Money Markets

1. Money Markets FNCE 4070Financial Markets and Institutions

2. Definition • Money Markets Defined • Money market securities are usually sold in large denominations ($1,000,000 or more) • They have low default risk • They mature in one year or less from their issue date, although most mature in less than 120 days

3. Why do Money Markets exist? • Banks should be able to fulfill the needs of short term deposits and loans which the money market provides • Banks are at a signifiant cost disadvantage • Highly regulated • Reserve Requirements

4. The purpose of Money Markets • Investors in Money Market: Provides a place for warehousing surplus funds for short periods of time • Borrowers from money market provide low-cost source of temporary funds • Allows both to manage the timing of inflows and outflows efficiently.

5. Participants

6. Money Market Instruments • Federal Funds • Treasury Bills • Commercial Paper • Repurchase Agreements • Negotiable Certificates of Deposit • Eurodollars • Banker’s Acceptance

7. Fed Funds vs T-Bills

8. Money Market Instruments: Commercial Paper Rates

9. Bruce Bent Reserve Fund • The first -- calling the company to ask about the fund's holdings -- might seem daunting given the complexities of many of these portfolios. But in fact the request can test a company's responsiveness to its customers, observes Bruce Bent, who created the money fund 37 years ago. • "A number of funds will say 'we don't give that out,'" said Bent, whose New York-based firm, The Reserve, has about $80 billion in money-fund assets, none of which, he adds, is exposed to subprime loans or SIVs. • If the fund company isn't forthcoming, he says, "take your money out and say goodbye." • A second warning flag, Bent points out, is a money fund that's consistently the top-yielding performer. "That gives you pause," he said. • Ideally a fund would land in the top 25% of its peers. "If some guy is always the No. 1 fund, he's doing something that's inappropriate for a money fund," Bent said.