5-1 Chapter 5 Money Market Instruments

5-2 Money Market Instruments United States treasury bills Federal funds Repurchase agreements Commercial paper Prime rate Bankers acceptances Bank certificates of deposit Eurocurrency certificates of deposit Money market funds

5-3 Repurchase Agreements Points in time 2:00 p.m.5:00 p.m.9:00 a.m. January 15January 15January 16 Dealer buysDealer sellsDealer repurchases $450 million$400 million$400 million and of bondsof bonds as pays overnight repointerest Financing Needs of a Bond Dealer

5-4 US money market Bankers Acceptances US bankUS retailer Pays in future Bankers acceptance $ $ $Goods Foreign producer Foreign bank

5-5 Bank Borrowers Individuals and businesses Large CDs 7.5% Loans $ $ $ Deposit 6.9% Money market mutual funds Money Market Funds Fee = 0.10% Commercial paper 7% 5% Deposit $ $

5-6 Quoting rates on a discount basis Let the number of days until maturity be t. The price is P. The face value is par. The discount rate is d.

5-7 Money Market Cash Flows Points in time 0t days -P+par

5-8

5-9 Use of the discount rate suffers from two problems: a 360 day year and the rate being a fraction of par, instead of a fraction of the amount lent, P.

5-10 Add-On Rate: a

5-11 Bond Equivalent Yield: r

5-12 Semi-annual yield: i Annual yield: y

5-13 Comparing Money Market Rates Discount rate (d): Add-on rate (a): Bond equivalent yield (r):

5-14 Semiannual yield to maturity (i): Annual yield to maturity (y):

5-15 Add-on rate (a): Bond equivalent yield (r):

5-16 Semiannual yield to maturity (i): Annual yield to maturity (y):

5-17 Comparing Money Market Rates Rates Semiannual yield Annual yield Bond equivalent yield Add-on rate Discount rate Days