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Transcript of Money Market Money Market I. Chapter 10: Money Markets © Oltheten & Waspi 2012 Money Market Basics...
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
