III: Money Market 10: Money Market I.

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Presentation transcript:

III: Money Market 10: Money Market I

Money Market Basics Term to Maturity < 1 year at issue Each year has 360 days

Interest Interest Bearing Interest at Maturity Discount Paper Periodic interest (coupon) payments Interest at Maturity Discount Paper

Discount Paper © Oltheten & Waspi 2012

Bankers Discount Bankers: 360 days in a year Discount: price is calculated at a discount to the face value.

Example: Buy $1,000,000 104 day discount note at 3.42 Sept 14 Dec 27 $1,000,000. Dec 27 Interest = $ Price =

Money Market Yield To compare to other Money Market Investments

Money Market Yield To compare to other Money Market Investments

Straight Yield To compare to other Money Market Investments

Straight Yield To compare to other Fixed Income Investments

Ask Yield = straight yield for < 182.5 days = for > 182.5 days

Treasury Bills Treasury Bills Maturity Days Bid Ask Chg Ask Yield Sept 20 6 2.67 2.66 0.12 2.70 Dec 27 104 3.43 3.42 0.06 3.50 March13 181 3.77 3.76 0.02 3.89 Wall Street Journal Ask Yield © Oltheten & Waspi 2012

Exercise Calculate The price at which you would buy the T-Bill Money Market yield Ask Yield

Treasury Bills Treasury Bills Maturity Days Bid Ask Yield MM Yield Ask Sept 20 6 2.67 2.66 Dec 27 104 3.43 3.42 3.45 3.50 March 13 181 3.77 3.76 Wall Street Journal © Oltheten & Waspi 2012

Interest at Maturity © Oltheten & Waspi 2012

Interest at Maturity Discount Paper Interest at Maturity Face - discount Face Face Face + Interest

Interest at Maturity 360 days in a year

Example Principal: $1,000,000 Rate: 4% Term: 180 days

Discount Paper t = 0 $1,000,000. t =180 © Oltheten & Waspi 2012

Interest at Maturity t = 180 $1,000,000. t =0 © Oltheten & Waspi 2012

Money Market Yield Discount Paper Interest at Maturity © Oltheten & Waspi 2012

Straight Yield Discount Paper Interest at Maturity © Oltheten & Waspi 2012

Calendar Issues One year has 360 days 365 days

Money Market I