CHAPTER 5: MONEY MARKETS -money markets exist to transfer funds from individuals, corp.

s, and govt units w/ short-term excess funds (suppliers of funds) to economic agents who have short-term needs for funds (users of funds) -money markets: short-term debt instruments (those w/ an original maturity of one year/less); issued by economic agents that require short-term funds; purchased by economic agents that have excess short-term funds -markets that trade debt securities or instruments w/ maturities of less than one year -once issued, money market instruments trade in active secondary markets -capital markets serve similar function for market participants w/ excess funds to invest for periods of time longer than one year and/or who wish to borrow for periods longer than one year -market participants who concentrate their investments in capital market instruments also tend to invest in some money market securities so as to meet their short-term liquidity needs -secondary markets for money market instruments serve to reallocate (relatively) fixed amounts of liquid funds available in market at any particular time -as mortgage and mortgage-backed securities (MBS) markets started to experience large losses, money markets froze and banks stopped lending to each other at anything but high overnight rates MONEY MARKETS -need for money markets arises b/c immediate cash needs of individuals, corporations, and govts dont necessarily coincide w/ their receipts of cash -federal govt collects taxes quarterly but its operating and other expenses occur daily -corporations daily patterns of receipts from sales dont necessarily occur w/ same pattern as their daily expenses (eg. wages and other disbursements) -b/c excessive holdings of cash balances involve cost in form of forgone interest (opportunity cost), those economic units w/ excess cash usually keep such balances to minimum needed to meet their day-to-day transaction requirements -holders of cash invest excess cash funds in financial securities that can be quickly and relatively costlessly converted back to cash when needed w/ little risk of loss of value over short investment horizon -money markets efficient in performing this service in that they enable large amounts of money to be transferred from suppliers of funds to users of funds for short periods of time both quickly and at low cost to transacting parties -money market instrument provides investment opportunity that generates higher rate of interest (return) than holding cash (which yields zero interest), but also very liquid and (b/c of short maturity) has relatively low default risk -3 characteristics of money markets and money market securities/instruments: 1. MMIs generally sold in large denominations; most MM participants want/need to borrow large amounts of cash, so that transactions costs are low relative to interest paid -size of initial transactions prohibits most individuals from investing directly in MM mutual funds/short-term funds 2. MMIs have low default risk: risk of late/nonpayment of principal and/or interest is generally small -since cash lent in MMs must be available for quick return to lender, MMIs can generally be issued only by highquality borrowers w/ little risk of default 3. MMSs must have original maturity of one year/less (longer maturity of debt security, greater its interest rate risk and higher its required rate of return -short-term maturity of MMIs helps lower risk that interest rate changes will significantly affect securitys market value and price YIELDS ON MONEY MARKET SECURITIES: Bond equivalent yield (ibey): quoted nominal/stated yield on a security -used to calculate PV of investment -for MMSs, product of periodic rate and number of periods in year: ibey = [(Pf P0)/P0](365/h) Pf = face value P0 = purchase price of security h = number of days until maturity Effective Annual Return -BEY is a quoted nominal or stated rate earned on an investment over a one-year period -does not consider effects of compounding of interest during less than one year investment horizon -if interest paid/compounded more than once/year, true annual rate earned is effective annual return on an investment -BEY on MMSs w/ maturity of less than one year can be converted to an effective annual interest return (EAR): EAR = [1+ (ibey /365/h)]365/h 1 EXAMPLE: CALCULATION OF EAR ON MMS: You invest in MMS maturing in 75 days, offering 7% nominal annual interest(i.e. BEY). EAR = {1+[0.07/(365/75)]}365/h 1 = 7.20%

Discount Yields (idy): (eg. T.Bills, commercial paper, bankers acceptance yield) instead of directly received interest payments over investment horizon, return on these securities results from purchase of security at discount from face value (P0) and receipt of face value (Pf) at maturity -use 360-day year rather than 365-day year -interest rate calculation: idy = [(Pf P0)/Pf](360/h) -use terminal price/securitys face value (Pf) as base price in calculating annualized interest rate -BEY based on purchase price (P0) of security -generally use 360 vs. 365 to compute interest returns -comparing interest rates on discount vs nondiscount securities, adjusting for both base price and days in year differences, requires converting discount yield into BEY: ibey = idy (Pf /P0)(365/360) EXAMPLE: COMPARISON OF DY, BEY, AND EAR: You purchase $1 million Treasury bill, currently selling on discount basis at 97.5% of its face value. T-Bill is 140 days from maturity Discount Yield: idy = [($1m. - $975,000)/$1m.](360/140) = 6.43% BEY: ibey = [($1m. - $975,000)/$975,000](365/140) = 6.68% EAR = [1+0.0668/(365/140)]365/h 1 = 6.82% Single-Payment Yields (ispy): (eg. federal funds, repurchase agreements, negotiable certificates of deposit) only pay interest once during their lives: at maturity -single-payment security holder receives terminal payment consisting of interest + face value of security -special case of pure discount securities that only pay face value on maturity -quoted nominal interest rates on single-payment securities/single-payment yield, normally assume 360-day year -to compare with others, s.as T-Bonds that pay interest based on 365-day year, nominal interest rate must be converted: ibey = ispy(365/360) EAR = {1+[ispy(365/360) / (365/h)]}365/h 1 OR EAR = {1+[ibey / (365/h)]}365/h 1 EXAMPLE: COMPARISON OF SPY, BEY, AND EAR: you purchase $1 million jumbo CD currently 1-5 days from maturity; quoted annual interest rate of 5.16% for 360-day year ibey = 5.16%(365/360) = 5.232% EAR = [1+(0.05232) / (265/105)]365/105 1 = 5.33% MONEY MARKET SECURITIES -issued by corporations and govt units to obtain short-term funds 1. treasury bills: short-term obligations issued by U.S. govt to cover current govt budget shortfalls/deficits and to refinance maturing govt debt -purchase/sale is main tool used by U.S. govt to implement monetary policy -backed by govt so virtually default risk free referred to as the risk-free asset in U.S. -have little interest rate risk and liquidity risk b/c of short-term nature and active secondary market -New issue and Secondary Market Trading Process for Treasury Bills: -treasury bill auctions: formal process by which U.S. Treasury sells new issues of Treasury bills; every week -bids may be submitted by govt securities dealers, financial and nonfinancial corp.s, and individuals and must be received by Federal Reserve Bank -all successful bidders (competitive/noncompetitive) are awarded securities at same price: price equal to lowest price of competitive bids accepted -competitive bids: specify desired quantity of T-bills and bid price; highest bidder receives first allocation (allotment) of T-bills, and subsequent bids are filled in decreasing order of the bid until all T-bills auctioned that week are distributed -price paid by all bidders is lowest price of accepted competitive bidders -any competitive bidder can submit more than one bid; but no bidder can legally receive more than 35% of T-bills involved in any auction: limits one bidder to squeeze the market -1991 Salomon Brothers disclosed that in several Treasury auctions, it had improperly purchased substantially more than the 35% of an issue than any one firm is allowed to buy -also admitted submitting bids in names of customers who had not authorized it to do so, enabling it to buy more of the securities than allowed -firms president and 2 other top executives admitted that they had been told four moths earlier that firm had made illegal bids, but failed to report it to govt until mid-August -generally used by large investors and govt securities dealers and make up majority of auction market -noncompetitive bids: bidder indicates quantity of T-bills he/she wants to buy and agrees to pay lowest price of winning competitive bids

-bidders get preferential allocation: bids met before remaining T-bills are allocated to competitive bidders -bidder agrees to accept discount rate determined at auction and guaranteed to receive full amount of bid -limited to $1 million/less -allow small investors to participate in T-bill auction market w/out incurring large risks; small investors who are unfamiliar w/ money market interest rate movements can use a competitive bid to avoid bidding a price too low to receive any of the T-bills or bidding too high and paying more than fair market price -secondary market for T-bills: largest of any U.S. money market security -securities dealers designated as primary govt securities dealers by Federal Reserve Bank of NY (consisting of 18 financial institutions) who purchase majority of T-bills sold competitively at auction and create active 2ndary market -there are many smaller dealers who directly trade in secondary market -primary dealers make market for T-bills by buying and selling securities for their own account and by trading for their customers, including depository institutions, insurance companies, pension funds, etc. -T-bill market: centralized; most trading transacted over telephone -brokers keep track of market via closed circuit tv screens located in trading rooms of primary dealers -secondary market T-bill transactions between primary govt securities dealers are conducted over Federal Reserves wire transfer serviceFedwire -Treasury Bill Yields: rather than directly paying interest on T-bills (coupon rate is zero), govt issues T-bills at discount from their par/face value -return comes from difference between purchase price paid for T-bill and face value received at maturity -during financial crisis, investors worldwide, searching for safe haven for their funds, invested huge amounts of funds in U.S. Treasury securities; amount was so large that yield on 3-month Treasury bill went below zero for first time ever; investors were essentially paying U.S. govt to borrow money Discount yield (dy) on T-bill: iT-bill, dy = [(Pf P0)/Pf] (360/h) EXAMPLE: CALCULATING TREASURY BILL ASKED DISCOUNT YIELD: you purchase T-bill maturing on November 18, 2010, for $9,993.792. T-bill matures 133 days after settlement date, July 9, 2010; face value = $10,000. iT-bill, dy = [($10,000 $9,993.80) / $10,000] x (360,133) = 0.168% -differs from true rate of return/BEY b/c: 1. base price used is face value of T-bill and not purchase price of T-bill 2. 360-day year rather than 360-day -BEY uses 365-day year and purchase price rather than face value of T-bill as base price -formula for BEY on T-bill: iT-bill, bey = [(Pf P0)/P0] (365/h) example: [($10,000 $9,993,793)/$9,993,793] (365/133) EAR = {1 + [0.0017/(365/133)]}365/133 1 = 1.71% -T-bills price an be calculated from quote reported in financial press by rearranging yield equations -required market ask price: P0 = Pf [iT-bill, dy(h/360)Pf] for BEY: P0 = Pf / [1 + (iT-bill, bey (h/365)] EXAMPLE: CALCULATION OF TREASURY BILL PRICE FROM WALL STREET JOURNAL (pg. 152) QUOTE Asked/discount yield on T-bill maturing on September 23, 2010 (77 days from settlement date, July 9,2010) = 0.158%. Tbill price for T-bills: P0 = $10,000 [(0.00158)(77/360)($10,000)] = $9,996.62 or using asked yield/BEY on T-bill, 0.160%: P0 = $10,000 / {1 + [(0.0016)(77/365)]} = $9,996.62 2. federal funds: short-term funds transferred between financial institutions usu. for no more than one day -eg. commercial banks trade fed funds in form of excess reserves held at their local Federal Reserve Bank: one commercial bank may be short of reserves, requiring it to borrow excess reserves from another bank that has a surplus -institution that borrows fed funds incurs liability on its B/S: federal funds purchased -lends, records asset: federal funds sold -overnight/one day interest rate for borrowing fed funds: federal funds ratefunction of supply and demand for federal funds among financial institutions and effects of Federal Reserves trading through FOMC -fed funds are single-payment loansthey pay interest only once, at maturity; transactions take form of short-term (mostly overnight) unsecured loans -quoted interest rates on fed funds, iff,spy, assume 360-day year; to compare interest rates on fed funds w/ other securities s.as T.Bills, quoted fed funds interest rate must be converted into bond equivalent rate/yield, ibff,bey EXAMPLE: CONVERSION OF FED FUNDS RATE OF INTEREST TO BOND EQUIVALENT RATE Overnight fed funds rate July 8, 2010 = 0.20%; conversion of fed funds rate to bond equivalent rate: ibff,bey = iff,spy (365/360) = 0.20%(365/360) = 0.20278%

EAR = {1 + [0.0020278/(365/1)]} 1 = 0.20298% -fed funds rate particularly important b/c its a focus/target rate in conduct of monetary policy Trading in the Federal Funds Market: fed funds mkt highly liquid and flexible source of funding for commercial and savings banks -commercial banks (esp. largest) conduct vast majority of transactions in fed funds market -fed funds transactions created by banks borrowing and lending excess reserves held at their Fed Reserve Bank, using Fedwire to complete transaction -banks w/ excess reserves lend fed funds; banks w/ deficient reserves borrow fed funds -can be initiated by either lending/borrowing bank, w/ negotiations between any pair of commercial banks taking place directly over telephone -trades can be arranged through fed funds brokers who charge small fee for bringing 2 parties to together -if bank has excess reserves, will call correspondent banks (banks w/ reciprocal accounts and agreements) to see if they need overnight reserves; bank then sells to those correspondent banks that offer highest rates for these fed funds -when transaction agreed upon, lending bank instructs its district Fed Reserve Bank to transfer excess to borrowing banks reserve account at its Fed Reserve Bank -next day, transferred back from borrowing to lending banks reserve account at Fed Reserve Bank+1 day interest -overnight fed funds loans will likely be based on an oral agreement between parties; generally unsecured loans 3. repurchase agreements (repo/RP): agreements involving sale of securities by one party to another w/ promise to repurchase securities at specified date and price -essentially a collateralized fed funds loan, w/ collateral (held by repo seller) taking form of securities -T-bills and govt agency securities used most often in repos -collateral pledged in repurchase agreement has haircut applied: collateral valued at slightly less than market value -reflects underlying risk of collateral and protects repo buyer against change in value of collateral -specific to classes of collateral; eg. T-bills might have one rate and govt agency security have another haircut rate -reverse repurchase agreement (reverse repo): agreement involving purchase of securities by one party from another w/ promise to sell them back at given date in future -b/c parties in every repurchase agreement transaction have opposite perspectives, titles repo and reverse repo can be applied to same transaction: -given transaction is repo from point of view of securities seller and a reverse repo from point of view of securities buyer -whether transaction is termed repo or reverse repo generally depends on which party initiated transaction -most repos have very short terms to maturity (generally from 1-14 days), but there is growing market for longerterm 1- to 3-month repos -repos w/ maturity of less than one week generally involve denominations of $25 million/more -longer-term repos more often in denominations of $10 million -many commercial firms, w/ idle funds in their deposit accounts at banks, use repos as a way to earn a small return until these funds are needed: firm uses its idle funds to buy T-bills from its bank; bank then agrees to repurchase Tbills in future at higher price -most are collateralized fed funds transactions entered into by banks -in fed funds transaction, bank w/ excess reserves sells fed funds for one day to purchasing bank -next day, purchasing bank returns fed funds + one days interest reflecting fed funds rate -since there is credit risk exposure to selling bank in that purchasing bank may be unable to repay fed funds next day, selling bank may seek collateral backing fro one-day loan of fed funds -funds-selling bank receives govt securities as collateral from funds-purchasing bank: funds-purchasing bank temporarily exchanges securities for cash -next day, transaction is reversed, w/ funds-purchasing bank sending back fed funds borrowed + interest (repo rate); receives/repurchases its securities used as collateral in transaction TRADING PROCESS FOR REPO: arranged either directly between two parties or w/ help of brokers and dealers 1. repo buyer arranges to purchase fed funds from repo seller w/ agreement that seller will repurchase fed funds w/in stated period of timeone day 2. repo is collateralized w/ T-bonds: usu. repo buyer acquires title to securities for term of agreement 3. once transaction agreed upon, repo buyer instructs its district Fed Reserve Bank to transfer excess reserves to repo sellers reserve account 4. repo seller instructs its district Fed Reserve Bank to transfer that amount from its T-bond account via securities Fedwire to repo buyers T-bond account 5. upon maturity of repo, transactions are reversed

6. repo seller transfers add.l funds (1 days interest) from its reserve account to reserve account of repo buyer -repo agreements used by Fed to help it conduct open market operations as part of its overall monetary policy strategy -when monetary adjustments intended to be temporary (s.as smoothing out fluctuations in interest rates/money supply), Fed uses repos w/ dealers/banks -maturities of repos used by Fed are rarely longer than 15 days -govt securities dealerss.as largest investment and commercial banksengage in repos to manage their liquidity and to take advantage of anticipated changes in interest rates -Repo Agreement Yields: b/c Treasury securities back most repos, they are low credit risk investments and have lower interest rates than uncollateralized fed funds -spread btwn rate on collateralized repos vs. uncollateralized fed funds has usu. been in order of 0.25%/25 basis points -yield on repos calculated as annualized %age difference btwn initial selling price of securities and contracted (re)purchase price (selling price + interest paid on repo), using 260-day year: iRA = [(Pf P0)/P0](360/h) Pf = repurchase price of securities (= selling price + interest paid on repo) P0 = selling price of securities h = # days until repo matures EXAMPLE: CALCULATION OF YIELD ON REPO: bank enters reverse repo; agrees to buy fed funds from one of its correspondent banks for $10 million with promise to sell back at $10,000,291.67 ($10 million + interest) after 5 days: iRA,SPY = [($10,000,291.67 $10 million)/$10 million](360/5) = 0.21% -major differences between repos and fed funds: -repos are less liquid than fed funds b/c they can only be arranged after an agreed upon type of collateral is posted -(repos hard to arrange at close of banking day vs. fed funds can be arranged at very short notice, even few min.s) -nonbanks are more frequent users of repos 4. commercial paper: short-term unsecured promissory notes issued by company to raise short-term cash, often to finance working capital requirements -used most b/c companies w/ strong credit ratings can generally borrow money at lower interest rate by issuing commercial paper than by directly borrowing (via loans) from banks -SEC rule: securities w/ maturity of more 270 days must go through time-consuming and costly registration process to become public debt offering (i.e. corporate bond) -at maturity, most commercial paper is rolled over into new issues of commercial paper -can be sold directly by issuers to buyer s.as mutual fund (direct placement) or can be sold indirectly by dealers in commercial paper market -generally held by investors from time of issue until maturity: no active secondary market for commercial paper -credit rating important because commercial paper isnt actively traded and because its also unsecured debt -credit ratings provide potential investors w/ info regarding ability of issuing firm to repay borrowed funds, as promised, and to compare commercial paper issues of different companies -companies must obtain two rating evaluations -issuers w/ lower than prime credit ratings often back commercial paper issues w/ line of credit obtained from commercial bank: bank agrees to make promised pymt on commercial paper if issuer cant pay off debt on maturity -letter of credit backing commercial paper effectively substitutes credit rating of bank; reduces risk to purchasers of paper and result sin lower interest rate and higher credit rating on commercial paper TRADING PROCESS OF COMMERCIAL PAPER: sold to investors either directly, using issuers own sales force (eg. GMAC), or indirectly through brokers and dealers, s.as major bank subsidiaries that specialize in investment banking activities and investment banks underwriting issues -commercial paper underwritten and issued through brokers and dealers is more expensive to issuer, usu. increasing cost of issue by one-tenth to one-eighth of a %, reflecting an underwriting cost -in return, dealer guarantees, through firm commitment underwriting, sale of whole issue -dealer contacts prospective buyers of commercial paper, determines appropriate discount rate on commercial paper, and relays any special requests for commercial paper in term of specific quantities and maturities to issuer -when issued directly from issuer to buyer, company saves cost of dealer (and underwriting services) but must find appropriate investors and determine discount rate on paper that will place complete issue -when firm decides how much commercial paper it wants to issue, it posts offering rates to potential buyers based on its own estimates of investor demand -firm then monitors flow of money during day and adjusts its commercial paper rates depending on investor demand Commercial Paper Yields: quoted on discount basisdiscount return to commercial paper holders is annualized percentage difference between price paid for paper and par value using 360-day year:

icp,dy = [(Pf P0)/Pf](360/h) conversion to BEY: icp,bey = [(Pf P0)/P0](365/h) 5. negotiable certificates of deposit (CD): bank-issued time deposit that specifies an interest rate and maturity date and is negotiable (salable on a secondary market) -bearer instrument: instrument in which holder at maturity receives principal and interest -can be traded any number of times in secondary markets; therefore, original buyer not necessarily owner at maturity -denominations range $100,000 to $10 million; $1 million is most common -large denominations make it too large for most individuals to buy -2 weeks to one year, most mature 1-4 months TRADING PROCESS FOR NEGOTIABLE CERTIFICATES OF DEPOSIT: banks that issue negotiable CDs post daily set of rates for most popular maturities of their nCDs, normally 1, 2,3, 6, and 12 months -then, subject to its funding needs, tries to sell as many CDs to investors likely to hold them as investments rather than sell them to secondary market -sometimes, bank and CD investor directly negotiate rate, maturity, and size of CD; issuing bank delivers CD to custodian bank specified by investor -verifies CD, debits amount to investors account, credits amount to issuing bank -secondary mkt allows investors to buy existing nCDs rather than new ones; made up of lined network of approx. 15 brokers and dealers using telephones to transact -predominantly located in NYC -certificates phsycially transported between traders/custodian banks; verifies certificate and records deposit in investors acct -most transactions executed in morning usu. settled same day -most transactions executed later in day, settled next business day Negotiable CD Yields: negotiated between bank and CD buyer -large, well-known banks can offer CDs at slightly lower rates than smaller, less well-known banks b/c lower perceived default risk and greater marketability of well-known banks and partly to belief that larger banks often too big to fail -regulators will bail out troubled large banks and protect large depositors beyond explicit deposit cap under current FDIC insurance program -interest rates on negotiable CDs generally quoted on interest-bearing basis using 360-day year 6. bankers acceptances: time drafts payable to a seller of goods, w/ payment guaranteed by a bank -small part of money markets -time drafts issued by bank are orders for bank to pay specified amount of money to bearer of time draft on given date Trading Process for Bankers Acceptances: -many arise from international trade transactions and underlying letters of credit (or time drafts) that are used to finance trade in goods that have yet to be shipped from foreign exporter (seller) to domestic importer (buyer) -foreign exporters often prefer that banks act as guarantors for payment before sending goods to domestic importers, particularly when foreign supplier hasnt previously done business w/ domestic importer on regular basis -bankers acceptances payable to bearer at maturity; can and are traded in secondary markets -maturities on bankers acceptances determined by size of original transaction; once in secondary market, bankers acceptances often bundled and traded in round lots -only largest U.S. banks are active in bankers acceptance market -risk of default very low (investor is buying security fully backed by commercial bank guarantees) -double protection underlying bankers acceptances that reduces their default risk -investor also protected by value of goods imported to which he/she now has debtors claim so both importer and importers bank must default on transaction before investor subject to risk -goods underlying transaction can be viewed as collateral -like T-bills and commercial paper, sold on discounted basis Instrument Principal Issuer Principal Investor Treasury bills U.S. Treasury Federal Reserve System Commercial banks Mutual funds Brokers and dealers Other financial institutions Corporations Individuals

Commercial banks Federal Reserve System Commercial banks Mutual funds Brokers and dealers Other financial institutions Corporations Commercial paper Commercial banks Brokers an dealers Other financial institutions Mutual funds Corporations Corporations Other financial institutions Individuals Negotiable CDs Commercial banks Brokers and dealers Mutual funds Corporations Other financial institutions Individuals Bankers acceptances Commercial banks Commercial banks Brokers and dealers Corporations U.S. Treasury: raises significant amounts of funds in money market when issues T-bills -T-bills are most actively traded of money market securities; allow govt to raise money to meet unavoidable short-term expenditure needs prior to receipt of tax revenues -tax receipts generally concentrated around quarterly dates; govt expenditures more evenly distributed over year Federal Reserve: key participant in money markets; holds T-bills to conduct open market transactionspurchasing Tbills when wants to decrease money supply -often uses repurchase agreements and reverse repos to temporarily smooth interest rates and money supply -targets federal funds rate as part of its overall monetary policy strategy: can affect other market rates -operates discount window to influence supply of bank reserves to commercial banks and ultimately demand for and supply of fed funds and repos Commercial banks: most diverse group; participate as issuers and/or investors in almost all money market instruments -importance driven in part by their need to meet reserve req.s imposed y regulation -additional reserves can be obtained by borrowing fed funds from other banks, engaging in repos, selling nCDs, or selling commercial paper Money Market Mutual Funds: purchase large amounts of money market securities and sell shares in these pools based on value of their underlying (money market) securities -allow small investors to invest -provide alt. investment opportunity to interest-bearing deposits at commercial banks Brokers and dealers: important to smooth functioning of money markets 1. 18 primary govt security dealers: key role in marketing new issues of T-bills/securities -make market in T-bills, buying securities form Fed Reserve when issued and selling them in secondary market -assists Fed Reserve when it uses repo market to temporarily increase/decrease supply of bank reserves available 2. money and security brokers: when govt securities dealers trade w/ each other, often use as intermediaries -linking buyers and sellers in fed funds market -assist secondary trading in other money market securities -never trade for their own account -keep names of dealers involved in trades they handle confidential 3. those who act as intermediaries in money markets by linking buyers and sellers of money market securities -often act as intermediaries for smaller investors who dont have sufficient funds to invest in primary issues of money market securities or who simply want to invest in money markets Corporations: raise large amounts of funds, primarily in form of commercial paper -often invest excess cash funds in money market securities esp. T-ills, repos, commercial paper, nCDs, and bankers repos b/c corporate cash inflows rarely equal outflows Other financial institutions: property-casualty (PC) insurance companies, and to a lesser extent life insurance companies, must maintain large balances of liquid assets b/c liability pmts relatively unpredictable -invest heavily in highly liquid money market securities, esp. T-bills, repos, commercial paper, and negotiable CDs

Federal funds Repurchase agreements

Commercial banks Federal Reserve System Commercial banks Brokers and dealers Other financial institutions

-raise large amounts of funds in money markets, especially through issuance of commercial paper Individuals: participate in money markets through direct investments or through investments in money market mutual funds, which contain mix of all types of money market securities International Aspects of Money Markets: Growth: 1. U.S. money market securities bought and sold by foreign investors 2. foreign money market securities -during financial crisis, investors, searching for safe haven for funds, invested huge amounts in U.S. Treasury securities, while reducing investments in other money market (and capital market) securities -Eurodollar market: market in with Eurodollars trade -may be held by govts, corp.s, and individuals from anywhere in world and not directly subject to U.S. bank regulations, s.as reserve req.s and deposit insurance premiums (or protections) -rate paid on Eurodollar CDs generally higher than U.S.-domiciled CDs -companies can also obtain short-term funding by issuing Eurocommerical paper: issued in Europe but can be help inside/outside Europe -used by banks around world as source of overnight funding -market in which dollars held outside U.S. are tracked among multinational banks -London Interbank Offered Rate (LIBOR): rate paid on Eurodollars -Eurodollar CDs: dollar-denominated deposits in non-U.S. banks; maturity less than one year -deposited in non-U.S. banks so arent subject to reserve req.s -Eurocommercial paper: issued in Europe by dealers of commercial paper w/out involving bank