1. 1 CHAPTER 6 Money Markets

2. 2 CHAPTER 6 OVERVIEW This chapter will: A. Provide a background on the most popular money market securities B. Explain how money markets are used by institutional investors C.Explain the valuation and risk of money market securities D.Explain how money markets have become globally integrated

3. 3 A. Money Market Securities 1. Treasury Bills a. Investing in Treasury Bills b. Pricing Treasury Bills c. Treasury Bill Auction d. Estimating the Yield

4. 4 A. Money Market Securities 2. Commercial Paper a. Ratings b. Volume of Commercial Paper c. Placement d. Backing Commercial Paper e. Estimating the Yield f. Commercial Paper Yield Curve

5. 5 A. Money Market Securities 3. Negotiable Certificates of Deposit (NCDs) a.Placement b.Premium c.Yield

6. 6 A. Money Market Securities 4. Repurchase Agreements a. Placement b. Estimating the Yield 5. Federal Funds 6. Banker’s Acceptances a. Steps involved in Banker’s Acceptances

7. 7 B. Institutional Use of Money Markets 1. Types of Financial Institutions a.Commercial Banks b.Finance companies c.Money market mutual funds d.Insurance companies e.Pension funds

8. 8 C. Valuation and Risk of Money Market Securities 1. Explaining Money Market Price Movements a. Market price should equal the present value of the future cash flows discounted at the b. Required return on the money market security which is composed of the c.Short-term risk-free Interest Rate plus d. The Risk premium of the issuer

9. 9 C. Valuation and Risk of Money Market Securities 2. Efficiency of Money Market Securities a.in general, these markets are perceived to be efficient b.most are subject to large trading volumes

10. 10 C. Valuation and Risk of Money Market Securities 3. Risk of Money Market Securities a. Credit risk b. Measuring risk

11. 11 D. Globalization of Money Markets 1. Eurodollar Deposits and Euronotes 2. Euro-Commercial Paper 3. Performance of Foreign Money Market Securities