FIN 410 - Fall 2017

Instructor: Dr.Hatem Akeel

Chapter 11 Review

1. Why does the U.S. Government use the money markets?

2. Why do businesses use the money markets?
3. Why do banks not eliminate the need for money markets?
4. Who issues commercial paper and for what purpose?
5. Why are banker’s acceptances so popular for international transactions?

Who Participates in the Money Markets?
U.S. Treasury Department
Federal Reserve System
Commercial Banks
Businesses
Investment and Securities Firms
Individuals

What are Money Market Instruments?
Treasury Bills
Federal Funds
Repurchase Agreements
Negotiable Certificates of Deposit
Commercial Paper
Banker’s Acceptances
Eurodollars


1.What would be your discount rate % and our annualized investment rate % on the purchase of a 182
day Treasury bill for $4,925 that pays $5,000 at maturity?

$5,000 −$4,925 360

Discount Rate ⇓= × = 0.02967 = 2.967%
$5,000 182
$5,000 − $4,925 365
Investment Rate ⇓= × = 0.03054 = 3.054%
$4,925 182

2. The price of $8,000 face value commercial paper is $7,930. If the discount rate is 4%, when will
the paper mature? If the annualized investment rate % is 4%, when will the paper mature?

[($8,000 − $7,930) / $8,000)] × (360 / N ) = 0.04

($70 / $8,000) × (360 / N ) = 0.04
($0.00875) × (360 / N ) = 0.04

(360 / N ) = 0.04 × (1/ $0.00875)
(360 / N ) = 4.571429
N = 78.75 = 79days


[($8,000 − $7,930) /($7,930)] × (365 / N ) = 0.04
($70 / $7,930) × (365 / N ) = 0.04
(365 / N ) = 0.04 × (1/ 0.008827)
365 / N = 4.53155
N = 80.55 = 81days