Liquidity

The money markets are concerned with very liquid securities investment products based upon cash-flows, with usually less than one year to maturity and without associated coupons. Typical investment products include government treasury bills, certificates of deposit, commercial paper, and short-term zero-coupon bonds.

Although investment yields are often lower than long-term bonds and other equity-based investments, the high liquidity in the money markets means you can get in and out of your positions relatively quickly and easily.

Therefore the money markets attract large investors such as insurance companies who may need to turn investments into cash at very short notice.

The key yield curve in the money markets is the Inter-Bank Offer Rate (such as LIBOR), which itself is closely related to the market riskless rate. Many corporate products (such as commercial paper) have yields based upon a ‘spread’ to floating Inter-Bank Offer Rates (i.e. they offer higher yields than bank-to-bank loans and treasury bills).

There are also four other key yield measures employed in the money markets.

These are the Bank Discount Yield, the Holding Period Yield, the (simple) Money Market Yield, and the Effective (compounded) Annual Yield.

This lecture discusses all four, how they are used, how they are related, and how they offer different kinds of short-term investment information.

The full YouTube playlist of Securities Investment 101 lecture videos can be found by clicking here.

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In today’s lecture, we examine the ‘special’ yield curve known as the ‘riskless’ yield curve and how we define it and its terms.

Once we have this special yield curve defined, we then talk about credit spreads, which are essentially the difference in yields between bonds of the same maturity, particularly as compared to the riskless yield curve.

The full YouTube playlist of Securities Investment 101 lecture videos can be found by clicking here.

Please read our disclaimer.

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The Inverted Yield Curve, Lecture 016, Securities Investment 101

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In this lecture we describe the inverted yield curve and how it differs from the normal yield curve. Before we get to that, we explain the strategy of ‘riding the yield curve’ and then why the inverted yield curve is such a dangerous thing when riding the yield curve. We explain why the inverted yield […]

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The Yield Curve, Lecture 015, Securities Investment 101

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In this lecture, we introduce the yield curve, which lies at the base of most cashflow trading. We explain liquidity preference theory, which determines the typical ‘standard’ shape of the yield curve, and how risk and reward, measured by credit risk and opportunity risk, create the standard yield curve. It must be noted, however, that […]

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