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FIN3244 EXAM 2 CH 5

Terms in this set (24)

. 'Lehman paper' is commercial paper that Lehman Brothers had issued to raise funds. The Lehman paper was worthless because Lehman Brothers had gone bankrupt.
b. 'Breaking the buck' means that the net asset value of the money market fund had fallen below $1 to $0.97. As a result, investors in the mutual fund would take a capital loss of 3% when they redeemed their shares. 'Breaking the buck' was significant because it was highly unusual for a money market mutual fund to allow the price of its shares to drop below $1. Investors in money market mutual funds were willing to accept the relatively low interest rates these funds offered relative to some other investments only if they were sure that they would not suffer a capital loss from a decline in the value of the shares. 'Breaking the buck' badly hurt investor faith in money markets and reminded them that their higher return had come at the acceptance of higher risk.
c. A run is a rush to withdraw money before everyone else does. One money market mutual fund breaking the buck signaled that other money market mutual funds might also do so. Investors became worried about the value of the assets in their money market mutual funds and whether they would be able to redeem their shares at the usual value of $1 per share. Given the low interest rates paid on money market mutual fund shares, investors were not willing to risk capital losses on their investments. The fear generated by the 'breaking of the buck' by one money market mutual fund spread to the whole industry. This is 'contagion'.