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Financial Markets
Chapter Eight
The Money Markets
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Commercial Banks
Businesses
Individuals
(mostly through money market mutual funds)
Copyright 2003 Pearson
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Treasury Bills
1. Short-term borrowings of the federal government
2. Usually sold at discount
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Discounting Example
You pay $9850 for a 91-day T-bill. It is worth
$10,000 at maturity. What is its annualized yield?
F P 365
iyt
P
n
(1)
0.0611 6.11%
$9,850
91
Copyright 2003 Pearson
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Federal Funds
Short-term funds transferred (loaned or
borrowed) between financial institutions,
usually for a period of one day
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Federal Funds
Figure 8.2: Federal Funds and Treasury Bill Interest Rates, January 1990January 2002
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Figure 8.3: Interest Rates on Negotiable Certificates of Deposit and on Treasury Bills,
January 1990January 2002
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Commercial Paper
Unsecured promissory notes, issued by
corporations, that mature in no more than
270 days
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Commercial Paper
Comparing Interest on Commercial Paper to Bank Prime Rate
Figure 8.4: Return on Commercial Paper and the Prime Rate, January 1990January 2002
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Bankers Acceptances
An order to pay a specified amount
to the bearer on a given date if specified
conditions have been met, usually delivery
of promised goods
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Eurodollars
Dollar denominated deposits held
in foreign banks
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Eurodollars
London interbank bid rate (LIBID)
The rate paid by banks buying funds
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Growth
in Money
Market
Mutual
Funds
Figure 8.7:
Net Assets of
Money Market
Mutual Funds,
19752000
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Money Market
Fund Assets
Figure 8.8:
Average Distribution
of Money Market
Fund Assets, 2001
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