Transcript The Principal Money Market Instruments: Amount Outstanding

CHAPTER
Financial Markets,
Instruments, and Market Makers
Copyright © 2003 by South-Western/Thomson Learning. All rights reserved.
6
The Principal Money Market Instruments:
Amount Outstanding, End of Year (in Billions
of Dollars)
Type of Instrument
1960
1970
1980
1990
1998
2001c
Treasury bills
$37
$76
$200
$482
$ 691
$ 620
Negotiable CDs
0
45
260
NAa
NAa
Commercial paperb
5
35
99
558
1,173
1,471
Bankers’ acceptances
1
4
32
52
14
7
Repurchase agreements
and fed funds
1
22
102
324
878
1,241
Eurodollars
1
20
68
NAa
151
214
aNot
available.
bIncludes
cAs
commercial paper issued by financial and nonfinancial firms.
of June 30, 2001.
SOURCE: Federal Reserve Flow of Funds Accounts, Z1, 2nd Quarter 2001 (September 18, 2001).
Copyright © 2003 by South-Western/Thomson Learning. All rights reserved.
NAa
The Money Market
Instrument
Typical Maturities
Principal Borrowers
Secondary Market
Treasury bills
3 to 12 months
U.S. government
Very active
Negotiable CDs
1 to 6 months
Depository institutions
Modest activity
Commercial paper
1 to 270 days
Financial and business firms
Moderately active
Bankers’ acceptances
90 days
Financial and business firms
Limited
Repurchase agreements 1 day, and 2 days
to 3 months typical;
6 months less typical
Banks, securities dealers,
other owners of securities,
nonfinancial firms,
governments
None, but very
active primary
market for short
maturities
Fed funds
Chiefly 1 business day
Depository institutions
Active brokers’
market
Eurodollars
Overnight, 1 week,
1 to 6 months, and
longer
Banks
None
Copyright © 2003 by South-Western/Thomson Learning. All rights reserved.
Bankers’ Acceptances
IMPORTER
Goods Now
EXPORTER
Cash Later
IMPORTER
Goods Now
Copyright © 2003 by South-Western/Thomson Learning. All rights reserved.
INVESTOR
Cash Now
SOURCE: Adapted from Ann-Marie Meulendyke, U.S. Monetary Policy and Financial
Markets (New York: Federal Reserve Bank of New York, 1989): 80
BANK
Accepted Now
Transaction occurs
with a bankers’
acceptance; less risk
to the exporter
EXPORTER
The Principal Capital Market Instruments:
Amount Outstanding, End of Year (in Billions
of Dollars)
2001**
Type of Instrument
1960
1970
1980
1990
1998
Corporate stock
$451
$906
$1,920
$3,530
$15,438
$15,863.6
142
297
965
3,804
5,782
7,250.4
75
167
319
1,704
3,894
5,435.1
178
156
394
2,776
3,724
3,234.4
U.S. government agency
securities*
10
51
170
426
1,328
4,620.4
Municipal securities
71
144
NA
1,464
1,629.3
Mortgages
Corporate and foreign bonds
U.S. government securities
NA
*Excludes federally sponsored mortgage pools.
**As of June 30, 2001.
SOURCE: Federal Reserve Flow of Funds Accounts, Z1 (September 18, 2001); Federal Reserve Bulletin, various issues; Banking and Monetary
Statistics 1941-1970.
Copyright © 2003 by South-Western/Thomson Learning. All rights reserved.
The Capital Market
Instrument
Typical Maturities
Principal Borrowers
Secondary Market
Corporate Stock
—
Corporations
Very active for large
corporations
Mortgages
15 to 30 years
Home owners and other investors
Moderately active
Corporate bonds
2 to 30 years
Corporations
Active
U.S. government
securities
Notes
Bonds
2 to 10 years
30 years (currently)
U.S. government
U.S. government
Very active
Very active
U.S. government
agency securities
Up to 30 years
U.S. government agency
Some activity
Municipals
2 to 30 years
State and local governments
Active
Copyright © 2003 by South-Western/Thomson Learning. All rights reserved.
Market Makers
Assist in raising funds to finance deficits by marketing a borrower’s
new securities in the primary market
MARKET MAKERS
Advise potential buyers and
sellers of securities on the
course of action likely to
minimize costs and
maximize returns
Copyright © 2003 by South-Western/Thomson Learning. All rights reserved.
Stand ready to buy or sell
outstanding securities in the
secondary market
The Marketing and Subsequent
Trading of a Corporate Bond
APEI wants to issue bonds to finance investment
Merrill Lynch agrees (for a fee) to design a
bond offering and to market (sell) the bonds
Primary Market
Activity
SSUs and financial intermediaries buy APEI bonds
that will mature in 20 years
One year later SSUs (or financial intermediaries)
decide to sell some of their APEI bonds
Salomon Smith Barney makes a market in
APEI bonds by buying bonds from SSUs
Salomon sells “used” APEI bonds to another SSU
Copyright © 2003 by South-Western/Thomson Learning. All rights reserved.
Secondary
Market Activity