# Chapter 7 by mudoc123

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```									     Chapter 7

Money Markets

1
Treasury Bills

• Pricing of Treasury Bills:

– Treasury bills are priced on a bond-equivalent yield
basis. The bond-equivalent yield, YBE, is the
annualized difference between the face value and the
purchase price of the bill.

2                    Dr. Hisham Handal Abdelbaki - FIN 221 - Chapter 7
1- the   formula for the bond equivalent yield (ybe) :

Where Pf is the face price, P0 is the purchase price and n is
the number of days to maturity.

2- the formula for purchase price on bond equivalent yield
basis:

3                       Dr. Hisham Handal Abdelbaki - FIN 221 - Chapter 7
Example 1:
You are given the following data:
Face price = 10,000, buying price = 9760, days to maturity =
100. what is the yield on a bond – equivalent basis?

Solution
YBE = [(Face Value - Price)/Price] x [(365/Days to Maturity) ] x
100%

YBE = [(10000 – 9760) / 9760] [365 / 100] [100%]

= (0.025 )(3.65)(100%) = 8.9%

4                      Dr. Hisham Handal Abdelbaki - FIN 221 - Chapter 7
Example 2:

You are given the following data:
Face price = 10,000, days till maturity = 91 and yield = 8.19%.
what is buying price on a bond – equivalent basis?

Solution
Price = [face price] / [1 + (YBE * days to Maturity / 365)
= 10000 / 1.0204
= 9800

Class work
In example 1, assume the purchase price is unknown and calculate it
by using other information.

5                     Dr. Hisham Handal Abdelbaki - FIN 221 - Chapter 7
Repurchase Agreements (Repos)
• Repo is the sale of a short-term security
(collateral) and buying it back in the future at
a predetermined (higher) price.
• Reverse Repo is the purchase of a short-
term security (collateral) and selling it back in
the future a predetermined (higher) price.
• Repos and reveres repos are just opposite sides
of the same transaction.
• Repos are used by the Federal Reserve in open
market operations.

6                 Dr. Hisham Handal Abdelbaki - FIN 221 - Chapter 7
The formula for the repo yield (yrepo) or interest rate is:

Where Prepo = repurchase price of the security, which
equals the selling price plus interest.

P0 = sale price of the security
N = number of days to maturity

Dr. Hisham Handal Abdelbaki - FIN 221 -
7
Chapter 7
Commercial Papers
• Characteristics of Commercial Papers
– Maturity up to 270 days
– Unsecured securities issued by high-
quality borrowers, but backed by lines of
credit from banks to support or guarantee
quality.
– Large denominations - \$100,000 and up
– Sold at a discount from par

8                   Dr. Hisham Handal Abdelbaki - FIN 221 - Chapter 7
1- the formula for the bond equivalent yield (ybe) :

Where Pf is the face price, P0 is the purchase price and n is
the number of days to maturity.

2- the formula for purchase price on bond equivalent yield
basis:

Dr. Hisham Handal Abdelbaki - FIN 221 -
9
Chapter 7
Creating a Banker's Acceptance
• Importer wants to make a purchase from foreign exporter,
payable in the future.
• Importer needs financing; exporter needs guarantee of
payment in future.
• Importer's bank writes a letter of credit for exporter that
specifies purchase order and authorizes exporter to draw
time draft on bank.
• Exporter draws the draft on the importer's bank and collect
its money.
• The importer’s bank accepts the draft and creates a
banker's acceptance.

10                          Dr. Hisham Handal Abdelbaki - FIN 221 - Chapter 7
The Sequence of a Banker’s
Acceptance Transaction

11         Dr. Hisham Handal Abdelbaki - FIN 221 - Chapter 7

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