1. 11: Money Market Instruments
III: Money Markets
11: Money Market Instruments

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

3. 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

4. Treasury Bills
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5. 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.

6. 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

7. Commercial Paper
© Oltheten & Waspi 2012

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

9. 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

10. Bankers Acceptance
© Oltheten & Waspi 2012

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

12. Commercial Transaction
Cambridge Instruments
Involving a 60 day waiting period
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13. BA: Goods Shipped Shipping Papers (dated: April 3, 2018)
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14. 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

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

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

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

18. 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

19. Certificates of Deposit
© Oltheten & Waspi 2012

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

21. 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

22. 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

23. 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

24. 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

25. Federal Funds
© Oltheten & Waspi 2012

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

27. 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

28. Repurchase Agreements
© Oltheten & Waspi 2012

29. 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

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

31. Money Markets II