FINANCIAL MARKET
Chapter 6 and 7
MONEY MARKET SECURITIES
TREASURY BILLS
EX:
- If investors require a 4% annualized return
on a one-year T-bill with a $10,000 par
value, the price that they are willing to pay
is:
● Estimating the Yield
- T-bills do not offer coupon payments and
are sold at a discount from par value.
- The higher the forecasted selling price, the
higher the expected annualized yield.
EX:
- An investor purchases a T-bill with a
six-month (182-day) maturity and $10,000
par value for $9,800. If this T-bill is held
until maturity, its yield is:
EX:
- Suppose the investor plans to sell the T-bill
after 120 days and forecasts a selling price
of $9,900 at that time. The expected
annualized yield based on this forecast is:
● Estimating the Treasury Bill Discount
- T-bill discount represents the percentage
discount of the purchase price from par
value (Par) for newly issued T-bills.
- For a newly issued T-bill that is held to
maturity, the T-bill yield will always be
higher than the discount.
EX:
- If a newly issued 6-month (182-day) T-bill
with a par value of $10,000 is purchased for
$9,800, the T-bill discount is:
COMMERCIAL PAPER
● Estimating the Yield
- Commercial paper does not pay interest and
is priced at a discount from par value.
EX:
- If an investor purchases 30-day commercial
paper with a par value of $1,000,000 for a
price of $995,000, and holds the commercial
paper until maturity, the yield (Ycp) is:
FINANCIAL MARKET
Chapter 6 and 7
INSTITUTIONAL USE OF MONEY MARKETS
NEGOTIABLE CERTIFICATES OF DEPOSIT

● Yield

EX:
- An investor purchased an NCD a year ago in
the secondary market for $990,000. He
redeems it today upon maturity and receives
$1,000,000. He also receives interest of
$40,000. His annualized yield (YNCD) on
this investment is:

● Estimating the Yield

EX:
- An investor initially purchased securities at a
price (PP) of $992,000 while agreeing to sell
them back at a price (SP) of $1,000,000 at VALUATION OF MONEY MARKET
the end of a 60-day period. The yield (or SECURITIES
repo rate) on this repurchase agreement is:
● Market Price

BANKER’S ACCEPTANCES

● Change in P
FINANCIAL MARKET
Chapter 6 and 7
BOND MARKETS
PERFORMANCE OF FOREIGN MMS

● Yield earned

● Effective Yield

EX:
- A U.S. investor obtains Mexican pesos when
the peso is worth $0.12 and invests in a
one-year money market security that
provides a yield (in pesos) of 22 percent. At
the end of one year, the investor converts
the proceeds from the investment back to
dollars at the prevailing spot rate of $0.13
per peso. In this example, the peso
increased in value by 8.33 percent, or
0.0833. The effective yield earned by the
investor is: