The Money Market Flashcards
(38 cards)
What is the money market?
The money market consists of short-term securities under one year to maturity, normally issued in large denominations (over $100,000).
What are Treasury bills?
(money market)
Short-term loans to the government that are zero coupon payments, meaning you receive the face value at maturity.
so you don’t get periodic payments, you get what you gave at the end
The way bond buyers make money is because the government issues them at discount.
How do you earn money from T-Bills?
By paying at a discount to par (less than face value) and receiving the face value at maturity.
They are considered very safe as they are issued by the government.
What is the tax implication of earning from T-Bills?
You have to pay ** taxes on that profit** to the federal government. However, you** don’t have to pay state or local taxes**, which makes T-Bills more tax-efficient than many other investments.
What is the bank discount method?
An older method to calculate the price of T-Bills that only considers the difference between the purchase price and the face value.
it does not reflect the true YTM
What is a Certificate of Deposit (CD)?
A bank time deposit where you agree to let banks KEEP your money for a fixed period in exchange for interest. You cannot withdraw before maturity without paying a penalty.
What is the FDIC’s role in CDs?
reason why CDs are very safe
(Federal Deposit Insurance Corporation)
CDs are insured up to $250,000 by the Federal Deposit Insurance Corporation, protecting your money in case the bank fails.
What are the two types of CDs?
- Coupon-bearing CDs
- Zero-coupon CDs
What is Commercial Paper?
A short-term debt instrument issued by large corporations to manage short-term liabilities.
Very liquid (easily bought and sold), unsecured
Is commercial paper more suitable for institutional investors or individual? Why?
Institutional investors
Commercial paper is** issued in multiples of $100,000**
How is Commercial Paper similar to T-Bills?
Both are sold at a discount and repaid at full face value at maturity.
CP is like a corporate version of a T-Bill, but it’s riskier because it depends on the company’s creditworthiness, not the government’s backing.
What is a Bankers Acceptance?
A short-term financial instrument where a bank guarantees payment for its customer at a future date (usually within 6 months). If the customer can’t pay, the bank steps in and pays the holder.
It’s like a postdated check backed by the bank.
How does a Bankers Acceptance work?
The bank guarantees payment to the seller if the buyer fails to pay on a specific future date.
The bank gains the fees and interests (if the buyer doesn’t pay)
What happens if the buyer fails to pay on a Bankers Acceptance?
The bank pays the seller and then collects the money from the buyer later.
What is the liquidity status of CDs?
They are less flexible than regular savings accounts as you cannot withdraw before maturity without a penalty.
CDs over $100,000 are called ———– . What does this mean?
Negotiable CDs
They can be sold to other investors.
However, they are not very liquid. With a regular CD, you’re stuck until the time is up.
With a negotiable CD, you can find someone else to take your place and give you the money now.
What is commercial paper backed by?
Only the corporation’s promise to pay
it is not backed by any collateral or company assets
What are eurodollars?
U.S. dollar-denominated deposits held in banks outside the United States, regardless of whether those banks are foreign or branches of U.S. banks
the Eurodollar market is HUGE averade $140bn daily
They are normally for large sums (5mn+) and mostly used by banks lending to and borrowing from each other.
What are Money Market Funds?
Mutual funds that invest money in money market instruments
A type of mutual fund ✅
That pools money from many investors ✅
And uses that money to buy super low-risk, short-term investments.
What are the 3 types of investments in money market funds?
Government (most T Bills and agency securities), prime (corporate) or a combination
What are Broker’s Calls?
not really a money market instrument though
Loans that banks give to brokerage firms. These loans help brokers lend money to their clients who are buying stocks or other securities on margin (which means trading with borrowed money).
These loans can be terminated at any time by the bank. That’s why they’re called “at call” loans, the bank can “call” the loan back whenever it needs to. (bank can demand repayment at any time)
How does the interest of Broker’s calls work?
The broker pays interest on these loans, usually based on the interest rate of short-term Treasury Bills (1 week to 3 months) plus an extra 1%.
What are Repos?
(Repurchase Agreements)
a market participant sells securities to another with an agreement to buy them back at a higher price. They are collateralised loans (using securities as collateral)
point of view of the borrower
A loan between two parties, but instead of using cash as collateral, they use securities (like government bonds). If you don’t pay back the loan or repurchase the bond, the lender can keep the bond to cover their losses.This makes the loan less risky for the lender.
How long do repos usually last? are there other alternatives to this?
- Most repos are very short-term and last just one day. This is why they’re called Overnight Repos (ON repo)—you sell the bond today and buy it back tomorrow.
- Term Repos- Some repos last longer, for up to 6 months. These are called term repos, as they have a fixed period longer than overnight.
- Specialized Long-Term Repos- For specific needs, long-term repos (more than 6 months) can be arranged., These are done Over the Counter (OTC), meaning the terms are customized between the two parties.
