Money Markets

FNCE 4070Financial Markets and Institutions

Definition

• Money Markets Defined1. Money market securities are usually sold in

large denominations ($1,000,000 or more)2. They have low default risk3. They mature in one year or less from their

issue date, although most mature in less than 120 days

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

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.

Participants

Money Market Instruments

─Federal Funds─Treasury Bills─Commercial Paper─Repurchase Agreements─Negotiable Certificates of Deposit─Eurodollars─Banker’s Acceptance

Fed Funds vs T-Bills

Money Market Instruments: Commercial Paper Rates

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.