Chapter 7

Document Sample
Chapter 7 Powered By Docstoc
					     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