Money Markets Flashcards
What are money markets
Markets where highly liquid currencies approaching cash are traded, not currency though
What are the characteristics of assets in money markets
They are traded in large denominations which prevents everyday people from participating. They are low risk and mature in less than a year
Is there a secondary market for securities in the money market
Yes
What are money markets most often used for
Short term financial needs
When are money markets cheaper than borrowing from banks
When information asymmetry problems are not so severe
Why can it be more attractive for firms to hold their money in money markets
They earn more than bank rent with an added risk as the markets are relatively unregulated although that in itself can be a boon when legislation prevents banks from working optimally
Who act on the money markets
State treasury and reserves, commercial banks and businesses, investment and securities firms as well as some well of individuals
How does the treasury act on the money market
They demand funds by issuing treasury bills
How does the reserve act in the money market
They hold vast amounts if securities that they sell if interest is raised to high, they also purchase securities if interest becomes to low. Aka monetary policy
Are banks allowed to own stocks
No, they are forbidden from holding risky securities
How can individuals invest in the money market
Through mmmf money market mutual funds
What characteristics have treasury bills
They have a maturity if 4, 13, 26 or 52 weeks and they come in denominations of 100 or 1000 daras
What dies it mean that treasury bills are issued at a discount
That their price is lower than the face value aka the price at maturity
How do you calculate the interest of a treasury bill
i = (FV - P) / P
P stands for price and FV stands fore face value
Why are treasury bills risk free
Because they are backed up by government
