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CHAPTER 7 Money Markets
Overview of the Money Market Copyright© 2008 John Wiley & Sons, Inc. 2
Overview of the Money Market (concluded) Copyright© 2008 John Wiley & Sons, Inc. 3
How does money markets work? Copyright© 2006 John Wiley & Sons, Inc. 4
Economic Role of Money Market (MM) Copyright© 2008 John Wiley & Sons, Inc. 5
Characteristics of Money Market Instruments Copyright© 2008 John Wiley & Sons, Inc. 6
U. S. Treasury Bills Copyright© 2008 John Wiley & Sons, Inc. 7
Treasury Bills Yields Copyright© 2006 John Wiley & Sons, Inc. 8
U. S. Treasury Bills Copyright© 2008 John Wiley & Sons, Inc. 9
Example Copyright© 2006 John Wiley & Sons, Inc. 10
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U. S. Treasury Bills Copyright© 2008 John Wiley & Sons, Inc. 12
Dr. Hisham Handal Abdelbaki - FIN 221 - Chapter 7
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Repurchase Agreements (Repo) Copyright© 2008 John Wiley & Sons, Inc. 16
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Repurchase Agreements (concluded) Copyright© 2008 John Wiley & Sons, Inc. 18
The formula for the repo yield (yrepo) or interest rate is: Where Prepo = repurchase price of the security, which equals the selling price plus interest. P 0 = sale price(repo)/purchase price (reverse repo) of the security. N = number of days to. Hisham Handal Abdelbaki - FIN 221 Dr. maturity. Chapter 7
Repo yield Copyright© 2006 John Wiley & Sons, Inc. 20
Commercial Paper Copyright© 2008 John Wiley & Sons, Inc. 21
Commercial paper Yields(calculated exactly as T. Bills Yields). The discount yield and the Price using the discount yield : Copyright© 2006 John Wiley & Sons, Inc. 22
bond The bond equivalent yield (y equivalent yield basis: be ) and price on Where Pf is the face price, P 0 is the purchase price and n is the number of days to maturity. Dr. Hisham Handal Abdelbaki - FIN 221 Chapter 7
Bankers' Acceptances Copyright© 2008 John Wiley & Sons, Inc. 24
Tracing a Banker’s Acceptance Transaction Copyright© 2008 John Wiley & Sons, Inc. 25
Creating a Banker's Acceptance Copyright© 2008 John Wiley & Sons, Inc. 26
4. The exporter’s bank will pay the exporter immediate cash, but of a discount amount and the exporter becomes out of the picture. 5. The exporter bank will send the time draft and all the documents to the importer bank, who will accept the draft. 6. At maturity, the importer bank will pay the exporter bank the face value of the time draft. 7. The importer is responsible to pay his bank the amount at maturity. Copyright© 2006 John Wiley & Sons, Inc. 27
Creating a Banker's Acceptance (concluded) Copyright© 2008 John Wiley & Sons, Inc. 28
Advantages of a Banker Acceptance: Copyright© 2006 John Wiley & Sons, Inc. 29
Money Markets Participants Copyright© 2008 John Wiley & Sons, Inc. 30
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