Lecture 2 Flashcards
(22 cards)
What are money market instruments for?
Institutions meeting short-term cashflow needs
What is the difference between money market & capital market?
Capital market = more than 1 year (e.g. bonds, shares)
True or false: any large entity can borrow in money markets
False - only high-quality entities with low default risk
What are the main categories of money market instrument?
- Single payment securities
- Discount instruments
How do single-payment securities work?
Add interest to face value on maturity
How do discount instruments work?
Sold at a discount, pay out face value
What are T-bills an example of?
Discount instruments
What are repos an example of?
Single-payment securities
What are federal funds?
Money market instruments, funds transferred between institutions for <1 day
What is commercial paper?
Unsecured notes issued by companies
What are CDs?
Negotiable certificates of deposit
What are banker’s acceptances typically used for?
Importing & exporting
What are repurchase agreements (repos)?
Collateralised loans using temporary transfer of assets as security
How do the BoE & ECB use repos?
Control liquidity & set interest rates
What are the characteristics of money market instruments?
- High denominations
- Low default risk
- Low interest rates
- Short maturity
What money market instruments have an active secondary market?
T-bills
What money market instruments have a limited secondary market?
- Commercial paper
- CDs
- BAs
What money market instruments have no secondary market? Why?
Repos - too short term
What does LIBOR stand for?
London Interbank Offered Rate
What is LIBOR used for?
Rate paid on Eurodollar deposits
What is the PV of an annuity starting in one year?
c/r- c/r(r+1)^n
What is the PV of a perpetuity starting in one year?
c / r
