1. © K. Cuthbertson and D. Nitzsche Chapter 19 Money Markets Investments

2. Learning Objectives © K. Cuthbertson and D. Nitzsche Relationship between quoted rates of return and prices Discount rate, dollar discount and yield to maturity Main types of money market instruments-T-bills, banker’s acceptance, bank deposits and loans, commercial bills, CD and repos

3. Money market instruments © K. Cuthbertson and D. Nitzsche

4. Pricing of pure discount instruments © K. Cuthbertson and D. Nitzsche

5. Dollar discount and yield © K. Cuthbertson and D. Nitzsche

6. © K. Cuthbertson and D. Nitzsche Time T-bill, maturity of 1 year Par (face or maturity) value, FV = 100 Trading at a discount d(%) Has a current market price of P 01 FV = 100 P = 100(1-(d/100)) Discount, D Figure 1 : Discount instruments : 1-year bills

7. © K. Cuthbertson and D. Nitzsche Time in years T-bill, maturity of m days Par (face or maturity) value, FV = 100 Trading at a discount d(%) Has a current market price of P (1 year = a = 365 days) 0m/365 FV = 100 P = 100[1 - (m/365)(d/100)] Discount, D 1 D = FV - P = FV[(d/100) (m/a)] Figure 2 : Discount instruments : bills < 1 year

8. © K. Cuthbertson and D. Nitzsche Time FV = 100 deposited, maturity of 1 year Quoted yield = y(% p.a.) TV = 100(1 + y/100) 01 FV = 100 Figure 3 : Yield instrument : 1-year CDs

9. © K. Cuthbertson and D. Nitzsche Time in years FV = 100 deposited, maturity of m days Quoted yield = y(% p.a.) TV = 100 (1 + (m/365)(y/100)) (1 year = a = 365 days) 0 m/365 TV = 100[1 + (m/365)(y/100)] FV = 100 1 Figure 4 : Yield instruments : deposits < 1 year

10. © K. Cuthbertson and D. Nitzsche The UK CD market is very liquid and the market conventions are broadly similar to those in other banking centres such as New York, the euro area and the Far East. Key features of the UK market are :  Units of at least £ 500,000  Minimum/maximum redemption period is 7 days/5 years  Interest on 1 year (or less) CDs is paid on maturity  Interest on CDs with maturity graeter than 1 year is paid annually  Quotations (‘on the street’) are on a yield basis  Day-count basis is actual/actual Case Study 1 : CD Market Conventions

11. Amount ($bn)Cumulative bids Bid (yield) 0.5 5.55 0.71.25.56 0.825.57 135.58 1.14.15.59 1.25.36 1.36.66.01 1.58.16.02 © K. Cuthbertson and D. Nitzsche Table 6 : US Treasury auction, T-bills Total issue $ 10bn Less non-competitive bids $ 0.5bn Less Federal Reserve $2.5bn Amount for competitive bidders $ 7bn