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

Chapter 11: Money Market Instruments © 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 1pm
§ 13 week every Monday at 1pm
§ 26 week every Monday at 1pm
§ 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)
10%

8%

6%

4%
base of the yield curve
2%

0%
0 90 180 270 360 450
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 self-
liquidating commercial transaction
§ Generally involves at least one non-US
entity
§ Discount Paper

Chapter 11: Money Market Instruments © Oltheten & Waspi 2012

 Commercial Transaction
Cambridge
Instruments
Involving a
60 day
waiting period

Chapter 11: Money Market 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?
JPM Accepts
There’s an at 3.0%
New York
investor
Computer
out there JP Morgan
Imports
somewhere Chase
.

Chapter 11: Money Market Instruments © Oltheten & Waspi 2012

 Bankers Acceptances Cambridge
Instruments

Barclays Bank

New York
Computer JP Morgan
Imports Chase

Chapter 11: Money Market Instruments © Oltheten & Waspi 2012

 Bankers Acceptance

Bankers Acceptance Price Tag:

$_______
JP Morgan Chase
$4,000,000
Due April 3, 2018

Chapter 11: Money Market Instruments © Oltheten & Waspi 2012

 BA: Maturity Cambridge
Instruments

Barclays Bank

New York
Computer JP Morgan Investor
Imports Chase

Chapter 11: Money Market Instruments © Oltheten & Waspi 2012

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

Chapter 11: Money Market Instruments © Oltheten & Waspi 2012

 Certificates of Deposit

Chapter 11: Money Market Instruments © Oltheten & Waspi 2012

 Bank Transactions
§ Initial Deposit of $1m

Assets: Liabilities
Cash: $900,000.00 Deposit: $1,000,000.00
Reserve: $100,000.00
Assets: $1,000,000.00 Liabilities: $1,000,000.00

Chapter 11: Money Market Instruments © Oltheten & Waspi 2012

 Bank Transactions
§ Loan of $900,000

Assets Liabilities
Cash: $810,000.00 Deposits: $1,000,000.00
Loans: $900,000.00 $900,000.00
Reserve: $190,000.00
Assets: $1,900,000.00 Liabilities: $1,900,000,00

Chapter 11: Money Market Instruments © Oltheten & Waspi 2012

 Bank Transactions
§ Loan of $810,000

Assets Liabilities
Cash: $729,000.00 Deposits: $1,000,000.00
Loans: $1,710,000.00 $900,000.00
Reserve: $271,000.00 $810,000.00
Assets: $2,710,000.00 Liabilities: $2,710,000,00

Chapter 11: Money Market Instruments © Oltheten & Waspi 2012

 Bank Transactions
§ Loan of $729,000

Assets Liabilities
Cash: $656,100.00 Deposits: $1,000,000.00
Loans: $2,439,000.00 $900,000.00
Reserve: $343,900.00 $810,000.00
$729,000.00
Assets: $3,439,000.00 Liabilities: $3,439,000,00

Chapter 11: Money Market Instruments © Oltheten & Waspi 2012

 Certificates of Deposit
§ Eventually
Assets Liabilities
Cash: $0.00 Deposits: $1,000,000.00
Loans: $9,000,000.00 $900,000.00
Reserve: $1,000,000.00 $810,000.00
$729,000.00
$656,100.00
…..
Assets: $10,000,000.00 Liabilities: $10,000,000,00

Chapter 11: Money Market Instruments © 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
é 1 ù
$1,000,000 ê1 + .03 ú =$
ë 360 û

Chapter 11: Money Market Instruments © Oltheten & Waspi 2012

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

Chapter 11: Money Market Instruments © 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 Buy back collateral
collateral
$1,000,000.
Chapter 11: Money Market Instruments © 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