Service
Expertise
Integrity
Windy City Summit
CTP Review
Chapter 11
Presented by: The Northern Trust Company
Elizabeth V. Hasten,CTP
© 2012 Northern Trust Corporation
Chapter 11
Money Markets, Short-Term Investing and
Borrowing
2
Windy City Summit CTP Review
Service
Expertise
Integrity
Global Money Markets
Money Market Participants
Government
Securities
entities
dealers
Commercial
banks
Corporations
Individuals
Broker-dealer
3
Windy City Summit CTP Review
Service
Expertise
Integrity
Global Money Markets
Types of Money Market Instruments and Investments
 Commercial
Paper (CP)- tradable promissory notes issued by companies
at a discounted price (liquid but not secured)
 Asset-backed
 Bank
commercial paper- CP that is secured against a specific asset
Obligations- time deposits such as CDs
 Government
Paper (T-bills)- tradable promissory notes issued by
governments
 Floating
rate notes- promises to return face value plus interest
 Repurchase
agreements (repos)- bank or dealer sells securities agreeing to
buy them back later at a higher price
 Money
Market Funds- comingled pools of money market instruments
Mutual Funds- invest in securities with longer maturities
than most money market instruments
 Short-Duration
 Sweep
4
Accounts-loan sweeps
Windy City Summit CTP Review
Service
Expertise
Integrity
Short-Term Money Markets in the U.S.
Processing and Clearing of Short-Term Investments
Commercial
Book Entry System(CBES)- Delivery system for
the simultaneous transfer of securities against the settlement of
funds
Depository
Trust and Clearing Corporation (DTCC)- Provides
clearing, settlement and information services for bonds, money
market instruments, securities and derivatives
U.S. Money Market Participants
U.S.
Treasury and federal agencies
Commercial banks
Thrifts
Municipalities
Corporations
Federal Reserve
Securities dealers
5
Windy City Summit CTP Review
Service
Expertise
Integrity
Short-term Money Markets in the U. S.
U. S. Money Market Instruments
 U.S.
Treasury Bills: usually exempt from state income tax, mature in
less than one year and are sold through a sealed bid auction
 Bank
Debt Obligations: FDIC insured
 Commercial
Paper: has maturity of less than 270 days, evaluated by
rating agencies and is issued by large corporations, and non-bank
finance companies
 U.S.
Federal Agency and Government-Sponsored Enterprise (GSE)
Securities: carries explicit or implied guarantee by the U.S.
government (Ginnie Mae)
 Municipal
Notes, Variable Rate Demand Obligations and TaxExempt Commercial Paper: mature in 3 months- one year
 Money
Market Funds: prime, government, treasury and tax-exempt
classes, sold in shares by banks, fund providers and investment
brokers
6
Windy City Summit CTP Review
Service
Expertise
Integrity
Managing Short-term Investments
Short-Term Investment Policy
Focuses
on liquidity maintenance and principal preservation, based
on risk tolerance
In-House Management vs. Outsourced Management
In-house
expensive for small companies and small investment
portfolios
Policies
and guidelines must be communicated clearly to outside
manager when outsourced
Investment Strategies
Buy-and-hold-to-maturity
Actively
managed
Tax-based
Reliable Reporting
7
Windy City Summit CTP Review
Service
Expertise
Integrity
Managing Short-term Investments
Securities Safekeeping and Custody Services
Focuses
on liquidity maintenance and principal
preservation, based on risk tolerance
Investment Risk Considerations and Factors Influencing
Investment Pricing
Credit or Default Risk (higher yields, higher risk)
Asset Liquidity Risk
Price/Interest Rate Risk
Foreign Exchange (FX) Risk
8
Windy City Summit CTP Review
Service
Expertise
Integrity
Pricing and Yields on Short-Term Investments
Factors Influencing Investment Pricing
Yield
: measure of return on investment
Yield curves
Tax status
Taxable Equivalent Yield = Tax Exempt Yield
(1-Investor’s Marginal Tax Rate)
Yield Calculations for Short-Term Investments
Yield
calculation principles and examples
Holding
Annual
9
Period Yield= Cash Received at Maturity – Amount Invested
Amount Invested
Yield= Holding Period Yield x Days in Year
Days to Maturity
Windy City Summit CTP Review
Service
Expertise
Integrity
Managing Short-Term Financing
Short-Term Funding Alternatives
Trade
credit syndications and participations
Internal borrowing
Selling of receivables
Commercial bank credit
Loan syndication and participations
Line of credit
Revolving credit agreement
Single payment notes
Repurchase agreement
Commercial paper Issuance
Asset-based borrowing
10
Windy City Summit CTP Review
Service
Expertise
Integrity
Managing Short-Term Financing
Dollar Discount =Par Value – Purchase Price
=Cash received at maturity – amount invested
=Discount Rate x Par Value x Days to Maturity
360
Discount Rate= Dollar Discount
Par value
x
360
Days to maturity
Money Market Yield= Holding period yield
(based on 360 day year)
x 360
Days to maturity
Bond Equivalent Yield = Holding period yield
(based on 365 day year)
11
Windy City Summit CTP Review
x 365
Days to maturity
Service
Expertise
Integrity
Managing Short-Term Financing
Bond Equivalent Yield = Holding period yield
(based on 365 day year)
x 365
Days to maturity
= Money market yield x
365
360
Bond equivalent yield will always exceed the money market
yield
Money market yield will always exceed the discount rate
Purchase Price = Par Value – Dollar Discount
12
Windy City Summit CTP Review
Service
Expertise
Integrity
Managing Short-Term Financing
Annual Cost of Commercial Paper Issuance =
Dollar Discount = Discount Rate x Par Value x Days to Maturity
360
Usable Funds = Par value – Dollar Discount
Prorated Dealer Fee = Annual Fee Rate x CP Issue Size x Days to Maturity
360
Prorated Backup Line = Annual Line Rate x CP Issue Size x Days to Maturity
of credit Fee
360
Annual Interest Rate=Dollar Discount + Dealer Fee + Backup Line Fee x 365
Usable Funds
360
Commercial Paper Nominal Yield = Dollar Discount x
365
Purchase Price
Days to Maturity
13
Windy City Summit CTP Review
Service
Expertise
Integrity
Managing Short-Term Financing
Annual Cost of Line of Credit=
Interest Paid = Average Borrowing x All-in-Rate
Fee on Unused Portion = Unused Portion x Commitment Fee
Annual Interest Rate = Interest Paid+ Fee on Unused Portion
Unused
Portion ofShort-Termnancing
Line (-Compensating Balance)
Managing
Avail. Amt = Borrowed Amt –(Compensating Balance %) x (Borrowed Amt)
Borrowed Amount = Available Amount
1-(Compensating Balance %)
14
Windy City Summit CTP Review
Service
Expertise
Integrity