.70 7-day 4.22 4.62 4.16 15-day 4.18 4.65 5.51 30-day 5.63 4.37 6.06 60-day 4.19 5.39 4.82 5.98 90-day 4.17 5.37 4.94 5.60 http://www.federalreserve.gov/releases/cp/ Sept. 24, 2009 Financial Institutions & Markets, Ch. 9

Commercial Paper Rates, 2008 Data as of December 11, 2008 Commercial Paper Rates and Outstanding Derived from data supplied by The Depository Trust & Clearing Corporation Posted December 12, 2008 Discount rates Term AA nonfinancial A2/P2 nonfinancial AA financial AA asset-backed 1-day 0.05 1.72 0.10 0.65 7-day 3.11 0.09 0.89 15-day 0.08 3.81 0.30 1.18 30-day 0.28 5.11 0.41 1.16 60-day n.a. 5.28 0.78 90-day 1.29 Trade data insufficient to support calculation of the 60-day AA nonfinancial, 90-day AA nonfinancial, 90-day A2/P2 nonfinancial, 60-day AA financial, and 90-day AA financial rates for December 11, 2008. http://www.federalreserve.gov/releases/cp/ Sept. 24, 2009 Financial Institutions & Markets, Ch. 9

Commercial Paper Rates, 2009 Data as of September 22, 2009 Commercial Paper Rates and Outstanding Derived from data supplied by The Depository Trust & Clearing Corporation Posted September 23, 2009 Discount rates Term AA nonfinancial A2/P2 nonfinancial AA financial AA asset-backed 1-day 0.15 0.31 0.14 0.38 7-day 0.10 0.47 0.74 15-day 0.12 0.25 0.16 0.43 30-day 0.09 0.40 0.18 0.22 60-day 0.17 0.37 0.24 90-day 0.21 n.a. 0.29 Trade data insufficient to support calculation of the 90-day A2/P2 nonfinancial rate for September 22, 2009. http://www.federalreserve.gov/releases/cp/ Back to “Normal” - almost Sept. 24, 2009 Financial Institutions & Markets, Ch. 9

The Purpose of Money Markets Place to Keep Cash (Funds) for a short time Source for borrowers that just need funds for a short time period. Place to earn a little on funds (cash) not in use (earning income) for a firm. Quickly able to access these funds! Graph source: WSJ Sept. 24, 2009 Financial Institutions & Markets, Ch. 9

Fed Lost Control of Fed Funds Rate? Take a look at the last few months and notice the “Target” rate – the rate the FOMC sets NOW look at the “Daily” rate – the rate that Banks loan “Fed Funds” on the market There is a VAST difference lately – not before!!! Most “Fed Watchers” worry about this – that the Fed has no control! Sept. 24, 2009 Financial Institutions & Markets, Ch. 9

Financial Institutions & Markets, Ch. 9 http://www.newyorkfed.org/markets/omo/dmm/historical/fedfunds/ff.cfm Sept. 24, 2009 Financial Institutions & Markets, Ch. 9

Participants and Instruments Are detailed very well in Mishkin’s Chapter 9 PowerPoint Slides. See the PPT … Commercial Paper Sept. 24, 2009 Financial Institutions & Markets, Ch. 9