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Material Type: Paper; Professor: Ren; Class: Financial Markets and Institutions; Subject: Finance; University: University of North Texas; Term: Unknown 1989;
Typology: Papers
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Answers to Chapter 5 Questions
Brokers and dealers services are important to the smooth functioning of money markets. We have alluded to various categories of brokers and dealers in the chapter. First, are the 30 primary government security dealers. This group of participants plays a key role in marketing new issues of Treasury bills (and other Treasury securities). Primary government securities dealers also make the market in Treasury bills; buying securities from the Federal Reserve when they are issued and selling them in the secondary market. Secondary market transactions in the T-bill markets are transacted in the trading rooms of these primary dealers. These dealers also assist the Federal Reserve when it uses the repo market to temporarily increase or decrease the supply of bank reserves available. The second group of brokers and dealers are money and security brokers. These brokers play a major role in linking buyers and sellers in the fed funds market and assist secondary trading in other money market securities as well. The third group of brokers and dealers are the thousands of brokers and dealers who act as intermediaries in the money markets by linking buyers and sellers of money market securities. This group of brokers and dealers often act as the intermediaries for smaller investors who do not have sufficient funds to invest in primary issues of money market securities or who simply want to invest in the money markets. Nonfinancial and financial corporations raise large amounts of funds in the money markets, primarily in the form of commercial paper. The volume of commercial paper issued by corporations has been so large that there is now more commercial paper outstanding than any other type of money market security. Because corporate cash inflows rarely equal their cash outflows, they often invest their excess cash funds in money market securities, especially T-bills, repos, commercial paper, negotiable CDs, and bankers acceptances. Because their liability payments are relatively unpredictable, property-casualty (PC) insurance companies, and to a lesser extent life insurance companies, must maintain large balances of liquid assets. To accomplish this insurance companies invest heavily in highly liquid money market securities, especially T-bills, repos, commercial paper and negotiable CDs. Since finance companies are not banks and cannot issue deposits, they raise large amounts of funds in the money markets, especially through the issuance of commercial paper. Finally money market mutual funds purchase large amounts of money market securities and sell shares in these pools based on the value of their underlying (money market) securities. In doing so, money market mutual funds allow small investors to invest in money market instruments.
commercial paper without involving a bank. The Eurocommercial paper rate is generally about one-half to one percent above the LIBOR rate.