The Principal Money Market Instruments: Amount Outstanding ...

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 Not available. a Includes commercial paper issued by financial and nonfinancial firms. b As of June 30, 2001.

c 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 Goods Now IMPORTER EXPORTER Cash Later Goods Now IMPORTER SOURCE: Adapted from Ann-Marie Meulendyke, U.S. Monetary Policy and Financial Markets (New York: Federal Reserve Bank of New York, 1989): 80 Copyright 2003 by South-Western/Thomson Learning. All rights reserved. e Tim d e ept Acc aft Now Dr BANK Ca s h Late r INVESTOR Cash Now

Cash L ater EXPORTER Accepted Now Transaction occurs with a bankers acceptance; less risk to the exporter Docu Now ments The Principal Capital Market Instruments: Amount Outstanding, End of Year (in Billions of Dollars) Type of Instrument 1960 1970 1980 1990 1998 Corporate stock $451 $906 $1,920 $3,530 $15,438 $15,863.6 Mortgages 142 297 965 3,804 5,782 7,250.4

Corporate and foreign bonds 75 167 319 1,704 3,894 5,435.1 U.S. government securities 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 NA 2001**

*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 borrowers 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

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