Money Market and Treasury Bills Overview

What is the primary characteristic of money markets?

Which of the following denominations is most commonly associated with Treasury Bills?

What type of risk is associated with Treasury Bills?

What is the typical maturity range for Treasury Bills?

What is the primary issuer of Certificates of Deposit (CDs)?

What is the typical minimum denomination for marketable Certificates of Deposit?

What formula is used to calculate the Bank Discount Rate for Treasury Bills?

Which of the following statements about the taxation of Treasury Bills is true?

What is the typical range of maturity for a Certificate of Deposit?

How is interest typically paid on Treasury Bills?

Money Market

A subsector of the fixed-income market
Short-term debt securities
Highly liquid, meaning they can be easily bought and sold
Low risk, meaning they are considered safe investments
Often have large denominations, meaning they are typically sold in large amounts

Treasury Bills

Issuer: Federal Government
Denomination: Commonly 10,000;10,000; 10,000;1,000
Maturity: 4, 13, 26 or 52 Weeks
Liquidity: High
Default Risk: None
Interest Type: Discount (investors buy T-bills at a discount to face value and receive the full face value at maturity, the difference between the purchase price and the face value represents the interest earned)
Taxation: Interest earned on T-bills is subject to federal income tax but exempt from state and local taxes.

Bank Discount Rate

This is how T-bill yields are quoted
Formula: rBD = ((10,000−P)/10,000 - P) / 10,000−P)/10,000) * (360/n) - rBD = bank discount rate - P = market price of the T-bill - n = number of days to maturity
Example: A 90-day T-bill with a price of $9,875 would have a bank discount rate of 5.00%

Certificates of Deposit (CDs)

Issuer: Depository institutions (like banks)
Denomination: any, $100,000 or more marketable
Maturity: Varies, typically 14-day minimum
Liquidity: High for CDs that are marketable

Explore the fundamentals of the money market, focusing on short-term debt securities like Treasury Bills. This quiz covers key aspects such as liquidity, risk, and taxation of T-bills. Test your knowledge on the bank discount rate and its calculation.