Money Markets by Edu Pristine

Author of lecture Money Markets

Edu Pristine

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... of deposits (demand, notice and fixed - Define a reference rate - Describe a credit facility - Discuss syndication - Calculate the interest payment on a term repo Describe the Eurocurrency market, particularly the Eurodoll ar market - Define “add-on” interest - Define LIBOR - Describe ...

... by sharing the loan among several lenders, banks lessen their exposure to a given borrower. 3 Characteristics of Money Market Instruments. The cash market for interest-rate assets and liabilities can be thought of as two distinct but related markets: the market for deposits and loans and the market for securities. These are collectively called as fixed-income instruments and may have any or all of the following six characteristics: I. Term: It is the length of time that the borrower borrows the money II. Principal: It is the amount that the borrower agrees to repay to the lender on the maturity date III. Interest rate: The amount that the borrower agrees to pay the lender for the use of the money. For example, an interest rate of 6% per annum. IV. Marketability: Ownership of the interest transferred to a third party. Most interest V. Security: Fixed-income-instruments can be either secured, or collateralized, by specific assets, or unsecured. If an instrument is secured, the lender has the right to take ownership of the specified assets if the borrower does not fulfill his or her obligation to repay the principal. VI. Call or put features: A provision that allows the borrower to repay the principal (a call feature) or the lender to demand repayment of the principal (a put feature) before the maturity date. Characteristics of Money Market Instruments rate assets and liabilities can be thought of as two distinct but ...

... any term longer than one day. Interest paid on repo: -Interest Paid = Principal × Interest Rate × W here DTM = the number of days until maturity (Days ADC = the denominator of the relevant day, or repo, is a loan in which a borrower sells a security to a lender at a price with an agreement to buy the security back on a future date at a higher price, the other side of the same agreement, the lender’s position in the agreement is generally referred to as a reverse repurchase agreement, or reverse repo. The security sold to the lender acts as collateral for the loan. If the borrower cannot repay the funds on the maturity date of the repo, is a repo with a term of one day are repos with any term longer than one day ×(DTM/ADC) W here DTM = the number of days until maturity (Days-To-Maturity) ADC = the denominator of the relevant day-count convention 5 ...

... London wholesale money market (or interbank market). British Bankers’ Association surveys the rates offered by a t least eight banks chosen for their ‘reputation, scale of activity in the London market, and perceived expertise in the currency concerned, and giving due consideration to credit standing. It ranks the quotes from highest to lowest, drops the highest and lowest 25%, and takes the average of the remaining 50%. The result is the official BBA London Interbank Offered Rate (LIBOR) and maturity. For the US dollar in particular, it has become the primary benchmark interest rate for many short-term US dollar loans to corporations. US- dollar LIBOR is also the basis for settling many interest month Eurodollar contract and some OTC interest. The London Interbank Offered Rate (LIBOR). This type of interest that the banks pay on Eurocurrency deposits is known as on interest”. That is, interest is added to the deposit amount and paid when the deposit matures. The actual amount of interest is calculated on a money market yield basis with an is a daily reference rate based on the ...

... on its obligations to repay interest, principal or both. Liquidity risk: The risk that an investor wishing to sell a security is not able to do so quickly without sacrificing price. Money market securities allow investors to get a higher rate of return than they would from money sitting in a traditional bank account, while at the same time providing the issuers of money market securities with a relatively low-cost source of short initially issued with terms of one year or less and are widely traded secondary market with a wide variety of structures and characteristics. Money Market Securities ...

... (n/360) n denotes the remaining life of a T-bill in calendar days 11 Bond-equivalent yield of a T-bill Question 1: The quoted rate on a US T-bill with 50 days to maturity is 8.12%. The year basis is 360. For a $ 500 deal, you would have to pay: A. $594.35B. $ 494.35 C. $ 385.35 D. $ 485.35 Answer: Y = 1 - P × (n/360) Or 500 × [1 - 0.0812 × (50/360)] = 494.35 Question 2: If a 90-day Government of Canada Treasury bill with a face value of $1 million is offered for a price of $990,000, then what is the yield on T Answer: Yield of a T-bill from ...

... bills (but using Actual/365 convention) Basis point:100 basis points equals 1 percentage point. Stamping fee: The extra basis points that one party pays to bank represents sents the stamping fee, which is bank’s compensation for effectively guaranteeing party’s debt. JFE must pay the stamping fee to bank in advance. Value of the stamping fee is based on the face value of the Banker’s Acceptance instead of amount lent. Certificates of Deposit: A certificate of deposit is a time deposit with a bank which can be traded, with maturity of less than 3 months. Bills, issued by corporate for short-term financing, they are backed by the liquidity of a bank line of credit. The yields on commercial paper will generally be bills because of the relatively greater credit risk and liquidity risk are very similar to commercial paper, they are bills issueded by a borrower without the credit support of a financial institution. Term ...

... 5. The quoted rate on a US T-bill with 40 days to maturity is 7.82%. The year basis is 360. For a $ 800 deal, one would have to pay A. $712.35B. $764.75 C. $793.05 D. $737.95 Answer: C. Y = 1 - P × (n/360) = [1 - 0.0782 × ...