11: Money Market Instruments III: Money Markets 11: Money Market Instruments

Money Market Instruments Treasury Bills Commercial Paper Bankers Acceptances Certificates of Deposit Federal Funds Repurchase Agreements

Money Market Instruments Pricing Issuer Characteristic Treasury Bills Discount Paper US Treasury “Full Faith and Credit” of the US Government Commercial Corporations Short term corporate debt Bankers Acceptance Banks Finances self-liquidating transaction involving non-US entity Certificate of Deposit Interest at Maturity Borrowing by banks from investors Federal Funds Borrowing by Banks from other banks Repurchase Agreement Money Market Dealers Borrowing with financial assets as collateral in order to lend at a higher rate: “Pawnshop Model” © Oltheten & Waspi 2012

Treasury Bills © Oltheten & Waspi 2012

Primary Market Treasury Bills are auctioned on a regular calendar basis. 4 week every Tuesday at 1pm 13 week every Monday at 1pm 26 week every Monday at 1pm 52 week Bills discontinued in March 2001 Each is for settlement on Thursday Which is why Treasury Bills mature every Thursday.

Treasury Bills Characteristics Primary Market Secondary Market Debt of the US Department of the Treasury Discount Paper Primary Market Auction call Secondary Market OTC On/Off the run

Commercial Paper © Oltheten & Waspi 2012

Commercial Paper Characteristics Issued by Corporations Discount Paper < 270 days (average is 30 days) base of the yield curve

Commercial Paper Characteristics Primary Market Secondary Market Issued by Corporations Discount Paper < 270 days (average is 30 days) Primary Market Directly placed/Dealer placed Secondary Market None

Bankers Acceptance © Oltheten & Waspi 2012

Bankers Acceptance Issued by Banks to finance a specific self-liquidating commercial transaction Generally involves at least one non-US entity Discount Paper

Commercial Transaction Cambridge Instruments Involving a 60 day waiting period © Oltheten & Waspi 2012

BA: Goods Shipped Shipping Papers (dated: April 3, 2018) © Oltheten & Waspi 2012

Bankers Acceptances Who has to wait 60 days? JPM Accepts at 3.0% Cambridge Instruments Barclays Bank Who has to wait 60 days? JPM Accepts at 3.0% There’s an investor out there somewhere. New York Computer Imports JP Morgan Chase © Oltheten & Waspi 2012

Cambridge Instruments New York Computer Imports Bankers Acceptances Cambridge Instruments Barclays Bank New York Computer Imports JP Morgan Chase © Oltheten & Waspi 2012

Bankers Acceptance Bankers Acceptance Price Tag: $_______ JP Morgan Chase $4,000,000 Due April 3, 2018 Price Tag: $_______ © Oltheten & Waspi 2012

Cambridge Instruments New York Computer Imports BA: Maturity Cambridge Instruments Barclays Bank New York Computer Imports JP Morgan Chase Investor © Oltheten & Waspi 2012

Money Market Instruments Pricing Issuer Characteristic Treasury Bills Discount Paper US Treasury “Full Faith and Credit” of the US Government Commercial Corporations Short term corporate debt Bankers Acceptance Banks Finances self-liquidating transaction involving non-US entity Certificate of Deposit Interest at Maturity Borrowing by banks from investors Federal Funds Borrowing by Banks from other banks Repurchase Agreement Money Market Dealers Borrowing with financial assets as collateral in order to lend at a higher rate: “Pawnshop Model” © Oltheten & Waspi 2012

Certificates of Deposit © Oltheten & Waspi 2012

Bank Transactions Initial Deposit of $1m Assets: Liabilities Cash: Reserve: $900,000.00 $100,000.00 Deposit: $1,000,000.00 Liabilities:

Bank Transactions Loan of $900,000 Assets Liabilities Cash: Loans: Reserve: $810,000.00 $900,000.00 $190,000.00 Deposits: $1,000,000.00 Assets: $1,900,000.00 Liabilities: $1,900,000,00

Bank Transactions Loan of $810,000 Assets Liabilities Cash: Loans: Reserve: $729,000.00 $1,710,000.00 $271,000.00 Deposits: $1,000,000.00 $900,000.00 $810,000.00 Assets: $2,710,000.00 Liabilities: $2,710,000,00

Bank Transactions Loan of $729,000 Assets Liabilities Cash: Loans: Reserve: $656,100.00 $2,439,000.00 $343,900.00 Deposits: $1,000,000.00 $900,000.00 $810,000.00 $729,000.00 Assets: $3,439,000.00 Liabilities: $3,439,000,00

Certificates of Deposit Eventually Assets Liabilities Cash: Loans: Reserve: $0.00 $9,000,000.00 $1,000,000.00 Deposits: $900,000.00 $810,000.00 $729,000.00 $656,100.00 ….. Assets: $10,000,000.00 Liabilities: $10,000,000,00

Federal Funds © Oltheten & Waspi 2012

Federal Funds Borrowing and Lending of Bank Reserves on deposit with the Federal Reserve Interest at Maturity Overnight money

Money Market Instruments Pricing Issuer Characteristic Treasury Bills Discount Paper US Treasury “Full Faith and Credit” of the US Government Commercial Corporations Short term corporate debt Bankers Acceptance Banks Finances self-liquidating transaction involving non-US entity Certificate of Deposit Interest at Maturity Borrowing by banks from investors Federal Funds Borrowing by Banks from other banks Repurchase Agreement Money Market Dealers Borrowing with financial assets as collateral in order to lend at a higher rate: “Pawnshop Model” © Oltheten & Waspi 2012

Repurchase Agreements © Oltheten & Waspi 2012

Repurchase Agreements Simultaneous Sale and Repurchase of Collateral to facilitate a loan Interest at maturity Pawnshop Model 60 days at 3½% sell collateral $1,000,000. Buy back collateral

Question: 11-1 Bankers Acceptance financed through a Repurchase Agreement on T-Bills.

Money Markets II