Money Market

Money Market I

Chapter 10: Money Markets © Oltheten & Waspi 2012

Money Market Basics

Term to Maturity < 1 year at issue Each year has 360 days

Chapter 10: Money Markets © Oltheten & Waspi 2012

Interest

Interest Bearing Periodic interest (coupon) payments

Interest at Maturity

Discount Paper

Chapter 10: Money Markets © Oltheten & Waspi 2012

Discount Paper

Chapter 10: Money Markets © Oltheten & Waspi 2012

Bankers Discount

Bankers: 360 days in a year Discount: price is calculated at a discount to

the face value.

360

DaysRate 1PP faceMarket

Chapter 10: Money Markets © Oltheten & Waspi 2012

Example:

Buy $1,000,000 104 day discount note at 3.42

Sept 14

$1,000,000.

Dec 27Interest = $

Price =

Chapter 10: Money Markets © Oltheten & Waspi 2012

Money Market Yield

To compare to other Money Market Investments

days

360*

Investment

InterestY tMoneyMarke

Chapter 10: Money Markets © Oltheten & Waspi 2012

Money Market Yield

To compare to other Money Market Investments

days

360*

Investment

InterestY tMoneyMarke

104

360*

0$990,120.0

$9,880.00Y tMoneyMarke

Chapter 10: Money Markets © Oltheten & Waspi 2012

Straight Yield

To compare to other Money Market Investments

days

365*

Investment

InterestYStraight

Chapter 10: Money Markets © Oltheten & Waspi 2012

Straight Yield

To compare to other Fixed Income Investments

days

365*

Investment

InterestYStraight

104365*

0$990,120.0$9,880.00

YStraight

Chapter 10: Money Markets © Oltheten & Waspi 2012

Ask Yield

= straight yield for < 182.5 days = for > 182.5 days

182.5days

InvestmentInterest

182.5days730days daysY

2

Ask

Chapter 10: Money Markets © Oltheten & Waspi 2012

Treasury Bills

Treasury Bills

Maturity Days Bid Ask Chg Ask Yield

Sept 20 6 2.67 2.66 0.12 2.70

Dec 27 104 3.43 3.42 0.06 3.50

March13 181 3.77 3.76 0.02 3.89Wall Street Journal

© Oltheten & Waspi 2012

Ask Yield

Chapter 10: Money Markets © Oltheten & Waspi 2012

Exercise

Calculate The price at which you would buy the T-Bill Money Market yield Ask Yield

Chapter 10: Money Markets © Oltheten & Waspi 2012

Treasury Bills

Treasury Bills

Maturity Days Bid Ask Yield MM Yield Ask

Sept 20 6 2.67 2.66

Dec 27 104 3.43 3.42 3.45 3.50

March 13 181 3.77 3.76

Wall Street Journal

© Oltheten & Waspi 2012

Chapter 10: Money Markets © Oltheten & Waspi 2012

Interest at Maturity

Chapter 10: Money Markets © Oltheten & Waspi 2012

Interest at Maturity

Discount Paper

Interest at Maturity

Face Face + Interest

Face - discount Face

360

DaysRate 1PP faceMarket

360

DaysRate 1PP faceT

Chapter 10: Money Markets © Oltheten & Waspi 2012

Interest at Maturity

360 days in a year

360

DaysRate 1PP faceT

Chapter 10: Money Markets © Oltheten & Waspi 2012

Example

Principal: $1,000,000 Rate: 4% Term: 180 days

Chapter 10: Money Markets © Oltheten & Waspi 2012

Discount Paper

t = 0

$1,000,000.

t =180

360

DaysRate 1PP faceMarket

Chapter 10: Money Markets © Oltheten & Waspi 2012

Interest at Maturity

t = 180

$1,000,000.

t =0

360

DaysRate 1PP faceT

Chapter 10: Money Markets © Oltheten & Waspi 2012

Money Market Yield

days

360*

Investment

InterestYMM

180

360*

0$980,000.0

$20,000.00YMM

180

360*

.00$1,000,000

$20,000.00YMM

Discount Paper

Interest at Maturity

Chapter 10: Money Markets © Oltheten & Waspi 2012

Straight Yield

days

365*

Investment

InterestYS

180

365*

0$980,000.0

$20,000.00YS

180

365*

.00$1,000,000

$20,000.00YS

Discount Paper

Interest at Maturity

Chapter 10: Money Markets © Oltheten & Waspi 2012

Calendar Issues

One year has 360 days 365 days

Money Market I© Oltheten & Waspi

2012