# Seminar Questions: Money Markets

Question 1

 Treasury Bill Returns and Prices Term to Maturity Annual Return Market Price (per £100) 1 Month 2.00% 3 Months 2.50% £99.38 6 Months 2.80% 12 months 3.00% £97.09

Assume that the 1-month bill matures in 28 days and the 6-month bill in 182 days. Calculate their prices and monetary gains based on the annualised returns.

Question 2

 Treasury Bill Tender Results for the Week Ending 8 February 2013 Maturity Amount Borrowed Average Yield Average Price (per £100) 11 March £500 million £99.98 13 May £500 million £99.93 12 August £1500 million £99.81

Investors pay for the bills when the market opens on 11 February 2013. Calculate the days to maturity for each issue and the average annualised yields implied by the average prices using the formula:

Question 3

Referring to the UK Treasury bill auction data for Friday 7th October 2016, follow the method employed in the lecture presentation to derive the average prices for the 3 and 6 month bills.

What is the most striking feature of the average yields on UK Treasury Bills in early October 2016?

Question 4

1. a) XYZ PLC has issued CP in units with a maturity value of \$100,000. The term to maturity is 91 days. The annualised yield is 0.35%. Calculate the sale price of the CP.

1. b) If the term to maturity is 270 days and the paper was sold for an average price of \$99,580. Calculate the annualised yield.

1. c) Describe the main characteristics of commercial paper and the advantages it offers to borrowers over other sources of credit.

Question 5

1. a) Referring to the example of the profit potential on repos in the lecture slides assume that by the end of the repo the bonds had fallen in value to £499,500. Calculate the trader’s return.
2. b) Why is the sale under a sale and repurchase agreement not a real sale?
3. c) In repo agreements, what is a ‘haircut’?

Question 6

A company wishes to borrow €4,600,000 in 91 days’ time for a period of 91 days. The current €-denominated money market rates are:

91 days interest rate spread             0.80% – 0.90%

182 days interest rate spread             1.15% – 1.25%

Assume that one year consists of 365 days.

1. Explain the interest rate risk facing the borrower.

1. Outline the terms of a money market hedge and calculate the forward rate

Question 7

A company wishes to deposit €4,600,000 in 91 days’ time for a period of 91 days. The current €-denominated money market rates are:

91 days interest rate spread             0.80% – 0.90%

182 days interest rate spread             1.15% – 1.25%

Assume that one year consists of 365 days.

1. Explain the interest rate risk facing the company.

1. Outline the terms of a money market hedge and calculate the forward rate

Question 8

A company wishes to borrow €4,600,000 in 91 days’ time for a period of 91 days. Instead of undertaking a money market hedge, the company enters a forward rate agreement with a bank, based on a settlement rate of 1.70%.

1. Calculate the cash flow between the company and the bank if three-month €LIBOR on the settlement date is 1.58%.

1. Calculate the cash flow between the company and the bank if three-month €LIBOR on the settlement date is 2.00%

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