Financial Institutions and Markets Dr. Andrew L. H. Parkes Day 5 “How do financial markets work?” 卜安吉

Financial Institutions Financial Institutions and Marketsand Markets

Dr. Andrew L. H. ParkesDr. Andrew L. H. Parkes

Day 5Day 5““How do financial markets work?”How do financial markets work?”

卜安吉卜安吉

April 8, 2014April 8, 2014Financial Institutions & Markets, Financial Institutions & Markets,

Ch. 8Ch. 8 22

Chapter 9: Money MarketsChapter 9: Money Markets

Money MarketMoney Market

Short-termShort-term Low riskLow risk Very LiquidVery Liquid

Therefore, they are Therefore, they are SAFE and LIQUID SAFE and LIQUID –– or or CLOSE to being CLOSE to being MONEYMONEY. . ALMOST – Money


Ch. 8Ch. 8 33



Sold in Large AmountsSold in Large Amounts Low DEFAULT riskLow DEFAULT risk Less than 1 year to Less than 1 year to

maturitymaturity

Most less than 120 Most less than 120 days days –– so CLOSE to so CLOSE to being being MONEYMONEY. . 6 month U.S. Treasury Bill

rate

As of Dec. 12, 2008


Ch. 8Ch. 8 44



Prime Rate is top flat linePrime Rate is top flat line

Federal Funds is the Federal Funds is the bottom flat line (notice bottom flat line (notice the rate is almost zero) the rate is almost zero)

These are really These are really considered as considered as MONEYMONEY. .

Rate comparisons - NYT

http://markets.on.nytimes.com/research/markets/bonds/bonds.asp


Ch. 8Ch. 8 55



Prime Rate is top flat linePrime Rate is top flat line

Bottom (faint) line is Fed Bottom (faint) line is Fed Funds Funds –– what are they what are they again?again?

These are really These are really

considered as considered as MONEYMONEY. . Rate comparisons - NYT

http://markets.on.nytimes.com/research/markets/bonds/bonds.asp


Ch. 8Ch. 8 66

CONSUMER MONEY RATESTuesday, December 09, 2008

YIELD/RATE (%) 52-WEEKCHANGE INPCT. PTS

Interest Rate Last Wk Ago High Low 52-Wk 3-Yr

Federal-funds rate target 1.00 1.00 4.25 1.00 -3.25 -3.00

Prime rate* 4.00 4.00 7.25 4.00 -3.25 -3.00

Libor, 3-month 2.16 2.21 5.11 2.13 -2.95 -2.32

Money market, annual yield 2.37 2.40 3.54 2.25 -1.17 -0.35

Five-year CD, annual yield 3.71 3.83 4.48 3.23 -0.77 -0.80

30-year mortgage, fixed 5.83 5.81 6.61 5.36 -0.09 -0.03

15-year mortgage, fixed 5.54 5.60 6.22 4.91 0.02 0.08

Jumbo mortgages, $417,000-plus 7.03 7.22 7.89 6.49 0.17 0.88

Five-year adj mortage (ARM) 5.92 5.97 6.14 5.01 0.13 0.51

New-car loan, 48-month 6.80 6.83 7.14 6.45 -0.06 0.19

Home-equity loan, $30,000 5.44 5.15 6.88 4.64 -1.40 -0.60

* Base rate posted by 75% of the nation's largest banks.

Source: Thomson Reuters, WSJ Market Data Group, Bankrate.comhttp://online.wsj.com/mdc/public/page/marketsdata.html


Ch. 8Ch. 8 77

CONSUMER MONEY RATES

http://online.wsj.com/mdc/public/page/marketsdata.html

Consumer Money Rates4/04/2014YIELD/RATE % 52-WEEK CHANGE IN PCT. PTS

Interest Rate LAST WK AGO HI LO 52-WK 3-YR

Federal-funds rate target

0-0.25 0-0.25 0-0.25 0-0.25 0.00 0.00

Prime rate*3.25 3.25 3.25 3.25 0.00 0.00

Libor, 3-month0.23 0.23 0.28 0.23 -0.05 -0.06

Money market, annual yield0.41 0.41 0.50 0.40 -0.09 -0.19

Five-year CD, annual yield1.39 1.34 1.39 1.15 0.17 -0.59


Ch. 8Ch. 8 88

U.S. Treasury (Bills) 1 Month - As of 4:05 pm 12/13/2010 ET

http://online.wsj.com/mdc/public/npage/2_3050.html?rnd=7055&sid=1224035&page=bond


Ch. 8Ch. 8 99

U.S. Treasury (Bills) 1 Month - As of 4:05 pm 4/4/2014 ET

http://online.wsj.com/mdc/public/npage/2_3050.html?rnd=7055&sid=1224035&page=bond


Ch. 8Ch. 8 1010

Why are Money Markets Why are Money Markets needed?needed?

Banks have the information Banks have the information advantage advantage –– they can they can mediate asymmetric mediate asymmetric information between savers information between savers and borrowersand borrowers

BUT BUT MONEY MARKETSMONEY MARKETS Have: Have: Less Regulation, and a Less Regulation, and a

Cost AdvantageCost Advantage So banks only operate where the So banks only operate where the

info advantage > reg costsinfo advantage > reg costs

http://www.federalreserve.gov/releases/cp/yieldcurve.gif

Top is Dec. 2008 the bottom is Dec. 2010!!! Why different?!


Ch. 8Ch. 8 1111

Commercial Paper Rates 2007 Commercial Paper Rates 2007 Data as of December 13, 2007Commercial Paper Rates and OutstandingDerived from data supplied by The Depository Trust & Clearing CorporationPosted December 14, 2007

Discount rates

TermAA

nonfinancialA2/P2

nonfinancialAA

financialAA

asset-backed

1-day 4.20 4.51 4.21 4.70

7-day 4.22 4.62 4.16 4.70

15-day 4.18 4.65 4.16 5.51

30-day 4.21 5.63 4.37 6.06

60-day 4.19 5.39 4.82 5.98

90-day 4.17 5.37 4.94 5.60

http://www.federalreserve.gov/releases/cp/


Ch. 8Ch. 8 1212

Commercial Paper Rates, 2008 Commercial Paper Rates, 2008 Data as of December 11, 2008Commercial Paper Rates and OutstandingDerived from data supplied by The Depository Trust & Clearing CorporationPosted December 12, 2008

Discount rates


TermAA

nonfinancialA2/P2

nonfinancialAA

financialAA

asset-backed

1-day 0.05 1.72 0.10 0.65

7-day 0.10 3.11 0.09 0.89

15-day 0.08 3.81 0.30 1.18

30-day 0.28 5.11 0.41 1.16

60-day n.a. 5.28 n.a. 0.78

90-day n.a. n.a. n.a. 1.29

Trade data insufficient to support calculation of the 60-day AA nonfinancial, 90-day AA nonfinancial, 90-day A2/P2 nonfinancial, 60-day AA financial, and 90-day AA financial rates for December 11, 2008.


Ch. 8Ch. 8 1313

Commercial Paper Rates, 2009 Commercial Paper Rates, 2009


Data as of September 22, 2009Commercial Paper Rates and OutstandingDerived from data supplied by The Depository Trust & Clearing CorporationPosted September 23, 2009

Discount rates

TermAA

nonfinancialA2/P2

nonfinancialAA

financialAA

asset-backed

1-day 0.15 0.31 0.14 0.38

7-day 0.10 0.47 0.15 0.74

15-day 0.12 0.25 0.16 0.43

30-day 0.09 0.40 0.18 0.22

60-day 0.17 0.37 0.18 0.24

90-day 0.21 n.a. 0.21 0.29Trade data insufficient to support calculation of the 90-day A2/P2 nonfinancial rate for September 22, 2009.

Back to “Normal” - almost


Ch. 8Ch. 8 1414

Commercial Paper Rates, 2010 Commercial Paper Rates, 2010


Data as of December 10, 2010Commercial Paper Rates and OutstandingDerived from data supplied by The Depository Trust & Clearing Corporation

Posted December 13, 2010

Back to “Normal” - almost

Discount rates

TermAA

nonfinancialA2/P2

nonfinancialAA

financialAA

asset-backed

1-day 0.17 0.33 0.16 0.26

7-day 0.17 0.27 0.19 0.30

15-day 0.18 0.33 0.18 0.26

30-day 0.18 0.36 0.21 0.36

60-day 0.21 0.40 0.24 0.30

90-day 0.21 n.a. 0.28 0.34

Trade data insufficient to support calculation of the 90-day A2/P2 nonfinancial rate for December 10, 2010.


Ch. 8Ch. 8

http://http://www.federalreserve.gov/www.federalreserve.gov/

releases/h15/Current/ releases/h15/Current/

Commercial Paper Rates, 2014Commercial Paper Rates, 2014Data as of April 4, 2014Commercial Paper Rates and OutstandingDerived from data supplied by The Depository Trust & Clearing Corporation Discount rates


Ch. 8Ch. 8 1616

The Purpose of Money Markets The Purpose of Money Markets

Place to Keep Cash (Funds) Place to Keep Cash (Funds) for a short timefor a short time

Source for borrowers that Source for borrowers that just need funds for a short just need funds for a short time period.time period.

Place to earn a little on funds Place to earn a little on funds (cash) not in use (earning (cash) not in use (earning income) for a firm.income) for a firm.

Quickly able to access these funds!Quickly able to access these funds! Graph source: WSJ


Ch. 8Ch. 8 1717

Fed Lost Control of Fed Funds Fed Lost Control of Fed Funds Rate?Rate?

Take a look at the last few months and Take a look at the last few months and notice the “Target” rate – the rate the notice the “Target” rate – the rate the FOMC setsFOMC sets

NOW look at the “Daily” rate – the rate NOW look at the “Daily” rate – the rate that Banks loan “Fed Funds” on the that Banks loan “Fed Funds” on the marketmarket

There is a VAST difference lately – not There is a VAST difference lately – not before!!! Most “Fed Watchers” worry before!!! Most “Fed Watchers” worry about this – that the Fed has no about this – that the Fed has no control!control!


Ch. 8Ch. 8 1818

Federal Funds Rates, 2008

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

11/14/2007 1/3/2008 2/22/2008 4/12/2008 6/1/2008 7/21/2008 9/9/2008 10/29/2008 12/18/2008 2/6/2009

Target FF Daily FF

http://www.newyorkfed.org/markets/omo/dmm/historical/fedfunds/ff.cfmhttp://www.newyorkfed.org/markets/omo/dmm/historical/fedfunds/ff.cfm


Ch. 8Ch. 8 1919

Participants and Instruments Participants and Instruments

Are detailed very Are detailed very well in Mishkin’s well in Mishkin’s Chapter 8 Chapter 8 PowerPoint Slides.PowerPoint Slides.

See the PPT …See the PPT …Commercial Paper

Documents

Financial Institutions and Markets Dr. Andrew L. H. Parkes Day 5 “How do financial markets work?” 卜安吉