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Chapter 11: Money Markets, Short-Term Investing and Borrowing Outline: Global Money Markets Short-Term Money Markets in the U.S. Managing Short-Term Investments Pricing and Yields on Short-Term Investments Managing Short-Term Financing v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 8: Module 5, Chapter 11 - 1

Chapter 11: Money Markets, Short- Term Investing and Borrowing Outline: Global Money Markets Short-Term Money Markets in the U.S. Managing Short-Term Investments

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Page 1: Chapter 11: Money Markets, Short- Term Investing and Borrowing Outline: Global Money Markets Short-Term Money Markets in the U.S. Managing Short-Term Investments

Chapter 11: Money Markets, Short-Term Investing and Borrowing

Outline: Global Money Markets Short-Term Money Markets in the U.S. Managing Short-Term Investments Pricing and Yields on Short-Term

Investments Managing Short-Term Financing

v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 8: Module 5, Chapter 11 - 1

Page 2: Chapter 11: Money Markets, Short- Term Investing and Borrowing Outline: Global Money Markets Short-Term Money Markets in the U.S. Managing Short-Term Investments

Issuers of money markets: Government entities, securities dealers,

commercial banks, corporations

Investors are lenders; issuers are borrowers Individuals who invest are lending

Broker-dealers As brokers, trade on behalf of customers As dealers, trade for their own account Place majority of new issues in primary market and

provide liquidity in secondary markets Take positions in securities (ask price/bid price)

v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 8: Module 5, Chapter 11 - 2

Money Market Participants

Page 3: Chapter 11: Money Markets, Short- Term Investing and Borrowing Outline: Global Money Markets Short-Term Money Markets in the U.S. Managing Short-Term Investments

Money Market InstrumentsCP ABCP

Bank Obligations

Government Paper

FRNs Repos

Maturity Overnight–270 days

Overnight–270 days

1 day–2 years

4–52 weeks Variable Wholly negotiable

Issued by Companies Companies Banks Government/public

Companies/FIs

Companies/FIs

Interest rate

Fixed Fixed Fixed Fixed Variable Negotiable

Interest paid

On maturity

On maturity During or maturity

On maturity During or maturity

On maturity

Issued Discount Discount Interest Discount Interest Discount

Secured No Yes No No Yes/no Yes

Access to capital before maturity

Sell on secondary market

Sell on secondary market

Negotiable CDs sell on secondary market

Sell on secondary market

Sell on secondary; periodic reset dates

Negotiable

Risks Credit, price

Credit, liquidity, price

Credit, liquidity

Price Credit, liquidity

Credit, liquidity

v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 8: Module 5, Chapter 11 - 3

Page 4: Chapter 11: Money Markets, Short- Term Investing and Borrowing Outline: Global Money Markets Short-Term Money Markets in the U.S. Managing Short-Term Investments

Standard and Asset-Backed CP

CP Overnight to 270 days, but

most issued < 45 days Can be sold on secondary

market, but most held to maturity

Unsecured CP tends to be highly liquid and have broad range of maturities

Diversifiable risk Europe and U.S. have highly

developed markets Disadvantage is it is not

asset-backed; could have credit enhancement

ABCP Secured against short-

term trade receivables Single seller Multi-seller

More security than CP and liquidity support (credit enhancement) facilitates timely repayment

More complex, requires specialist appraisal and credit monitoring; moderately higher return

v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 8: Module 5, Chapter 11 - 4

Page 5: Chapter 11: Money Markets, Short- Term Investing and Borrowing Outline: Global Money Markets Short-Term Money Markets in the U.S. Managing Short-Term Investments

Bank Obligations

Banks raise funds in money markets. Time deposits:

Savings accounts, certificates of deposit (CDs), negotiable CDs ($100,000 or more)

Active secondary market for negotiable CDs

Repurchase agreements (repos)

Eurodollar deposits

Banker’s acceptances (BAs) Time draft issued by

purchaser and accepted by bank

Unconditional promise to pay at maturity

Holder can hold to maturity or sell at discount

v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 8: Module 5, Chapter 11 - 5

Page 6: Chapter 11: Money Markets, Short- Term Investing and Borrowing Outline: Global Money Markets Short-Term Money Markets in the U.S. Managing Short-Term Investments

Discussion Question

Which of the following typically has longer maturities for money market instruments and is based on LIBOR or Euribor but also has a wider bid-offer spread so regular trading can erode its yield advantage quickly?a) Government paperb) Floating rate notes (FRNs)c) Retail CDs

Answer: b

v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 8: Module 5, Chapter 11 - 6

Page 7: Chapter 11: Money Markets, Short- Term Investing and Borrowing Outline: Global Money Markets Short-Term Money Markets in the U.S. Managing Short-Term Investments

Repurchase Agreements (Repos)

Bank or securities dealer sells government securities to an investor and agrees to repurchase them later at a slightly higher price. Reverse repo is opposite side of same transaction. Can be based on any agreed-upon security.

Types: Overnight Term (2 days or longer) Open (no maturity date, can be terminated by either party

on day-to-day basis) Ample room to tailor maturity and interest. Legal possession provides comfort because

underlying can be sold.

v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 8: Module 5, Chapter 11 - 7

Page 8: Chapter 11: Money Markets, Short- Term Investing and Borrowing Outline: Global Money Markets Short-Term Money Markets in the U.S. Managing Short-Term Investments

Money Market Funds (MMFs) Commingled pools of

money market instruments in which investors have an ownership interest

Local or foreign currency (if allowed)

NAV set at one unit of the currency

Funds can differ in: Risk Maturity Return

Professionally managed, marketable securities portfolio at low cost

May be more cost-effective than managing short-term investment portfolio

Administratively easy Daily liquidity; pay

dividends Low minimum

investment When interest rates are

falling, can extend maturities to lock in yields

Large scale = competitive trading

v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 8: Module 5, Chapter 11 - 8

Page 9: Chapter 11: Money Markets, Short- Term Investing and Borrowing Outline: Global Money Markets Short-Term Money Markets in the U.S. Managing Short-Term Investments

Short-Duration Mutual Funds

Invest in securities with maturities that exceed most money market instruments Average maturity 1

to 3 years Instruments

include government issues, CDs, CP

Offer higher average returns but also a higher risk of fluctuating NAV: Not configured

to maintain a fixed unit NAV

May be used for matching strategy

v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 8: Module 5, Chapter 11 - 9

Page 10: Chapter 11: Money Markets, Short- Term Investing and Borrowing Outline: Global Money Markets Short-Term Money Markets in the U.S. Managing Short-Term Investments

Short-Term Money Markets in the U.S.: Commercial Book-Entry System Nearly all short-term

securities issued in book-entry form: Registered and

transferred electronically by U.S. Treasury (Treasury securities only) or Commercial Book-Entry System (CBES)

Simultaneous transfer of securities against settlement of funds

National Book-Entry

System (NBES)

Depository institutions—

hold book- entry accounts

Brokers, dealers, banks—maintain book-

entry accounts for individual customers

v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 8: Module 5, Chapter 11 - 10

Page 11: Chapter 11: Money Markets, Short- Term Investing and Borrowing Outline: Global Money Markets Short-Term Money Markets in the U.S. Managing Short-Term Investments

Depository Trust and Clearing Corporation (DTCC)

DTCC works through subsidiaries to provide:Clearing, settlement and information services for:

Equities Corporate and municipal

bonds Government and mortgage-

backed securities Money market instruments OTC derivatives

Legal depositoryCustody and asset servicingIndustry-ownedOperates on at-cost basisSEC-registered services

v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 8: Module 5, Chapter 11 - 11

DTCC

Depository Trust Company

(DTC)

National Securities Clearing Corporation

(NSCC)

Page 12: Chapter 11: Money Markets, Short- Term Investing and Borrowing Outline: Global Money Markets Short-Term Money Markets in the U.S. Managing Short-Term Investments

U.S. Treasury Bills (T-Bills) Exempt from state tax

for most U.S. investors May have franchise tax Money market

instruments Original maturities < 1

year (4, 13, 26, 52 weeks)

Multiple-price, sealed-bid auction

Competitive or non-competitive

Daily dealer bid and ask yield quotes

v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 8: Module 5, Chapter 11 - 12

Page 13: Chapter 11: Money Markets, Short- Term Investing and Borrowing Outline: Global Money Markets Short-Term Money Markets in the U.S. Managing Short-Term Investments

Commercial Paper (CP) and the U.S. Money Market

Unsecured promissory note Major issuers in the U.S. are corporations, bank

holding companies, and non-bank finance companies Public market: 270 days or less SEC code: Section 3[a]3 for public issue, Section 4[2]

for private issue

Among highest yields in money market Default risk Limited secondary market Evaluated by rating agencies (can be credit-enhanced)

v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 8: Module 5, Chapter 11 - 13

Page 14: Chapter 11: Money Markets, Short- Term Investing and Borrowing Outline: Global Money Markets Short-Term Money Markets in the U.S. Managing Short-Term Investments

U.S. Federal Agency and Government-Sponsored Enterprise (GSE) Securities

Guarantees backed by full faith and credit of U.S. government. Ginnie Mae (GNMA) provides liquidity through its MBS

program. Real estate mortgage investment conduits (REMICs) Interest rate related price and prepayment risks Pools of mortgages (tranches) allow risk control

VA guarantees REMICs issued through Vendee Mortgage Trust.

GSEs are private companies providing funds for loans in housing, education and agriculture. Strong implication government would intervene in crisis. Fannie Mae, Federal Farm Credit Banks Funding Corporation,

Freddie Mac, Federal Home Loan Banks Office of Finance.

v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 8: Module 5, Chapter 11 - 14

Page 15: Chapter 11: Money Markets, Short- Term Investing and Borrowing Outline: Global Money Markets Short-Term Money Markets in the U.S. Managing Short-Term Investments

Municipal Notes, VRDOs and Tax-Exempt CP

Issued by state and local governments or their agencies (up to 270 days for CP).

Many are exempt from federal and/or state income taxes in state of issuance.

Provide interim financing for general obligation bond projects.

VRDOs issued as long-term bonds with a put.

Active secondary market for short-term municipal obligations.

v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 8: Module 5, Chapter 11 - 15

Page 16: Chapter 11: Money Markets, Short- Term Investing and Borrowing Outline: Global Money Markets Short-Term Money Markets in the U.S. Managing Short-Term Investments

Short-Term Investment Policy Investment objectives Permissible and prohibited

investments Minimum/acceptable

security ratings Maximum maturity for

individual securities and maximum duration for portfolio

Maximum percentage amounts of portfolio that may be invested in individual securities, companies, instrument classes, geographic areas, industries

Specific responsibilities for implementing policy

Methods of monitoring compliance with policies, procedures, internal controls

Provisions for performance measurement, evaluation, reporting

Guidance for classification of investments per FASB and GASB rules

Responsibilities and reporting requirements for custodians and broker-dealers

v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 8: Module 5, Chapter 11 - 16

Page 17: Chapter 11: Money Markets, Short- Term Investing and Borrowing Outline: Global Money Markets Short-Term Money Markets in the U.S. Managing Short-Term Investments

Investment Strategies

Buy-and-hold-to-maturity: conservative investor Matching: Purchasing securities that mature when funds

are required to meet an expected obligation or obligations Actively managed: aggressive investor

Two strategies for buying highly liquid, marketable securities (T-bills) that mature on a different day from when the investor intends to sell

Normal yield curve: Purchase maturities past capital need, sell early Inverted yield curve: Purchase maturities shorter than capital need,

then reinvest

Tax-based: high-tax-bracket investor Tax-advantaged mutual funds Dividend capture

v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 8: Module 5, Chapter 11 - 17

Page 18: Chapter 11: Money Markets, Short- Term Investing and Borrowing Outline: Global Money Markets Short-Term Money Markets in the U.S. Managing Short-Term Investments

Discussion Question

Which of the following securities safekeeping and custody services methods is generally less costly but also more risky due to the higher risk of fraud?a) Engage a third party to provide custodial

services for an investor (corporate trust department of a commercial bank).

b) Keep securities at the institution (usually a brokerage firm) from which they were purchased.

Answer: b

v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 8: Module 5, Chapter 11 - 18

Page 19: Chapter 11: Money Markets, Short- Term Investing and Borrowing Outline: Global Money Markets Short-Term Money Markets in the U.S. Managing Short-Term Investments

Investment Risk Considerations: Credit or Default Risk

Risk that payments on a security will not be made under the original terms

Credit evaluation assesses default likelihood Credit ratings based on default risk,

seniority and any collateral by Nationally Recognized Statistical Rating Organizations (NRSROs): Moody’s Standard and Poor’s (S&P) Fitch Dominion (DBRS) and other 6

Credit enhancement

v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 8: Module 5, Chapter 11 - 19

Page 20: Chapter 11: Money Markets, Short- Term Investing and Borrowing Outline: Global Money Markets Short-Term Money Markets in the U.S. Managing Short-Term Investments

Discussion Question

What is the primary benefit of a borrower receiving credit support?

Answer:Because the borrower’s debt assumes the credit rating of the guarantor, the borrowing cost may be reduced or the marketability of the debt enhanced.

v3.0 © 2011 Association for Financial Professionals. All rights reserved.

Session 8: Module 5, Chapter 11 - 20

Page 21: Chapter 11: Money Markets, Short- Term Investing and Borrowing Outline: Global Money Markets Short-Term Money Markets in the U.S. Managing Short-Term Investments

Investment Risk Considerations: Asset Liquidity Risk

Risk that a security cannot be sold quickly without an unacceptable loss

Marketability Existence of active secondary market? Unrated securities may not be liquid; must

perform credit analysis. Maturity

Date on which obligation is settled. Holding investments over longer time

periods increases price risk.

v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 8: Module 5, Chapter 11 - 21

Page 22: Chapter 11: Money Markets, Short- Term Investing and Borrowing Outline: Global Money Markets Short-Term Money Markets in the U.S. Managing Short-Term Investments

Price/interest rate risk Risk that arises when interest rates for

securities that are identical or nearly identical to portfolio securities change

Longer maturities subject to more price risk Threat that interest rates may rise during

holding period of fixed-rate security Reinvestment risk

Foreign exchange (FX) risk Risk of change in FX rates between currency of

security and company’s local currency

v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 8: Module 5, Chapter 11 - 22

Investment Risk Considerations: Other Risks

Page 23: Chapter 11: Money Markets, Short- Term Investing and Borrowing Outline: Global Money Markets Short-Term Money Markets in the U.S. Managing Short-Term Investments

Yield Curves

v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 8: Module 5, Chapter 11 - 23

Page 24: Chapter 11: Money Markets, Short- Term Investing and Borrowing Outline: Global Money Markets Short-Term Money Markets in the U.S. Managing Short-Term Investments

Taxable Equivalent Yield (TEY)Example: Taxable security = 4.60% yield. Tax-exempt security (of similar risk and maturity) = 3.20%

yield. Firm’s marginal income tax rate is 35%.

v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 8: Module 5, Chapter 11 - 24

The tax-exempt security should be chosen because it has a higher effective after-tax yield. The after-tax yield of the taxable security is .046(1 – 0.35), or 2.99%.

Tax-exempt YieldTEY =

1 Investor's Marginal Tax Rate

0.032= = 0.0492 = 4.92%1 0.35

Page 25: Chapter 11: Money Markets, Short- Term Investing and Borrowing Outline: Global Money Markets Short-Term Money Markets in the U.S. Managing Short-Term Investments

Holding Period Yield (HPY)

HPY example: 90-day $100,000 T-bill purchased for $98,800

v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 8: Module 5, Chapter 11 - 25

Cash Received at Maturity Amount InvestedHPY =

Amount Invested

$100,000 $98,800 $1,200= = = 0.01215 = 1.215%$98,800 $98,800

Page 26: Chapter 11: Money Markets, Short- Term Investing and Borrowing Outline: Global Money Markets Short-Term Money Markets in the U.S. Managing Short-Term Investments

Discussion Question

Which of the following is true of T-Bills, CP and BAs?a) They pay unregulated rates of interest

based on current market value.b) They do not pay interest; rather, they

are issued at less than par value (the discount) and pay par value at maturity.

c) They pay a semiannual coupon.

Answer: b. They are all discounted instruments.

v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 8: Module 5, Chapter 11 - 26

Page 27: Chapter 11: Money Markets, Short- Term Investing and Borrowing Outline: Global Money Markets Short-Term Money Markets in the U.S. Managing Short-Term Investments

Dollar Discount and Discount Rate

Example: $1,000,000 par (or face) value 182-day T-bill is sold for $974,216

HPY = 0.0265 and 360-day basis yield = 5.24%

v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 8: Module 5, Chapter 11 - 27

Dollar Discount 360Discount Rate = Par Value Days to Maturity

$25,784 360= = 0.0510 = 5.10%$1,000,000 182

Dollar Discount = Par Value Purchase Price = Cash Received at Maturity Amount Invested = $1,000,000 $974,216 = $25,784

Page 28: Chapter 11: Money Markets, Short- Term Investing and Borrowing Outline: Global Money Markets Short-Term Money Markets in the U.S. Managing Short-Term Investments

Dollar Discount and Money Market Yield The dollar discount can be related to the discount

rate by rearranging the discount rate equation from the prior slide. Example from prior slide: 182-day $1,000,000 T-bill with a discount rate of 5.1% = $25,784 dollar discount.

v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 8: Module 5, Chapter 11 - 28

360Money Market Yield = Holding Period Yield ×

Days to Maturity

$1,000,000 $974,216 360= ×

$974,216 182

= 0.0265 x 1.978 = 0.0524 or 5.24%

The money market yield (360-day year):

Days to MaturityDollar Discount = Discount Rate × Par Value ×

360

Page 29: Chapter 11: Money Markets, Short- Term Investing and Borrowing Outline: Global Money Markets Short-Term Money Markets in the U.S. Managing Short-Term Investments

Bond Equivalent Yield

Bond equivalent yield, or annual yield to an investor, using a 365-day-per-year follows.

Example from prior slides: 182-day $1,000,000 T-bill, $974,216 invested.

v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 8: Module 5, Chapter 11 - 29

Method 1

365Bond Equivalent Yield = Holding Period Yield ×

Days to Maturity

$1,000,000 $974,216 365= ×

$974,216 182

= 0.0265 × 2.0055 = 0.0531 or 5.31%

Page 30: Chapter 11: Money Markets, Short- Term Investing and Borrowing Outline: Global Money Markets Short-Term Money Markets in the U.S. Managing Short-Term Investments

T-Bill Quotes Dealers buy and sell T-bills in a secondary market. Bid quote is the discount at which a dealer will buy a T-bill. Ask quote is the discount at which a dealer will sell a T-bill. Ask yield is the yield to an investor purchasing a T-bill at

the ask discount. Ask yield is quoted on a 365-day-per-year basis.

v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 8: Module 5, Chapter 11 - 30

Maturity Date

Days to Maturity

Bid Discount

Ask Discount

Ask Yield (%)

Feb 20 29 1.14 1.13 1.15

Feb 27 36 1.14 1.13 1.15

Mar 06 43 1.13 1.12 1.14

Page 31: Chapter 11: Money Markets, Short- Term Investing and Borrowing Outline: Global Money Markets Short-Term Money Markets in the U.S. Managing Short-Term Investments

Short-Term Funding Alternatives

Trade credit Internal borrowing Selling of

receivables Commercial bank

credit Loan syndications

and participations Line of credit Revolving credit

agreement

Single payment notes

Repurchase agreement (repo)

Commercial paper (CP) issuance

Asset-based borrowing

v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 8: Module 5, Chapter 11 - 31

Page 32: Chapter 11: Money Markets, Short- Term Investing and Borrowing Outline: Global Money Markets Short-Term Money Markets in the U.S. Managing Short-Term Investments

Selling of Receivables

Factoring The sale or transfer of A/R to a third party, who charges a percentage commission to the borrower on the amount of A/R (depending on the quality of A/R, not company’s financial statements); with or without recourse.

Securitization Company issues debt securities backed by a pool of receivables; suitable assets usually have a predictable cash flow stream to retire the issue and a historical record of low losses.

v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 8: Module 5, Chapter 11 - 32

Page 33: Chapter 11: Money Markets, Short- Term Investing and Borrowing Outline: Global Money Markets Short-Term Money Markets in the U.S. Managing Short-Term Investments

Commercial Bank Credit: Loan Syndication and Participation

Multiple financial institutions (syndicate) share a single credit facility.

An agent acts as an intermediary.

All syndicate members share documentation; each lender has a promissory note.

A financial institution purchases interest in another lender’s credit facility.

The purchaser is called the participant; the seller is the lead institution.

A participant does not have a separate note.

v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 8: Module 5, Chapter 11 - 33

Loan participationLoan syndication

Direct lending relationship Indirect lending relationship

Page 34: Chapter 11: Money Markets, Short- Term Investing and Borrowing Outline: Global Money Markets Short-Term Money Markets in the U.S. Managing Short-Term Investments

Line of Credit Key Characteristics

Lender gives access to funds up to a maximum amount over a specified period.

May be committed or uncommitted line: Committed obligates

the buyer to provide funding as long as the buyer is not in default.

Uncommitted can be cancelled by the lender at any time.

Usually revolving. May be secured or

unsecured. Usually has a 30- to

60-day clean-up period.

Basic cost components: All-in rate of interest Commitment fees Compensating

balances

v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 8: Module 5, Chapter 11 - 34

Page 35: Chapter 11: Money Markets, Short- Term Investing and Borrowing Outline: Global Money Markets Short-Term Money Markets in the U.S. Managing Short-Term Investments

Commercial Paper (CP) Issuance

In practice, many CP issuers roll over outstanding balances at maturity to new CP issue. To do this: Maintain CP backup lines of credit. Issuer must carry strong credit rating or get

higher rating through credit enhancement (standby L/C).

Issued at discount + dealer fees, backup credit facility fees, rating agency charges and credit enhancement costs. Therefore rarely used for less than $50 million.

v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 8: Module 5, Chapter 11 - 35

Page 36: Chapter 11: Money Markets, Short- Term Investing and Borrowing Outline: Global Money Markets Short-Term Money Markets in the U.S. Managing Short-Term Investments

Annual Cost for Commercial Paper (CP)

Example: A company issues $20 million of CP with a 20-day maturity at a discount of 5.40%.

v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 8: Module 5, Chapter 11 - 36

Part 1 of 4:

Days to MaturityDollar Discount = Discount Rate Par Value

36020= 0.054 $20,000,000 = $60,000360

Usable Funds= Par Value Discount= $20,000,000 $60,000= $19,940,000

Page 37: Chapter 11: Money Markets, Short- Term Investing and Borrowing Outline: Global Money Markets Short-Term Money Markets in the U.S. Managing Short-Term Investments

Annual Cost for a Line of Credit

A line of credit lender charges interest and a commitment fee on the line.

Interest is charged on the used portion of the line. The commitment fee may be charged on the line

or its unused portion. The overall interest rate on the line is determined

by the total interest paid on the line’s used portion and the amount paid for the commitment fee relative to the average used portion of the credit line over the borrowing period.

v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 8: Module 5, Chapter 11 - 37