III Money Markets 11 Money Market Instruments Money

III: Money Markets 11: Money Market Instruments

Money Market Instruments § § § Treasury Bills Commercial Paper Bankers Acceptances Certificates of Deposit Federal Funds Repurchase Agreements Chapter 11: Money Market Instruments © Oltheten & Waspi 2012

Money Market Instruments Pricing Treasury Bills Commercial Paper Bankers Acceptance Discount Paper Certificate of Deposit Federal Funds Repurchase Agreement Issuer Characteristic US Treasury “Full Faith and Credit” of the US Government Corporations Finances self-liquidating transaction involving non-US entity Banks Interest at Maturity Chapter 11: Money Market Instruments Short term corporate debt Borrowing by banks from investors Borrowing by Banks from other banks Money Market Dealers Borrowing with financial assets as collateral in order to lend at a higher rate: “Pawnshop Model” © Oltheten & Waspi 2012

Treasury Bills Chapter 11: Money Market Instruments © Oltheten & Waspi 2012

Primary Market § Treasury Bills are auctioned on a regular calendar basis. § § 4 week every Tuesday at 1 pm 13 week every Monday at 1 pm 26 week every Monday at 1 pm 52 week Bills discontinued in March 2001 § Each is for settlement on Thursday § Which is why Treasury Bills mature every Thursday. Chapter 11: Money Market Instruments © Oltheten & Waspi 2012

Treasury Bills § Characteristics § Debt of the US Department of the Treasury § Discount Paper § Primary Market § Auction call § Secondary Market § OTC § On/Off the run Chapter 11: Money Market Instruments © Oltheten & Waspi 2012

Commercial Paper Chapter 11: Money Market Instruments © Oltheten & Waspi 2012

Commercial Paper § Characteristics § Issued by Corporations § Discount Paper § < 270 days (average is 30 days) base of the yield curve Chapter 11: Money Market Instruments © Oltheten & Waspi 2012

Commercial Paper § Characteristics § Issued by Corporations § Discount Paper § < 270 days (average is 30 days) § Primary Market § Directly placed/Dealer placed § Secondary Market § None Chapter 11: Money Market Instruments © Oltheten & Waspi 2012

Bankers Acceptance Chapter 11: Money Market Instruments © Oltheten & Waspi 2012

Bankers Acceptance § Issued by Banks to finance a specific selfliquidating commercial transaction § Generally involves at least one non-US entity § Discount Paper Chapter 11: Money Market Instruments © Oltheten & Waspi 2012

Commercial Transaction Involving a 60 day waiting period Chapter 11: Money Market Instruments Cambridge Instruments © Oltheten & Waspi 2012

BA: Goods Shipped Shipping Papers (dated: April 3, 2018) Chapter 11: Money Market Instruments © Oltheten & Waspi 2012

Bankers Acceptances Cambridge Instruments Barclays Bank Who has to wait 60 days? There’s an New York investor Computer out there Imports somewhere. Chapter 11: Money Market Instruments JPM Accepts at 3. 0% JP Morgan Chase © Oltheten & Waspi 2012

Bankers Acceptances Cambridge Instruments Barclays Bank New York Computer Imports Chapter 11: Money Market Instruments JP Morgan Chase © Oltheten & Waspi 2012

Bankers Acceptance JP Morgan Chase Price Tag: $_______ $4, 000 Due April 3, 2018 Chapter 11: Money Market Instruments © Oltheten & Waspi 2012

BA: Maturity Cambridge Instruments Barclays Bank New York Computer Imports Chapter 11: Money Market Instruments JP Morgan Chase Investor © Oltheten & Waspi 2012

Money Market Instruments Pricing Treasury Bills Commercial Paper Bankers Acceptance Discount Paper Certificate of Deposit Federal Funds Repurchase Agreement Issuer Characteristic US Treasury “Full Faith and Credit” of the US Government Corporations Finances self-liquidating transaction involving non-US entity Banks Interest at Maturity Chapter 11: Money Market Instruments Short term corporate debt Borrowing by banks from investors Borrowing by Banks from other banks Money Market Dealers Borrowing with financial assets as collateral in order to lend at a higher rate: “Pawnshop Model” © Oltheten & Waspi 2012

Certificates of Deposit Chapter 11: Money Market Instruments © Oltheten & Waspi 2012

Bank Transactions § Initial Deposit of $1 m Assets: Liabilities Cash: Reserve: Assets: $900, 000. 00 Deposit: $100, 000. 00 $1, 000, 000. 00 Liabilities: $1, 000. 00 Chapter 11: Money Market Instruments © Oltheten & Waspi 2012

Bank Transactions § Loan of $900, 000 Assets Liabilities Cash: Loans: Reserve: Assets: $810, 000. 00 Deposits: $900, 000. 00 $190, 000. 00 $1, 000. 00 $900, 000. 00 $1, 900, 000. 00 Liabilities: $1, 900, 00 Chapter 11: Money Market Instruments © Oltheten & Waspi 2012

Bank Transactions § Loan of $810, 000 Assets Liabilities Cash: Loans: Reserve: $729, 000. 00 Deposits: $1, 710, 000. 00 $271, 000. 00 $1, 000. 00 $900, 000. 00 $810, 000. 00 Assets: $2, 710, 000. 00 Liabilities: $2, 710, 00 Chapter 11: Money Market Instruments © Oltheten & Waspi 2012

Bank Transactions § Loan of $729, 000 Assets Liabilities Cash: Loans: Reserve: $656, 100. 00 Deposits: $2, 439, 000. 00 $343, 900. 00 Assets: $3, 439, 000. 00 Liabilities: Chapter 11: Money Market Instruments $1, 000. 00 $900, 000. 00 $810, 000. 00 $729, 000. 00 $3, 439, 000, 00 © Oltheten & Waspi 2012

Certificates of Deposit § Eventually Assets Cash: Loans: Reserve: Assets: Liabilities $0. 00 Deposits: $9, 000, 000. 00 $10, 000. 00 Liabilities: Chapter 11: Money Market Instruments $1, 000. 00 $900, 000. 00 $810, 000. 00 $729, 000. 00 $656, 100. 00 …. . $10, 000, 00 © Oltheten & Waspi 2012

Federal Funds Chapter 11: Money Market Instruments © Oltheten & Waspi 2012

Federal Funds § Borrowing and Lending of Bank Reserves on deposit with the Federal Reserve § Interest at Maturity Overnight money Chapter 11: Money Market Instruments © Oltheten & Waspi 2012

Money Market Instruments Pricing Treasury Bills Commercial Paper Bankers Acceptance Discount Paper Certificate of Deposit Federal Funds Repurchase Agreement Issuer Characteristic US Treasury “Full Faith and Credit” of the US Government Corporations Finances self-liquidating transaction involving non-US entity Banks Interest at Maturity Chapter 11: Money Market Instruments Short term corporate debt Borrowing by banks from investors Borrowing by Banks from other banks Money Market Dealers Borrowing with financial assets as collateral in order to lend at a higher rate: “Pawnshop Model” © Oltheten & Waspi 2012

Repurchase Agreements Chapter 11: Money Market Instruments © Oltheten & Waspi 2012

Repurchase Agreements § Simultaneous Sale and Repurchase of Collateral to facilitate a loan § Interest at maturity § Pawnshop Model 60 days at 3½% sell collateral $1, 000. Chapter 11: Money Market Instruments Buy back collateral © Oltheten & Waspi 2012

Question: 11 -1 § Bankers Acceptance financed through a Repurchase Agreement on T-Bills. Chapter 11: Money Market Instruments © Oltheten & Waspi 2012

Money Markets II