Ebook Financial markets and institutions (7th edition): Part 2
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Ebook Financial markets and institutions (7th edition): Part 2
PART FIVE FINANCIAL MARKETSCHAPTERThe Money MarketsPreviewIf you were Io review Microsoft's annuel report for XX19, you would find that the company no Ebook Financial markets and institutions (7th edition): Part 2od over $6 billion in cash and equivalents. The firm also listed $2b billion in short-term securities. I he firm chose Io hold over $30 billion in highly liquid short term assets in order to be ready to take advantage of invest merit opportunities and to avoid the risks associated with other types o Ebook Financial markets and institutions (7th edition): Part 2f investments. Microsoft will have much of these funds invested in the money markets. Recall that money market securities are short-term, low-risk, anEbook Financial markets and institutions (7th edition): Part 2
d very liquid. Because of the high degree of safety and liquidity these securities exhibit, they are dose to being money, hence their name.The money mPART FIVE FINANCIAL MARKETSCHAPTERThe Money MarketsPreviewIf you were Io review Microsoft's annuel report for XX19, you would find that the company no Ebook Financial markets and institutions (7th edition): Part 2 the rise in short-term rates, coupled with a regulated ceiling on the rate that banks could pay for deposits, resulted in a rapid outflow of funds from financial institutions in the late 19/0s and early 1980s. This outflow in turn caused many banks and savings and loans to fail. The industry regain Ebook Financial markets and institutions (7th edition): Part 2ed its health only after massive changes were made to bank regulations with regard to money market interest rates.This chapter carefully reviews the mEbook Financial markets and institutions (7th edition): Part 2
oney markets and the securities that are traded there. In addition, we discuss why the money markets are important to our financial system.Chapter 11 PART FIVE FINANCIAL MARKETSCHAPTERThe Money MarketsPreviewIf you were Io review Microsoft's annuel report for XX19, you would find that the company no Ebook Financial markets and institutions (7th edition): Part 2use the securities that do trade there are short-term and highly liquid, however, they are close to being money. Money market securities, which are discussed in detail In this chapter, have three basic characteristics in common:•They are usually sold in large denominations.•They have low default ris Ebook Financial markets and institutions (7th edition): Part 2k.•They mature in one year or less/rewi Uufir original issue dale. Most money market instruments mature in less than 120 days.Money market transactionEbook Financial markets and institutions (7th edition): Part 2
s do not take place in any one particular location or building. Instead, traders usually arrange purdiases and sales between participants over the phoPART FIVE FINANCIAL MARKETSCHAPTERThe Money MarketsPreviewIf you were Io review Microsoft's annuel report for XX19, you would find that the company no Ebook Financial markets and institutions (7th edition): Part 2 after the security has been sold initially, it is relatively easy to find buyers who will purchase it in the future. An active secondary market makes money market securities very flexible instruments to use to fill short term financial needs. For example, Microsoft's aiuiual report stales, “We cons Ebook Financial markets and institutions (7th edition): Part 2ider all liigldy liquid interest earning invest ments with a maturity of 3 months or loss at date of purchase to ho cash equivalents.”Another cliaraclEbook Financial markets and institutions (7th edition): Part 2
erislic of the money markets is llial they are wholesale markets. Tills means that most transactions are very large, usually in excess of 51 million. PART FIVE FINANCIAL MARKETSCHAPTERThe Money MarketsPreviewIf you were Io review Microsoft's annuel report for XX19, you would find that the company no Ebook Financial markets and institutions (7th edition): Part 2ating ill the trading rooms of large banks and brokerage houses, bring customers together. These traders will buy or sell $50 or $ 10(1 million in more seconds—certainly nor a joh for rhe faint of heart!As you may recall from Cliapler 2, flexibility and imiovalion are two important characteristics o Ebook Financial markets and institutions (7th edition): Part 2f any financial market, and the money markets are no exception. Despite the wholesale nature of the money marker, innovative securities and trading meEbook Financial markets and institutions (7th edition): Part 2
thods have been developed to give small investors access to money market securities. We will discuss these securities and their characteristics later PART FIVE FINANCIAL MARKETSCHAPTERThe Money MarketsPreviewIf you were Io review Microsoft's annuel report for XX19, you would find that the company no Ebook Financial markets and institutions (7th edition): Part 2needed. The banking industry’ exists primarily to provide short-term loans and tn accept short-term deposits. Banks should have an efficiency advantage in gathering information, an advantage that should eliminate the need for the money markets. Thanks tn continuing relationships with customers, bank Ebook Financial markets and institutions (7th edition): Part 2s should bo able to offer loans more cheaply than diversified markets, which must evaluate each borrower every lime a new seen rlt.y is offered. FurthEbook Financial markets and institutions (7th edition): Part 2
ermore, short-term securities offered for sale in the money markets are neither as liquid nor as safe as deposits placed In banks and thrifts. Given tPART FIVE FINANCIAL MARKETSCHAPTERThe Money MarketsPreviewIf you were Io review Microsoft's annuel report for XX19, you would find that the company no Ebook Financial markets and institutions (7th edition): Part 2lem between saver-lenders and borrower-spenders, and banks can cam profits by capturing economies of scale wliile providing tills service. However, the banking industry Is subject to more regulations and governmental costs than are the money markets. In situations where t he asymmetric Information p Ebook Financial markets and institutions (7th edition): Part 2roblem Is not severe, the money markets have a distinct cost advantage over banks in providing short-term fluids.256 Part 5 Financial MarketsMoney MarEbook Financial markets and institutions (7th edition): Part 2
ket Cost AdvantagesBanks must put aside a portion of their deposits in the form of reserves that are held without interest at the federal Reserve. ThuPART FIVE FINANCIAL MARKETSCHAPTERThe Money MarketsPreviewIf you were Io review Microsoft's annuel report for XX19, you would find that the company no Ebook Financial markets and institutions (7th edition): Part 2n if the full deposit could be invested.Interest-rate regulations wore a second competitive obstacle for banks. One of the principal purposes of the banking regulations of the 1930s was to reduce competition among banks. With loss competition, regulators felt, hanks wore loss likely to fail. The cos Ebook Financial markets and institutions (7th edition): Part 2t to consumers of the greater profits banks earned because of the lack of free market competition was justified by the greater economic stability thatEbook Financial markets and institutions (7th edition): Part 2
a healthy banking system would provide.One way that banking profits were assured was by regulations that set a coiling on the rate of interest that bPART FIVE FINANCIAL MARKETSCHAPTERThe Money MarketsPreviewIf you were Io review Microsoft's annuel report for XX19, you would find that the company no Ebook Financial markets and institutions (7th edition): Part 2aid on time deposits. The limits on interest rates were not particularly relevant until the late 1950s. Figure 11.1 shows that the limits became especially trou blesome to hanks in the late 1970s and early 1980s when inflation pushed short-term interest rates above the level that banks could legally Ebook Financial markets and institutions (7th edition): Part 2 pay. Investors pulled their money out of banks and pul it into money market security accounts offered by manyPercent34 36 38 40 42 44 46 48 50 52 54Ebook Financial markets and institutions (7th edition): Part 2
56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86YearFIGURE 11.1 3-Month Treasury Bill Rate and Ceiling Rate on Savings Deposits at Commercial BanksSourPART FIVE FINANCIAL MARKETSCHAPTERThe Money MarketsPreviewIf you were Io review Microsoft's annuel report for XX19, you would find that the company no Ebook Financial markets and institutions (7th edition): Part 2duced from 3% to OKi in December 1990.Chapter 11 The Money Markets 257brokerage firms. These new Investors caused the money markets to grow rapidly. Commercial bank Interest rale ceilings were removed In March of 1986, but by then t he retail money markets wore well established.Banks continue to pro Ebook Financial markets and institutions (7th edition): Part 2vide valuable Intermediation, as we will see in several later chapters. In some situations, however, the cost structure of the banking industry makesEbook Financial markets and institutions (7th edition): Part 2
it unable to compete effectively in the market for short-term funds against the less restricted money markets.II The Purpose of the Money MarketsThe wPART FIVE FINANCIAL MARKETSCHAPTERThe Money MarketsPreviewIf you were Io review Microsoft's annuel report for XX19, you would find that the company no Ebook Financial markets and institutions (7th edition): Part 2urplus funds until they are needed. Similarly, the money markets provide a low-cost source of fluids to firms, the govenunent, and intermediaries that need a short term infu Sion of funds. Ebook Financial markets and institutions (7th edition): Part 2PART FIVE FINANCIAL MARKETSCHAPTERThe Money MarketsPreviewIf you were Io review Microsoft's annuel report for XX19, you would find that the company noGọi ngay
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