London Interbank Offer Rate

 -Rate at which large banks in London lend to each other.

-Base rate for many loans, and derivatives

-Originates when a purchasr of goods authorizes its bank to pay the seller for the goods at a date in the future (time draft)

-When the purchaser's bank 'accepts' the draft it becomes contingent liability of the bank and becomes a marketable secuirty.

-Depository Institutions must maintain deposits with the Federal Reserve Bank.

-Banks with a surplus can lend Fed deposits to banks that need to borrow in order to maintain required balance. Cost of borrowing is the Federal Funds rate.

-Key interest rate for the economy

Issued by Federal Gov.

4,13,26, or 52 week maturity

high liquid

no default risk

Discount interest type

Federal taxes ownder, exempt from local/state taxes

Issued by Depository Institutions

Typicall 14 day maturity minimum

3 months or less are liquid

First 100,000$ is insured

Add on interest type

Interest income is fully taxable

Issued by large creditworthy corporations and financial institutions

Max 270 days, usually 1-2 months maturity

3 months of less are liquid

Unsecure, rated, mostly high quality default risk

Discount interest type

Interest income is fully taxable

BUY

Holder has the right to BUY

Dollar denominated deposits held outside the US

PAy a higher interest rate than US deposits

Purchase Agreements and Reverse RPs (RPs or repos)

-short term sale of securities arranged with an agreement to repurchase the secuities a set higher price.

-A RP is a collateralized loan, many are overnight, although "term" RPs may have a one month maturity.

-A Reverse RP is lending money and obtaining secuirty title as collateral

-Interest rates on short term instruments are usually lower than yields on longer term investments.

-Yields on money market instruments are not always directly comparable.

-Par value vs investment value

-360 vs 365 days assumed in a year

- Simple vs Compound interest

SELL

Holder has right to SELL