Money Market Instruments Overview
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Money Market Instruments Overview

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Questions and Answers

How do borrowers benefit from money markets?

  • They gain access to high-interest loans
  • They can acquire long-term financing options
  • They can avoid paying interest entirely
  • They receive a low-cost source of temporary funds (correct)

    • Which instrument is a short-term security issued by the government?

  • Repurchase Agreements
  • Corporate Bonds
  • Fed Funds
  • Treasury Bills (correct)

    • What is the primary purpose of money markets for investors?

  • To provide long-term investment opportunities
  • To warehouse surplus funds for short periods (correct)
  • To achieve high returns on investment
  • To invest in real estate and commodities

    • When purchasing a 28-day T-bill for $996.37 that is worth $1,000 at maturity, what does the investor receive?

    <p>The difference between the purchase price and maturity value</p> Signup and view all the answers

    What type of bids does the Treasury accept during T-bill auctions?

    <p>Both competitive and noncompetitive bids</p> Signup and view all the answers

    What do financial institutions use Fed Funds for?

    <p>To meet short-term reserve requirements</p> Signup and view all the answers

    How long are Fed Funds typically transferred between financial institutions?

    <p>One day</p> Signup and view all the answers

    What is a key characteristic of money market securities?

    <p>They are usually sold in large denominations.</p> Signup and view all the answers

    Who can participate in Repurchase Agreements?

    <p>Both banks and nonbanks</p> Signup and view all the answers

    What is one reason for the growth of money markets compared to banks in the 1970s and 1980s?

    <p>Increased reserve requirements for banks.</p> Signup and view all the answers

    Why do money markets have a cost advantage over banks?

    <p>They do not have reserve requirements.</p> Signup and view all the answers

    Who primarily participates in money markets?

    <p>Institutional investors and banks.</p> Signup and view all the answers

    What common financial instrument is typically associated with money markets?

    <p>Treasury bills.</p> Signup and view all the answers

    What impact did rising interest rates have on depositors during the 1970s and 1980s?

    <p>They shifted funds towards money markets.</p> Signup and view all the answers

    How does the maturity period of money market securities differ from traditional securities?

    <p>Money market securities mature in one year or less.</p> Signup and view all the answers

    Which statement best describes the regulatory environment of banks compared to money markets?

    <p>Banks are heavily regulated, which raises their costs.</p> Signup and view all the answers

    What is a defining characteristic of the Eurodollar market?

    <p>It allows depositors to receive a higher rate of return than in the domestic market.</p> Signup and view all the answers

    How can an importer in Botswana use a banker's acceptance?

    <p>To guarantee payment in transactions with foreign suppliers.</p> Signup and view all the answers

    Why do money market instruments typically have relatively lower interest rates?

    <p>They involve short-term borrowing that has lower risk.</p> Signup and view all the answers

    What role does the money market play in an economy?

    <p>It facilitates short-term borrowing and lending.</p> Signup and view all the answers

    Which statement best describes the financial security assessment required for exporters?

    <p>Exporters are not required to assess the financial security of the importer due to bank guarantees.</p> Signup and view all the answers

    What is the primary purpose of a repo agreement?

    <p>To serve as a short-term collateralized loan</p> Signup and view all the answers

    What is a characteristic of negotiable certificates of deposit?

    <p>They specify an interest rate and maturity date.</p> Signup and view all the answers

    What led to the significant increase in the use of commercial paper in the early 1980s?

    <p>High inflation rates making loans expensive.</p> Signup and view all the answers

    What advantage does a banker’s acceptance provide to exporters?

    <p>It ensures immediate payment upon shipment.</p> Signup and view all the answers

    Which of the following best describes commercial paper?

    <p>Unsecured promissory notes issued for a maximum of 270 days.</p> Signup and view all the answers

    Which factor is most likely to contribute to the difference in rates between commercial paper and Treasury securities?

    <p>The credit quality of the issuers.</p> Signup and view all the answers

    What potential risk do banker’s acceptances eliminate for exporters?

    <p>Risk of currency exchange fluctuations.</p> Signup and view all the answers

    How are banker’s acceptances primarily utilized in international trade?

    <p>To facilitate payment across borders when conditions are met.</p> Signup and view all the answers

    Study Notes

    Money Market Instruments

    • Money market securities are typically sold in large denominations, have low default risk, and mature within one year, most maturing within 120 days. These securities are so close to money that they are sometimes referred to as close substitutes for money.
    • T-bills are auctioned to dealers where the US Treasury Department accepts both competitive and noncompetitive bids. The price that everyone pays is determined by the highest yield paid to any accepted bid.

    The Purpose of Money Markets

    • Investors use Money Markets as a safe place to store surplus funds for short periods.
    • Borrowers use Money Markets to acquire low-cost, temporary funding.
    • Corporations and governments use these markets to cover discrepancies in cash inflows and outflows.

    Money Market Participants

    • Participants in the money market include Commercial Banks, Federal Agencies, Non-Financial Corporations, and individuals, among others.

    Money Market Instruments

    • Treasury Bills are short-term government securities with 28-day to 12-month maturities.
    • Fed Funds are funds transferred, or loaned, between financial institutions, usually for a period of one day, and are used by banks to meet short-term reserve requirements.
    • Repurchase Agreements are similar to Fed Funds, but allow for nonbank participation. A firm sells Treasury securities with the agreement to buy them back within a set time frame, usually 3-14 days, for a certain price. Repurchase Agreements are effectively short-term collateralized loans.
    • Negotiable Certificates of Deposit are bank-issued, documented deposits that specify the interest rate and maturity. The denominations range from $100,000 to $10 million and are known as Fixed Deposits in Botswana.
    • Commercial Paper is unsecured promissory notes issued by corporations with a maturity period of no more than 270 days.
    • Banker's Acceptances are orders to pay a specified amount to the bearer on a set date if certain conditions are met, typically delivery of goods. They are commonly used when buyers and sellers of expensive goods live in different countries. An active secondary market for Banker's Acceptances exists until they mature.
    • Eurodollars are deposits of U.S. dollars held in banks outside of the United States.

    Comparing Money Market Securities

    • The Money Market is a mechanism for warehousing surplus funds for short periods and provides low-cost temporary funding.
    • Money market instruments typically have relatively lower interest rates compared to longer-term securities. The reasoning behind this is that shorter maturities tend to hold a lower level of default risk and require less of a compensation premium demanded by lenders.

    Botswana Applications

    • Governments, such as that of Botswana, can utilize the money market as a tool to implement and manage monetary policy.
    • Importers in Botswana can utilize a Banker's Acceptance to facilitate transactions with foreign parties.

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    Related Documents

    FIN301_8 Money Markets PDF

    Description

    This quiz covers the fundamental aspects of money market instruments, including their characteristics and purposes. Learn about the various participants in the money market and how these securities serve both investors and borrowers. Expand your understanding of short-term financing and the role of T-bills in the financial system.

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