Money Markets Flashcards
(18 cards)
What are Money Markets
Short term securities that mature in less than a year, they are wholesale markets used by institutions rather than the personal sector
Converting from yield to discount
d = i/(i + i * n
What is the main purpose of money markets?
Provide short-term funding and liquidity.
Name three key types of money market instruments (MMIs).
- Treasury bills
- Commercial paper
- Certificates of Deposit (CDs)
What is a repo (repurchase agreement)?
A sale of securities with a promise to repurchase later at a higher price.
What is the maturity and denomination of most MMIs?
Less than 1 year; often over £1 million in denomination.
What’s the difference between yield and discount?
Yield is based on purchase price; discount is based on maturity value.
Formula for discount rate (d)?
d = (M - P) / M × (n / sm)
Formula for yield (i)?
i = (M - P) / P × (n / sm)
What are Eurocurrency markets?
Markets for deposits in a currency not native to the country of the bank.
Example of a eurocurrency instrument?
Eurodollar – US dollars held outside the USA.
What is a key problem with Eurocurrency markets?
Lack of regulation and control, leading to higher systemic risk.
What is the central bank’s role in money markets?
Lender of last resort; sets policy rates (e.g., via repo deals).
What is the interest rate corridor system?
A system where central bank lending/deposit rates form a band around LIBOR.
What caused Northern Rock’s collapse in 2007?
Over-reliance on short-term interbank funding for long-term mortgages.
What percentage of Northern Rock’s funding came from money markets by 2007?
About 77%.
List 3 characteristics that differentiate bonds/assets.
- Term
- Interest type
- Negotiability
How are Treasury Bills quoted in the UK?
On a discount basis, usually as bearer securities.
