Question

in dollars outstanding in 2016, the largest money market security was Multiple Choice commercial paper. banker's acceptances. T-bills. Fed funds and repos.

Answer 1

The $2.2 trillion daily turnover in the repurchase, or repo, market is a vital, but not always well understood, part of the U.S. financial system. The repo market represents a liquid, efficient, tested and safe way for firms to participate in a short-term financing arrangement, providing funding for their day-to-day business. Repurchase agreements, or repos, are a sale of financial assets combined with a promise to repurchase those assets in the future (in many cases, the repurchase is agreed for the following business day). These arrangements have the economic characteristics of a secured loan – cash vs. collateral – and are used by short-term institutional cash investors as a secured money market instrument and by dealers as a way to finance long positions in securities.

While a broad array of assets may be financed in the repo market, the financial assets most commonly used include U.S. government and Federal agency securities, high quality mortgage-backed bonds and corporate bonds and money market instruments. Recent data for the tri-party repo (a form of repo that uses an agent to maintain cash and securities accounts for both parties) market, which represents a significant part of the entire U.S. repo market, indicates that U.S. government securities account for approximately 48.5 percent by dollar value of the most common collateral types, agency mortgage-backed securities and collateralized mortgage obligations account for 30.1 percent, and equities make up 7.1 percent.

Commercial paper is an unsecured and discounted promissory note issued to finance the short-term credit needs of large institutional buyers. Banks, corporations and foreign governments commonly use this type of funding. Exempt from SEC registration, commercial paper generally matures in a short period of time and usually does not exist for more than 270 days. The average maturity of commercial paper is between 30 and 35 days. The average investment is about $100,000, but some commercial paper investments are made in multiples of $1 million or more. It is not uncommon for issuers to adjust the amounts and/or the maturities of commercial paper to suit the investment needs of a particular buyer or group of buyers.

Commercial paper is usually issued by companies with very high credit ratings. Because of this, and because it generally matures in a very short period of time, commercial paper tends to be a very low-risk investment. Most commercial paper is assessed by more than one rating agency. The four primary agencies are: Moody's, Standard & Poor's, Fitch, and Duff & Phelps. Although commercial paper is occasionally issued as an interest-bearing note, it typically trades at a discount to its par value. In other words, investors usually purchase commercial paper below par and then receive its face value at maturity. The discount, or the difference between the purchase price and the face value of the note, is the interest received on the investment. All commercial paper interest rates are quoted on a discounted basis.

Commercial paper is issued by a wide variety of domestic and foreign firms, including financial companies, banks, and industrial firms. Major investors in commercial paper include money market mutual funds and commercial bank trust departments. These large institutional investors often prefer the cost savings inherent in using commercial paper instead of traditional bank loans. A Treasury Bill (T-Bill) is a short-term debt obligation backed by the Treasury Department of the U.S. government with a maturity of less than one year, sold in denominations of $1,000 up to a maximum purchase of $5 million on noncompetitive bids

T-Bills carry a primary advantage over other types of investments: safety. We've said it before and we'll say it again: All T-Bills are fully guaranteed by the full faith and credit of the U.S.

government and the Department of the Treasury. They carry almost zero default risk. Even in times of great financial stress, the government has the power to tax and the power to print money to fund its debts. In short, T-Bills offer a very low-risk way to earn a guaranteed return. But they offer other advantages as well:

•With a minimum investment requirement of just $100, they are accessible to a wide range of investors.

•Their interest income is exempt from state and local income taxes. (It is, however, subject to federal income taxes, and some components of the return may be taxable at sale/maturity.)

•They are highly liquid. Investors can keep funds in these treasuries if they believe that they may have some need of cash within the next year. Treasuries are also very easy to buy and sell, and they tend to carry lower spreads than other securities on the secondary market.

•They do not have any call provisions. In times of declining interest rates, when municipal or corporate bonds are often being called in by their issuers, T-Bill investors have the peace of mind of knowing exactly how long they can hold their securities.

•Because they are generally considered one of the safest short-term investments, T-Bills offer relatively low returns compared with other debt instruments. In fact, rates on T-Bills can be less than most money market funds or certificates of deposit (CDs). Remember the finance world mantra: less risk, less reward.

•The returns from T-Bills are only realized when they mature, making them a somewhat less attractive income vehicle – especially for investors seeking a steady cash flow.

Federal Reserve funds are overnight loans banks use to meet the reserve requirement at the end of each day. The Federal Reserve uses the fed funds to control the nation's interest rates. That is because banks borrow fed funds from each other. They pay an interest rate that they call the fed funds rate

Repo is short for repurchase agreement, a transaction used to finance ownership of bonds and other debt securities. In a standard repo transaction, a dealer finances its ownership of a bond by borrowing money from a customer on an overnight basis and posting the bond as collateral

It is economically similar to a loan collateralized by securities having a value higher than the loan to protect the Desk against market and credit risk. ... Currently, the Desk conducts overnight reverse repo operations daily as a means to help keep the federal funds rate in the target range set by the FOMC