2015 Topic 5 Money Market 1

Topics: Bond, Money market, Commercial paper Pages: 36 (2856 words) Published: April 4, 2015
Topic 5: The Money Market
Some key terms: treasury paper, commercial bill,
bank bill facility, commercial paper (or
promissory note), negotiable certificate of
deposit.

25741 Capital Markets

1

Lecture content
1.
2.

3.
4.
5.

6.
7.

Money Market
Pricing

Impact of changing maturity and interest
rate on security prices, yield to maturity,
holding period yield.
Repos
Treasury Notes
Commercial Bills

Acceptor, Bill facility
Commercial Paper
Negotiable Certificates of Deposit
25741 Capital Markets

2

Learning Objectives


After studying the material in this topic you
should be able to:










explain the differences and similarities between
the securities traded in the money market.
calculate the price of a money market security.
describe the impact of changing yields and
maturity on the price of a money market security.
calculate the return from investing in a money
market security.
describe the role played by a bank in a bill facility.
explain the importance of dealers and
underwriters in the issue of commercial paper.
25741 Capital Markets

3

1. MONEY MARKET


The money market is an over-the-counter
wholesale market.


Short-term interest rate securities are traded in this
market. These securities:




have a maturity of less than one year (i.e. between 2
and 364 days).
make only one payment, their face value at maturity.




Dealers quote yields rather than prices when trading
in these securities.




Their price is less than their face value.

Two-way yields are quoted with the bid yield being
higher than the offer yield.

Settlement can be open to negotiation between the
parties involved but normally is on the same day as
the trade and is done through Austraclear.
25741 Capital Markets

4

2. PRICING


Short-term securities are issued and traded at a
price that is at a discount to their face value.



They are often referred to as ‘discount securities’.
As their only payment is their face value at maturity
they can be priced using a simple interest formulae.

face value
face value 365
Price 
or
yield
 yield

1
t
365  
days to maturity 
100
 100



In the first formulae t = days to maturity/365
25741 Capital Markets

5

Illustration




An investor purchases a short-term security
with a face value of $100,000 and term to
maturity of 180 days when it is trading at yield
of 5.8%pa.
Using the first formulae. $100,000
Price $97,219.26 

1



5.8 180

100 365

$100,000 365
Using
the
second formulae.
Price
$97,219.26


 5.8

365  
180 
 100


25741 Capital Markets

6

Impact of decrease in
maturity


The price of the security will increase as its
term to maturity decreases.



There will be less time until the face value is paid.
For example, the price of a short-term security with a
face value of $100,000, a term to maturity of 180
days and a yield of 5.8%pa will be $97,219.26. In 10
days time if the yield remains at 5.8% the price
would be:
Price $97,369.68 

$100,000
5.8 170
1

100 365

25741 Capital Markets

7

Impact of yield change


The price of the security will increase
(decrease) if its yield decreases (increases).




For example, the price of a short-term security with a
face value of $100,000, a term to maturity of 180
days and a yield of 5.8%pa will be $97,219.26.
If its yield increases to 5.9% the price would be:
Price $97,172.67 



$100,000
5.9 180
1

100 365

If its yield decreases to 5.7% the price would be:
Price $97,265.90 

$100,000
5.7 180
1

100 365

25741 Capital Markets

8

Selling prior to maturity


Money market instruments are often sold prior
to their maturity date. This could be due to:






If an investor holds their securities until
maturity they obtain a...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • money Market Essay
  • Money Market Research Paper
  • Money Market Essay
  • Money Market Essay
  • Money Market Research Paper
  • Essay on Money Markets 2013
  • international money market Essay
  • Essay about topic 1

Become a StudyMode Member

Sign Up - It's Free