Chapter5

1. Why can discount yields not generally be compared to yields on the other
(nondiscount) securities?

Discount yields use a 360 day year rather than 365. Discount yields use the
face value as the base price rather than the purchase price

2. How are T-bills traded in secondary markets?

According to the Federal Reserve, a small number of primary dealers buy

the bonds at auction and make a market for the securities by offering the
investment products to other investors or trading among themselves. For
bonds, this secondary market generally operates as an over-the-counter
market. This OTC market is made up of commercial banks and other
financial institutions, investment companies and brokerage firms. Trading
takes place through telephone and digital transactions. Contact a bond
dealer and ask about the specific terms. Treasury bills are issued by the U.S.
government to cover up the government budget deficit and to refinance
maturity government debt. They are the short term obligation of the U.S.
government.

3. Why do commercial paper issues have an original maturity of 270 days or

less?

This 270 day maximum is due to a Securities and Exchange Commission (SEC)
rule that securities with a maturity of more than 270 days must go through
the time consuming and costly registration process to become a public debt
offering (i.e., a corporate bond). The commercial paper refers to a short
term debt instrument issued to investors by large corporates with good
credit in an attempt to raise funds. Its unsecured debt instrument thus does
not require any backing by collateral. Its maturity rages from 2 to 270 days.
The maturity time remains at 270 days to comply with the SEC rules and
regulations. A security with a maturity period beyond 270 days requires a
long and more expensive process for registration.
4. Describe the process by which a banker’s acceptance is created.

Banker’s acceptances arise from international trade transactions and are

used to finance trade in goods that have yet to be shipped from a foreign
exporter (seller) to a domestic importer (buyer). Foreign exporters often
prefer that banks act as guarantors for payment before sending goods to
domestic importers, particularly when the foreign supplier has not
previously done business with the domestic importer on a regular basis.
The U.S. bank ensures the international transaction by stamping
“Accepted” on a trade draft between the exporter and the importer,
signifying its obligation to pay the foreign exporter (or its bank) on a
specified date should the importer fail to pay for the goods. Foreign
exporters can then hold the banker’s acceptance until the date specified on
the trade draft or, if they have an immediate need for cash, can sell the
acceptance before that date at a discount from the face value to a buyer in
the money market (e.g., a bank). In this case, the ultimate bearer will
receive the face value of the banker’s acceptance on maturity.

5. What is the primary risk of trading in the fed funds markets?

Interest rate risk is the primary risk facing fed funds.

References:
Book
https://budgeting.thenest.com/buy-treasury-bonds-secondary-market-
23277.html
https://study.com/academy/answer/why-do-commercial-paper-issues-
have-an-original-maturity-of-270-days-or-less.html