Financial Market

Money Market

FIXED INCOME MARKET

Money market

Bond market

Debt securities that

matures in

less

than

one year

Debt securities that

matures in

more

than

one year

„Cash market”

„Credit market” , „Debt market”

In order to do so,

they use

„debt instruments”

, which pay interest.

The rate of income is often fixed, hence the term

„fixed income market”.

Market wherein banks and other financial

institutions lend, borrow and trade money

.

Money Market

Fixed Income Market

Short-term time horizon

(governments, financial institutions and large corporations

manage their short-term cash needs)

Very high denominations

(limited access for an individual investor)

High liquidity

(small bid/ask spreads)

Low interest rates

(money market securities are consider as an extraordinary safe investments)

Money Market

Features

High quality

(low default risk)

MMA is basically a high interest savings account.

Your

money goes into short-term debt securities

.

Your reward for allowing the financial institution to use your money is a premium interest rate.

MMA is insured by: Federal Deposit Insurance Corporation (FDIC) for up to $100 000.

Bank Guarantee Fund (Bankowy Fundusz Gwarancyjny) for up to €100 000.

Money Market

Money Market Account (MMA)

Minimum deposit, as well as a

minimum balance

(sometimes $1000-$2500).

A limit to how many withdrawals you can make in a month's time (from 3 to 6).

You cannot withdraw an amount, or combined total of amounts, that causes your balance to go below the

minimum without penalties.

You can write up to three checks each month.

Money Market

Money Market Account (MMA) - Restrictions

A time deposit

even more restricted than MMA.

A CD bears a

maturity date

(

FIXED TERM

deposit), a specified

fixed interest rate

and can be issued in

any

denomination

.

The longer the term of CD and the larger the initial deposit, the higher the interest rate.

CDs are negotiable

.

CDs are insured

by the Federal Deposit Insurance Corporation (FDIC) for

up to $100 000

.

Small CDs

=> deposit less than $100 000.

Large CDs (Jumbo CDs)

=> deposit more than $100 000

Denomination

Interest Rate

Maturity Date

Ranges from

one month

to

five years

.

Money Market

Certificate of Deposit (CD)

You won’t have access to your money.

You will, however, have an

option of drawing out the interest

as it’s paid.

Withdrawals before maturity are usually subject to

substantial penalty

.

The penalties ensure that it is generally not in a holder’s best interest to withdraw the money

Naturally, this

reduce total yield

because there is no compounding.

Interests could be mailed as a chequee or transffered into checking or savings account.

Money Market

Certificate of Deposit - Restrictions

Name of depositor

Amount

Date of Maturity

Money Market

Certificate of Deposit

Money Market

Certificate of Deposit Rates (CD Rates)

CD in which the

bank may „call” the CD

, thus closing it.

Callable CDs

pay higher interest

rate.

By having this option banks manage their interest rate risk.

Callable CDs

Yankee CDs

CD issued in the U.S.

market, typically in NY,

by a branch of a foreign bank

.

Most are negotiable instruments and have a minimum face value of $100 000.

Negotiable CDs (NCDs)

Inflation-Linked CDs

A CD with

minimum face value of $100 000

.

It is mostly use by financial institutions to invest in lo-risk, low-interest security.

Provide investors with inflationary protection via

annually variable interest rates

that increase or decrease

with changes in the consumer price index (CPI) or any other measure of inflation.

Money Market

Certificate of Deposit - Types

Bear CDs

Bull CDs

A CD whose

interest rate fluctuates in

direct

correlation

to the value of an underlying market index.

The

interest rate

paid on the CD

increases

as

the value of the

market index

increases

.

Because there is

minimum rate

that has to be paid

CD interest rate cannot go below 0% even if

market index falls rapidly

in value.

A CD whose

interest rate fluctuates in

inverse

correlation

to the value of an underlying market index.

The

interest rate

paid on the CD

increases

as

the value of the

market index

decreases

.

This type of CD is used for two main purposes:

speculation or hedging

.

Money Market

Certificate of Deposit - Types

Eurodollar Certificate of Deposit (Eurodollar)

History of Eurodollars:

After WW II USA was the largest consumer market.

After the invasion of Hungary in 1956, the Soviet Union feared that its deposits in U.S. banks would be frozen.

Deposits

denominated in U.S. dollars

at banks

outside the United States

, and thus are not under the

jurisdiction of the Federal Reserve.

Money Market

Certificate of Deposit - Types

Dollars do not have to be deposited in a European bank

to be considered Eurodollars.

Popular locations of Eurodollar are Bahamas, the Cayman Islands, Caracas and mamy non-European countries.

Foreign branches of American banks can also accept Eurodollars.

Money Market

Certificate of Deposit - Types

Money Market

Certificate of Deposit - Types

„

Euro" prefix

can be used to indicate

any currency held in a country where it is not the official currency

.

Eurocurrency

Euroyen

Eurosterling

Euroswiss

Euroeuro

Money Market

Certificate of Deposit - Types

Types of draft:

Require

immediate payment

by the second party

to the third

upon presentation

of the draft.

Sight draft:

(demand draft, sight bill,

customer draft)

Drawer

(maker , writer)

Drawee

(payer)

Payee

(bearer)

1. Drawer draws a draft

(instructs the drawee to pay the amount due a designated person (payee) upon demand)

2. Payee shows the draft

(demand the money from the drawee)

3. Drawee pays the money

(from drawer account)

Money Market

Drafts

Personal cheque

Date

Payee

Amount

(numerical) (longhand)

Drawer

’s signature

Money Market

Sight drafts - Cheques

Personal cheque

Order from a drawer (

a person

) that directs a bank to pay a define sum of money to a payee

form

drawer bank’s account.

Personal cheques can bounce, so they are more like promises.

Money Market

Sight drafts - Cheques

Certified cheque

A type of cheque where at the time the check is written

bank guarantees

payee that there is

enough cash available in

the drawer’s account. Funds are then

set aside in the bank's internal

account

until the check is cashed by the payee.

Money Market

Sight drafts - Cheques

Cashier’s Cheque

A check

written by a financial institution on its own funds

.

It is signed by a representative of the financial institution.

A customer can buy a cashier’s cheque for the full face value of the cheque.

A payee is guarantee to receive the money when cashing the cheques, because the amount of the

checque

must first be deposited by the drawer into the issuing institution’s own account.

Money Market

Sight drafts - Cheques

Both certified cheque and

cashier’s cheque

cannot bounce

.

Amount

Remitter

(who has paid)

Date

Drawee’s
signature

(Chasier)

Payee

Chasier’s Cheque

Money Market

Sight drafts - Cheques

I would like to

send 100 $ to my

uncle for his

birthday.

Money Market

Sight drafts – Bank draft

deposit

deposit

deposit

Buying Bank Draft with

Face Value = 100 $

(Payment in EUR)

Sending Bank Draft

Shows

Bank

Draft

Getting 100 $

Since it is not possible for personal cheques to be issued in a currency other then that of the

personal checking account,

individuals buy a bank draft to deal with foreign commerce

.

Cheque

draw by one bank

against funds deposited into its account at another bank, authorizing the second bank

to make payment to the individual named in the draft.

Amount

Drawee

Date

Drawer’s \ chasier’s

signature

Payee

Money Market

Sight drafts – Bank draft

Money Market

Sight drafts – Bank draft

Types of draft:

A draft which is

payable at a specified point in the future

or under certain circumstances.

Time draft:

(Time Bills , Time Loans)

Drawer

Drawee

Payee

1. Drawer draws a draft

(instructs the drawee to pay the amount due a designated person (payee)

at a specific date or under certain circumstances)

2. Payee shows the draft

(demand the money from the drawee)

3. Drawee pays the money if conditions are meet

(from drawer account)

Money Market

Time drafts

PAYEE

DATE

AMOUNT

SIGNATURE

AMOUNT

CONDITIONS

Money Market

Time drafts

Buyer

Seller

I need goods

but I don’t

have money

now

I want to sell

goods and I

trust those

guys.

Writing 3 bills of exchange upon buyer

Purchase order

Sending Bills

Bill of Exchange

Accepting the Bill

Market

Drawee / Acceptor

Drawer Payee

Money Market

Time drafts – Bill of Exchange

Bill of exchange

Bill of exchange

A type of draft (sight or time) that

guarantees payment for goods mostly

in international trade

.

The present form of the bill of exchange comes form 13th century.

Lombards of northern Italy used this in foreign commerce.

Very similar method of setting accounts was used by an Arab merchants as early as the 8th century AD.

Bills of exchange were initially developed by

merchants who wished to resell goods before making

payment on them

.

They are

usually made in sets of three

, which are alike in all.

The bills are sent by a different mails and whichever arrivers first is used.

Money Market

Time drafts – Bill of Exchange

Time drafts – Bill of Exchange

Amount

Drawee

Drawer

Payee

Money Market

Drawee

A

time draft

.

Could be defined as a

certified bill of exchange

.

Bill of exchange v

s Bankers’ acceptance

Similarities

Differences

Guarantees payment for goods mostly in international trade.

Drawee (a bank) certifies (accepts) the bill of exchange (drawer gets a credit line).

When dealing with international trade BAs

require letter of credit (L/C).

Money Market

Time drafts – Bankers’ Acceptance

I need goods

but I don’t

have money

now

Importer

Exporter

I don’t trust

the buyer so I

won’t sell on

credit

Importer’s bank

Ex

porter’s

bank

Second

market

1. Purchase order

2. L/C application

3. L/C

4. L/C

5. Shipment of goods

6. Shipping documents + time draft

7. Shipping documents

+ time draft

Time draft

accepted.

BA created.

10. PV(BA’s face value)

11. PV(BA’s face value)

8. BA

9. PV(BA’s face value)

12. BA presented

13. BA face value

14. BA face value

LEGEND:

-

Before BA creation

-

At and just after BA creation

-

At maturity date of BA

Money Market

Time drafts – Bankers’ Acceptance

Letter of Credit (L/C, LC, LOC)

(Documentary credit, Documentary letter of credit, DC, D/C or simply: credit)

A document

that a buyer can request from his bank in order to

guarantee that payment

for

goods will

be transferred to the seller

.

In pratice:

Buyer’s bank assure a seller that the

buyer has a credit line

.

In case that the

buyer won’t

be able to

make payment

on the purchase,

the bank will

.

The

supplier won’t be paid until banks receives a confirmation

that

the goods have been shipped.

Money Market

Time drafts – Letter of Credit

Buyer

Buyer’s credit limit

Bank issuing

L/C number

L/C maturity

Money Market

Time drafts – Letter of Credit

http://chestofbooks.com/finance/banking/Banking-Credits-

And-Finance/images/A-Letter-of-Credit-First-Page.png

Negotiable

time draft

financing international trade.

The draft is

guaranteed by the accepting bank

.

By accepting the draft, the

bank agrees to pay

the face value of the draft

if the drawer fails

to pay.

By lending its name to a transaction, the accepting bank

makes it easier

for an importer or

exporter

to obtain trade financing

.

The

accepting bank assume some risk

, although in most cases the credit risk is minimal as

banks generally deal only with tolerated companies.

Money Market

Time drafts – Bankers’ Acceptance

Acceptance

Maturity

Amount

L/C reference

Payee

Sight date

Drawee

Money Market

Time drafts – Bankers’ Acceptance

Issued in a

bearer form

.

Flexible maturity dates to a maturity of 1 year.

Typically

issued

from 30 to 90 days

.

Minimum issue size of

$500 000

.

Credit line required

.

Issued at discount face value.

A stamping fee is charged on each draw date as a compensation to a bank for accepting the BA.

Issued in multiples of $1 000.

Money Market

Time drafts – Bankers’ Acceptance

The

rates at which BAs are traded

calls Bankers acceptances rates (BA rates).

FED publishes BA rates in its H.15 bulletin (

also Wall Street Journal under „Money rates” section).

Money Market

Time drafts – Bankers’ Acceptance

A

short-term debt obligations of the National Treasury

with a maturity of less then one year.

They are sold with

denominations of

$1,000, $5,000, $10,000, $25,000, $50,000, $100,000 and $1 million.

T-bills usually have maturity of one month (

4 weeks

), three months (

13 weeks

) or six months (

26 weeks

)

T-bills are propably the most popular money market instruments:

they are simple, almost risk-free, free of taxes

Money Market

Treasury Bills

The profit from Treasury Bills is equal to a discount value

(today we are paying less than we will receive at maturity)

%

11

.

11

90

10









PV

PV

FV

r

%

00

.

10

100

10









FV

PV

FV

d

Example 1

Face value =

100

Price =

90

Time to maturity = 1 year (360 days)

10



discount

PV

FV

discount





FV

PV

FV

PV

r

d

discount rate equals:

rate of return equals:

so

…..

Money Market

T-Bills Yield

%

38

.

6

94

6





r

%

00

.

6

100

6





d

so

…..

Example 2

Face value =

100

,

Price =

94

,

Time to maturity = 180 days

If we want to compare T-bills between each other, we need to present rates in the same time horizon.

t

PV

PV

FV

r

360



















t

FV

PV

FV

d

360



















t = number of days to maturity

discount rate (d)

yield (r)

Example 1

10.00%

11.11%

Example 2

12.00%

12.76%

Money Market

T-Bills Yield

Let’s start with simple compounding:

as we know

T

PV

FV

r

1





PV

PV

FV

PV

FV







1

)

1

(

rT

PV

FV





and T = ( t / 360)

if we use that knowledge we will get:

360

t

PV

PV

FV

r





t

PV

PV

FV

r

360







Why do we multiply rates by ( 360/numbers of days to maturity ) ??

Money Market

T-Bills Yield

Finding nominal rate is simple:

Knowing discount rate or yield, we can easily find the price of a T-Bill:

t

PV

PV

FV

r

360







PV

FV

PV

t

r









360

rT

FV

PV





1

t

FV

PV

FV

d

360







)

1

(

dT

FV

PV





PV

FV

FV

t

d









360

T = ( t / 360)

Money Market

T-Bills Yield

T-bills are issue through a

bidding process

(occurs weekly) at a discount from par value.

You can bid T-Bills at a bank, through a dealer or broker.

Nowadays you can bid T-Bills online.

T-bill are now issued only in electronic form, though they used to be paper bills.

Bills with

13-week

and

26-week

maturities are auctioned

each Monday

.

Bills with

4-week

maturity are auctioned

each Tuesday

.

Bills with

52-week

maturity are auctioned

Mondays

, but only once a month (

every 4 weeks

).

Money Market

T-Bills Auctions

Non-competitive bid

(mostly small investors and individuals)

Competitive bid

(generally primary dealers)

You are

guaranteed to receive

the bill you want and in the

full amount

(

but up to $1 milion

).

You

specify a

discount rate

you are willing to accept.

You can buy

up to 35% of the initial offering amount for compatitive bidders.

In an auction, two types of bids can be submitted:

non-competitive

and

competitive

You agree to purchase specified quantity

with a discount rate set at auction.

Your offer

can be rejected

.

You agree to to purchase indicated quantity

at specified discount rate or at any higher rate

.

YOU DO KNOW THE DISCOUNT RATE

,

BUT YOU DON’T KNOW A QUANTITY.

YOU DO KNOW A QUANTITY

,

BUT YOU DON’T KNOW A DISCOUNT RATE.

Money Market

T-Bills Auctions

Competitive bidders

Non-competitive bidders

U.S. Treasury Department

Offering

$12 million

in 4 week T-bills

3 bidders:
1)

$3 million

2)

$0,5 million

3)

$0,5 million

8 bidders:

1)

$1,0

million at

3,5000%

2)

$1,5

million at

3,5050%

3)

$4,5

million at

3,5080%

4)

$1,0

million at

3,5100%

5)

$1,0

million at

3,5125%

6)

$7,0

million at

3,5150%

7)

$3,0

million at

3,5200%

8)

$4,0

million at

3,5250%

$2 million

in T-bills

(max 1 mln per bidder)

T-bills left:

$10 mln

$9 mln

$7,5 mln

$10mln x 35% = $3,5mln

$4 mln

$3 mln

$2 mln

$0 mln

$10mln x 35% = $3,5mln

Will get what is left: $2mln

STOP

highest accepted discount rate

minimum successful price

(if prices are given)

set discount rate

cut off yield

(coupons securities)

Weighted Average

Money Market

T-Bills Auctions

3.5088%

(max 3,5 mln per bidder)

1

10

∗ 0.035 +

1,5

10

∗ 0,0305 +

3,5

10

∗ 0,03508 +

1

10

∗ 0,0351 +

1

10

∗ 0,035125 +

2

10

∗ 0,03515

Competitive bidders

Non-competitive bidders

All competitive bidders receive

a

highest accepted discount rate.

Non-competitive will

get full amount.

3)

rejected

if the rate you specify

is higher

than the

discount rate set at the auction.

Competitive will get:

1)

full amount if

the specified rate

is less

than the

discount rate set by the auction.

2)

less than the full amount

if the bid

is equal

to the

set discount rate.

All non-competitive bidders receive

a

weighted average from a successfull

competitive bids.

Calculating T-bill price from a discount rate:

T-bill is quoted with 3,5088% discount rate.

Face value equals 10 000$ and there is 4 weeks to maturity.

Price = 10 000 * (1

– 0.035088 * (4*7 / 360)) = 9 972.71$

Money Market

T-Bills Auctions

Price = PV = FV * (1 - d*T)

Source: Bank of Tanzania

Currency: Tanzanian Shilling

Auction No. 753, Held on 20-Aug-2008

35 days

91 days

182 days

364 days

Due Date

25-Sep-08

20-Nov-08

19-Feb-09

20-Aug-09

No. Of Bids

23

27

37

53

Successful Bids

10

27

34

26

Highest Bid / 100

99.52

98.05

95.6

90.26

Lowest Bid / 100

99.05

97.27

94.25

88.5

Minimum Successful Price / 100

99.41

97.27

94.47

89.35

Weighed Average Price (WAP) for successful bids

99.46

97.82

95

89.71

Weighed Average Yield (WAY) per annum

5.66%

8.96%

10.55%

11.50%

Amount Offered

7,000,000,000

45,500,000,000

30,000,000,000

45,000,000,000

Total Tendered

10,938,000,000

27,239,570,000

18,864,960,000

60,663,050,000

Undersubscribed (+)

-3,938,000,000

18,260,430,000

11,135,040,000

-15,663,050,000

Oversubscribed (-)

Successful Bids

7,000,000,000

27,239,570,000

17,814,960,000

25,006,220,000

Money Market

T-Bills Auctions

Source: Ministry of Finance (Poland)

Auction held on 19 October 2009

52 weeks

Due Date

18 October 2010

Minimum Price

9585.38

Maximum Price

9590.81

Weighed Average Price (WAP)

9587.01

Weighed Average Yield (WAY)

4.260%

Amount Offered (mln PLN)

600,000,000

Total Tendered (mln PLN)

1,824,550,000

Successful Bids (mln PLN)

400,400,000

Auction Date

Supply (mln PLN)

Demand (mln PLN)

Sale (mln PLN)

06.04.09

1,000.00

2,832.50

1,077.40

09.04.09

1,500.00

5,065.17

1,961.37

20.04.09

1,500.00

3,239.57

1,492.38

27.04.09

1,500.00

2,365.08

1,215.08

04.05.09

1,700.00

3,231.06

1,328.06

11.05.09

800.00

1,563.01

758.51

18.05.09

800.00

1,359.40

633.10

25.05.09

2,500.00

8,378.21

2,515.26

01.06.09

2,000.00

9,419.31

2,125.00

08.06.09

1,600.00

5,932.95

1,600.00

15.06.09

1,600.00

3,177.76

1,615.86

22.06.09

1,000.00

4,690.65

1,083.00

29.06.09

1,200.00

4,663.86

1,200.00

06.07.09

1,200.00

3,254.65

1,255.95

13.07.09

1,300.00

3,065.87

1,317.37

27.07.09

1,500.00

2,311.49

1,454.79

03.08.09

1,500.00

3,153.56

1,512.00

10.08.09

1,300.00

4,218.53

1,420.00

17.08.09

1,000.00

2,213.64

835.20

24.08.09

1,000.00

3,365.05

860.00

31.08.09

1,000.00

2,173.60

812.10

07.09.09

1,000.00

1,540.50

806.50

14.09.09

1,000.00

1,495.18

803.18

21.09.09

1,000.00

3,658.33

1,000.00

28.09.09

1,000.00

2,485.21

848.06

12.10.09

600.00

1,962.10

408.65

19.10.09

600.00

1,824.55

400.40

Money Market

T-Bills Auctions

Maturity date

Number of days to

maturity

BUY

SELL

Discount rate

Price for 100 PLN

nominal value

Discount rate

Price for 100 PLN

nominal value

2007-04-12

9

4.096

99.898

3.098

99.923

2007-04-19

16

4.093

99.818

3.295

99.854

2007-04-26

23

4.089

99.739

3.492

99.777

2007-05-03

30

4.086

99.659

3.589

99.701

2007-05-17

44

4.080

99.501

3.584

99.562

2007-05-31

58

4.073

99.344

3.579

99.423

2007-06-14

72

4.067

99.187

3.673

99.265

2007-06-28

86

4.060

99.030

3.668

99.124

2007-07-26

114

4.145

98.687

3.755

98.811

2007-08-16

135

4.135

98.449

3.747

98.595

2007-09-06

156

4.125

98.213

3.835

98.338

2007-09-27

177

4.115

97.977

3.827

98.119

2007-10-18

198

4.105

97.742

3.818

97.900

2007-11-15

226

4.092

97.431

3.807

97.610

2007-12-13

254

4.079

97.122

3.890

97.255

2007-12-27

268

4.073

96.968

3.884

97.108

2008-01-10

282

4.160

96.741

3.972

96.888

2008-02-07

310

4.146

96.429

3.960

96.590

2008-03-06

338

4.225

96.033

4.041

96.206

2008-03-27

359

4.215

95.797

4.123

95.888

Source: BRE Bank (Poland)

Currency:

Polish Złoty

Money Market

Trading T-Bills

Money Market

T-Bills Rates - USA

Money Market

T-Bills Rates – Poland

Money Market

T-Bills Rates

Debt instrument that matures

before nine months (270 days)

and can be

issued by any corporation

.

The Company

The People

The money is only used

to fund operating expenses or current assets

(inventories, receivables

…) and it is

not used for financing fixed assets

,

such as land, buildings or machinery.

The Money

Income

LEGEND:

-

Before CP maturity

-

At

CP’s maturity

Employees

e.g. Salaries

Money Market

Commercial Paper (CP)

Company

Individuals

Dealer

Directly

Sell CP

to a dealer

Mutual Funds

…

Reselling CP

Money Market

Commercial Paper

In the US

dealer’s fee is approximately 5 basis points annualized.

It translates to $50,000 on every $100 million outstanding.

Large securities firms and subsidiaries of bank holding companies

.

Most of these firms also are dealers in US Treasury securities.

Financial companies

that

have frequent and sizable borrowing needs

and find it

more economical

to sell paper without the use of an intermediary.

Dealer fees tend to be lower outside the United States

Direct issuers

The dealers

Dealer

s’ Fee

Money Market

Commercial Paper

Commercial paper is a

lower cost alternative to a line of credit

with a bank.

Once a business becomes large enough, and maintains a high enough credit rating, then using commercial

paper is always cheaper than using a bank line of credit.

Money Market

Commercial Paper - Advantages

CP

is not backed by collateral

.

CP are

backed by the borrowing company's high credit ratings

and regular cash flow.

Only firms with excellent credit ratings from a recognized rating agency

will be able to sell their commercial paper at a reasonable price.

The

higher

the

rating

, the

lower

the CP

yield

should be.

The

lower

the

rating

, the

higher

the CP

yield

should be.

Money Market

Commercial Paper - Disadvantages

Long-Term:

A

-

Short-Term:

F2

Long-Term:

A

Short-Term:

F1

Long-Term:

BB

Long-Term:

BBB +

Long-Term:

BB +

Long-Term:

BBB +

Short-Term:

F2

Long-Term:

A

-

Wrocław

Gdańsk

Long-Term:

BBB +

Częstochowa

Long-Term:

BBB

Long-Term:

A

-

Short-Term:

F2

Money Market

Commercial Paper – Rating System

Mix of many different assets

which are jointly judged to have a low

risk of bankruptcy by a ratings agency.

Special Purpose Vehicle (SPV)

Structured Investment Vehicle (SIV)

Company

Bank

Assets

A corporate body

(usually a limited company of

some type or a limited partnership)

Selling assets

to SPV

Issuing ABCP

ABCP is a form of commercial paper that is

collateralised by financial as

sets

such as consumer loans.

Money Market

Asset Backed Commercial Paper (ABCP)

Money-market mutual funds

and other funds open primarily to institutional investors

buy about 60%

of the commercial paper in the market.

09 October 2009:

No. of companies in the United States that issue commercial paper:

Total commercial paper outstanding:

1,700

$1.299 trillion

Assed backed commercial paper outstanding:

$532 billion

„Non Assed Backed” commercial paper outstanding:

$767 billion

Issued by non-financial corporations:

$134 billion

Issued by financial corporations:

$633 billion

Money Market

Commercial Paper Outstanding

Money Market

Asset Backed Commercial Paper Outstanding

Money Market

Commercial Paper Outstanding in Poland

Commercial paper market was

lunched in 1994

.

The first issue was organized by

Próchnik S.A. (Polski Bank Rozwoju acted as a dealer.)

CP outstanding

(mln zł): 9 935,31

8 604,30

12 885

13 757,83

12 952,29

CP issuers: 193

(year 2004)

CP dealers: 13 (year 2006)

CP yield (AA Company): 6,3%

(year 2004)

End of: 2004 2005 2006

2007

2008

A REPO is economically similar to a

secured loan

.

Lender

Buyer

Cash Provider

Borrower

Seller

Cash Receiver

TODAY

Securities

Money

AFTER SOME TIME

Interests

Money Market

Repurchase Agreements (REPO)

Types of REPO (base on maturity)

Terminology

REPO (Dealer)

REVERSE REPO (FED)

You are:

Borrower

Cash receiver

Seller

Lender

Cash provider

Buyer

Near leg:

Sells securities

Buys securities

Far leg:

Buys securities

Sells securities

So

REPO

and

REVERSE REPO

are exactly the same kind of transaction,

just described from opposite points of view.

REPO

MATURITY

OVERNIGHT

one-day maturity transaction

TERM

repo with a specified end date

OPEN

has no end date

(repos are typically short-term, it is not unusual to see repos with a maturity as long as two years)

Money Market

Repurchase Agreements (REPO)

Money Market

Reversed Repurchase Agreements

FED

requires to keep

a certain percentage of banks

money on reserve

.

(USA: if dollar amount of net transaction accounts exceeds $58.8 million, the reserve equalls 10%).

Reserve requirements can act as inflation-fighting tool.

Banks

try to stay as close to the reserve limit as possible

without going under it,

lending money

overnight

back and forth

to maintain the proper level.

Reserves

Reserves limit

(% of customers money)

Withdrawals

!!!

Federal Reserve

Bank Account

Other Federal Reserve Bank Accounts

Fed Funds

Money Market

Federal Funds (Fed Funds)

Banks earn no interest on reserves.

Money Market

Federal Funds (Fed Funds)

Country

1968

1978

1988

1998

Turkey

58.3%

62.7%

30.8%

18.0%

United Kingdom

20.5%

15.9%

5.0%

3.1%

Germany

19.0%

19.3%

17.2%

11.9%

United States

12.3%

10.1%

8.5%

10.3%

Historical changes in cash reserve ratios

Australia

None

Costa Rica

15%

Canada

None

Hong Kong

18%

New Zealand

None

Brazil

20%

Sweden

None

China

21.5%

Eurozone

2%

Tajikistan

20%

Poland

3%

Suriname

25%

Turkey

8%

Lebanon

30%

Current cash reserve ratios:

The interest rate at which a

depository institution lends

immediately available

funds to another depository institution overnight

.

The Federal Open Market Committee (

FOMC

)

sets a target level for the fed funds rate

,

which is its primary tool for implementing monetary policy.

Money Market

Federal Funds Rates

Money market is based on a

short-term loans

.

Those short-term loans differs form each other due to:

Maturity

Denominations

Participants (borrowers, lenders)

After this section you should be familiar with:

Short term deposits: MMAs, CDs (and all of its types).

Drafts: Sight drafts (cheques), Time drafts (Bills of Exchange, BAs (L/C)).

T-Bills, Commercial Papers (plus credit rating system), ABCPs, REPOs, Federal Funds.

Money Market

Summary

David S. Kidwell, David W. Blackwell, David A. Whidbee, Richard L. Peterson,

„Financial Institutions, Markets, and Money”, 10th edition, John Wiley & Sons Inc., 2008.

Chapter 7, Page 167-199.

Money Market

Literature