Money Market

11 Key excerpts on "Money Market"

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  eBook - PDF

  Financial Matrix

  • Jhajra, Anil Kumar(Authors)
  • 2021(Publication Date)
  • Scholars World

    (Publisher)

  Chapter 4 Money Market Basically the Money Market is the global financial market for short-term borrowing and lending and provides short term liquid funding for the global financial system. The average amount of time that companies borrow money in a Money Market is about thirteen months or lower. Some of the more common types of things used in the Money Market are certificates of deposits, bankers’ acceptance, repurchase agreements and commercial paper to name a few. Basically what the Money Market consists of is banks that borrow and lend to each other, but other types of finance companies are involved in the Money Market. What usually happens is the finance companies fund themselves by issuing large amounts of asset backed commercial paper that is secured by the promise of eligible assets into an asset backed commercial paper conduit. Your most common examples of these are auto loans, mortgage loans, and credit card receivables. A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. The Money Market is used by participants as a means for borrowing and lending in the short term, from several days to just under a year. Money Market securities consist of negotiable certificates of deposit (CDs), bankers’ acceptances, U.S. Treasury bills, commercial paper, municipal notes, federal funds and repurchase agreements (repos). Money Market Instruments The Money Market instruments are amongst the safest forms of investment in the United States because the principals of these forms of investment are assured. The Money Market instruments are normally This ebook is exclusively for this university only. Cannot be resold/distributed. provided in the minimum denomination of $1 million. The term periods of the Money Market instruments could vary from a single day to a year itself. However the most commonly observed term periods are three months or less.

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  Bond and Money Markets

  Strategy, Trading, Analysis

  • Moorad Choudhry(Author)
  • 2003(Publication Date)
  • Butterworth-Heinemann

    (Publisher)

  . 507 31 The Money Markets In terms of trading volumes the Money Markets are the largest and most active market in the world. Money Market securities are securities with maturities of up to twelve months, so they are short term debt obligations. Money Market debt is an important part of the global financial markets, and facilitates the smooth running of the banking industry as well as providing working capital for industrial and commercial corporate institutions. The diversity of the Money Market is such that it provides market users with a wide range of opportunities and funding possibilities, and the market is characterised by the range of products that can be traded within it. Money Market instruments allow issuers, who are financial organisations as well as corporates, to raise funds for short term periods at relatively low interest rates. These issuers include sovereign governments, who issuer Treasury bills, corporates issuing com-mercial paper and banks issuing bills and certificates of deposit. At the same time investors are attracted to the market because the instruments are highly liquid and carry relatively low credit risk. The Treasury bill market in any country is that country’s lowest-risk instrument, and consequently carries the lowest yield of any debt instrument. Indeed the first market that develops in any country is usually the Treasury bill market. Investors in the Money Market include banks, local authorities, corporations, Money Market investment funds and individuals; the Money Market is essentially a wholesale one and the denominations of individual instruments are relatively large. Although the Money Market has traditionally been defined as the market for instruments maturing in one year or less, frequently the Money Market desks of banks trade instruments with maturities of up to two year, both cash and off-balance sheet.

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  Banking Policy and Structure (RLE Banking & Finance)

  A Comparative Analysis

  • J Wilson(Author)
  • 2012(Publication Date)
  • Taylor & Francis

    (Publisher)

  3 it has been possible to encourage private enterprise itself to supply the desired facilities, while at other times (e.g., in Australia) it was private enterprise that forced the pace and the authorities were ultimately obliged to recognise the existence of a market and to provide it with the lender-of-last-resort facilities without which such a market cannot approach its full potential.

  Defined in a narrow sense, the term ‘Money Market’ can be applied to that group of related markets which deals in assets of relative liquidity – such as call money, federal funds, Treasury bills or notes, bills of exchange (or other ‘commercial paper’), and short-dated government bonds. In some centres, the term has been applied very narrowly indeed, as used to be the case in London where the Money Market was regarded as deriving primarily from the market relationships between the discount houses and the commercial banks. Nevertheless, such an emphasis where it occurs must not blind us to the fact that the term is not infrequently also applied in a wider and looser context. In its broader connotations, the term encompasses the whole complex of financial institutions, which in varying degrees act together to satisfy the monetary needs of a community and, sometimes, such institutions are scattered spatially over a wide area.

  Whatever type of definition one attempts, money-market structure shows a wide diversity of form and it would serve no useful purpose to impose a classification by categories. In this field, probably more than in any other, it is extremely difficult to find any precise lines of division between one ‘type’ and another. Over recent years, it is true, economists have increasingly attempted to draw a distinction between ‘developed'and ‘undeveloped’ Money Markets, but the forms of organisation are so various that the line of demarcation becomes decidedly blurred. It is surely all a matter of degree. Yet some ‘standard of reference’ there must be.

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  Money, Banking, Financial Markets & Institutions

  • Michael Brandl(Author)
  • 2020(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  A Money Market, on the other hand, does not take place in one physical place. Instead, it takes place during tele-phone calls and on blinking computer screens, through which more than a trillion dollars trade hands every business day. While many of these traders and brokers are in the financial districts of New York, London, Tokyo, and Frankfurt, they hardly ever come face-to-face with each other. Thus, a formal definition of a Money Market would be “a wholesale market of short-term debt instruments that have a high level of liquidity and a low level of default risk.” Money Market: A segment of a financial market where short-term debt instruments with high levels of liquidity and low default risk are traded. Let’s look at each part of this definition: • “Wholesale market” means that the transactions that take place in the Money Markets are large in volume. While some smaller transactions do take place, most of the transactions are for $1 million to $10 million or more. Single trades of $50 million to $100 million are not uncommon. Thus, it is all but impossible for individuals to be directly involved in these markets. Instead, these markets are dominated by a network of brokers, dealers, 1 See Louis Uchitelle, “Ideas & Trends: The Bondholders Are Winning; Why America Won’t Boom.” The New York Times , June 12, 1994. 15-1 Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 331 CHAPTER 15 Money Markets investment banks, and commercial banks. Individuals usually access the market through a variety of brokers and dealers.

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  Investing in Fixed Income Securities

  Understanding the Bond Market

  • Gary Strumeyer(Author)
  • 2012(Publication Date)
  • Wiley

    (Publisher)

  Chapter 8

  Money Market Instruments

  An individual investor seeking to maximize the return on his short-term fixed income assets, or a cash manager looking to get the biggest bang for her buck on the firm’s liquid assets, must understand the Money Market (MM) with its unique characteristics and distinctive formulaic calculations. First, you should learn about the myriad MM products available, as well as the players in this unique market. You must understand the products’ characteristics and risk/reward trade-offs. Then, you need to determine the time horizon or duration of the assets purchased. Finally, you must compare the yields on these different products to assess whether you are being rewarded for any additional risks (credit and market) undertaken.

  The Money Market involves the borrowing and lending of money for periods of a year and less. Massive sums of capital can be transferred rapidly and efficiently from one economic unit (corporations, municipalities, banks, etc.) to another for relatively short periods of time. Institutions with short-term borrowing needs can meet these needs by maintaining access to the Money Market and raising funds when required. In the same way, holders of excess cash can maximize their returns by investing in Money Market securities.

  Money Market securities are thus debt instruments characterized by short-term maturities ranging from overnight to one year. Money Market securities are typically liquid, and possess relatively high credit quality and low interest rate risk. Trades in Money Markets are generally quite large (trades in the billions of dollars are common). Active secondary markets allow most MM securities to be sold prior to maturity if a need for cash emerges.

  These instruments are influenced by Federal Reserve policy and activity more than any other sector of the fixed income market. Utilizing the Money Market allows investors to enhance returns on cash reserves, while at the same time maintaining liquidity and preserving capital through high-quality investments. Investors managing large cash balances through the utilization of Money Market mutual funds can in effect cut out the middleman and purchase short-term securities directly in the Money Market.

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  Financial Institutions, Markets, and Money

  • David S. Kidwell, David W. Blackwell, David A. Whidbee, Richard W. Sias(Authors)
  • 2016(Publication Date)
  • Wiley

    (Publisher)

  One of the most important finan- cial markets in the United States, the fed funds market, is the market in which commercial banks and other finan- cial institutions lend each other excess funds overnight. Essentially, fed funds transactions are unsecured loans between banks for 1 to 7 days, in denominations of $1 million or more. The most important role of the fed funds market is that it facilitates the conduct of monetary policy by the Federal Reserve when it conducts open‐ market operations. 5 Identify other Money Market instruments that play an important role in liquidity markets. A repurchase agreement (repo) consists of the sale of a security, usu- ally a U.S. Treasury security, with the condition that after a specified period of time, the original seller will buy the security back at a predetermined price. In effect, a repo is a short‐term loan collateralized by a Treasury security. Commercial paper is a short‐term promissory note issued by a large corporation to finance short‐term capital needs. Commercial paper is viewed as an open‐ market alternative to bank borrowing, and firms use the commercial paper market to achieve interest savings over otherwise similar bank loans. A negotiable CD is a bank deposit that can be traded in the secondary market before its maturity. A banker’s acceptance is a time draft drawn on and accepted by a commercial bank. Most banker’s acceptances arise in international trade. 6 Describe the relationship among yields on the various Money Market instruments. Money Market instruments share many common characteristics; there- fore, they serve as close substitutes for one another. For this reason, the yields on Money Market instruments are highly correlated with one another. However, when con- cerns about credit quality or marketability of an instru- ment arise, investors quickly exit the market in a flight to quality, which happened during the financial crisis of 2007–2008.

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  Elements of Banking

  Made Simple

  • Julia Hoyle, Geoffrey Whitehead(Authors)
  • 2014(Publication Date)
  • Butterworth-Heinemann

    (Publisher)

  In particular if they are prepared to buy back paper from new investors in their own dealership programmes who need to recover liquidity, it lends confidence to the investors concerned. It is probably desirable that growth in this new activity should not be too rapid. (Estimates of the UK market show outstanding amounts at £1000 million in the UK by late 1986 and possibly £2500 million by mid 1987. By comparison the USA market in late 1986 was $322 000 million.) 10.13 Rapid revision: the London Money Market 1 A market is a place where dealers are in contact with one another to fix prices. The price of money is the rate of interest. The Money Market has no one location; buyers and sellers of money are in contact by telephone, 138 Elements of Banking Made Simple and binding contracts are made by word of mouth under the principle 'my word is my bond.' 2 There are really two markets: the primary or discount market, and the secondary or parallel market. The latter is really a group of markets: the local authority market, the finance house market, the interbank market, the intercompany market, the Eurocurrency market and the certificate of deposit markets. 3 The discount houses are bill brokers. They take money from those who have a surplus and lend it out to those that are in need of funds, against the security of bills of exchange. They operate in the short-term end of the market for capital; most of their transactions will be settled in less than one year, and usually very much sooner than that. 4 The discount houses assist the lending sector by taking from banks and other institutions surplus short-term funds, at fairly competitive rates of interest but at absolutely no risk and with a complete absence of fuss and formality. They assist the borrowing sector by lending these funds on again (at only a small margin above the rate they paid for them), against the security of bills of exchange.

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  eBook - ePub

  Bond Math

  The Theory Behind the Formulas

  • Donald J. Smith(Author)
  • 2014(Publication Date)
  • Bloomberg Press

    (Publisher)

  CHAPTER 1 Money Market Interest Rates

  An interest rate is a summary statistic about the cash flows on a debt security such as a loan or a bond. As a statistic, it is a number that we calculate. An objective of this chapter is to demonstrate that there are many ways to do this calculation. Like many statistics, an interest rate can be deceiving and misleading. Nevertheless, we need interest rates to make financial decisions about borrowing and lending money and about buying and selling securities. To avoid being deceived or misled, we need to understand how interest rates are calculated.

  It is useful to divide the world of debt securities into short-term Money Markets and long-term bond markets. The former is the home of Money Market instruments such as Treasury bills, commercial paper, bankers acceptances, bank certificates of deposit, and overnight and term sale-repurchase agreements (called “repos”). The latter is where we find coupon-bearing notes and bonds that are issued by the Treasury, corporations, federal agencies, and municipalities. The key reference interest rate in the U.S. Money Market is 3-month LIBOR (the London Interbank offer rate); the benchmark bond yield is on 10-year Treasuries.

  This chapter is on Money Market interest rates. Although the Money Market usually is defined as securities maturing in one year or less, much of the activity is in short-term instruments, from overnight out to six months. The typical motivation for both issuers and investors is cash management arising from the mismatch in the timing of revenues and expenses. Therefore, primary investor concerns are liquidity and safety. The instruments themselves are straightforward and entail just two cash flows, the purchase price and a known redemption amount at maturity.

  Let’s start with a practical Money Market investment problem. A fund manager has about $1 million to invest and needs to choose between two 6-month securities: (1) commercial paper (CP) quoted at 3.80% and (2) a bank certificate of deposit (CD) quoted at 3.90%. Assuming that the credit risks are the same and any differences in liquidity and taxation are immaterial, which investment offers the better rate of return, the CP at 3.80% or the CD at 3.90%? To the uninitiated, this must seem like a trick question—surely, 3.90% is higher than 3.80%. If we are correct in our assessment that the risks are the same, the CD appears to pick up an extra 10 basis points. The initiated know that first it is time for a bit of bond math.

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  eBook - ePub

  Management Economics: An Accelerated Approach

  An Accelerated Approach

  • William G. Forgang, Karl W. Einolf(Authors)
  • 2015(Publication Date)
  • Routledge

    (Publisher)

  3

  Money and the Financial Markets

  The previous chapter develops a model of the economy that explains short-term macroeconomic fluctuations through an income and expenditures approach. The prior chapter does not consider (1) the role of money in facilitating transactions in the goods or resource markets, (2) interest rates, monetary policy, and economic fluctuations, (3) the process by which funds flow from savers to investors, or (4) the mechanics of financing government budgetary deficits. This chapter fills the gaps.

  Learning Objectives

  The successful reader understands:

  • The structure and operations of the money and financial systems and the role of money and interest rates in the economy

  • Monetary policy and its effects on a firm’s operating environment

  • The money and financial system as environments within which business and personal investment occur

  An understanding of how money and credit interact with real economic activity is fundamental to management responsibilities. Business decisions dependent upon money and credit conditions include the management of a firm’s cash position, extending and receiving credit, establishing the appropriate debt-to-equity ratio, and planning for the firm’s long-term physical and financial capital needs. However, the importance of money and credit extends well beyond financial management decisions. The demand for many products is sensitive to the price and availability of credit, and decisions in production, procurement, hiring, and inventory control are made within the monetary and financial environments. Further, personal financial planning and investment decisions are made within these environments and include the timing of buying goods on credit, choosing a fixed-or variable-rate mortgage, selecting stocks, and choosing the maturity of financial investments.

  Two sets of issues are covered in this chapter. The flow of funds section of this chapter examines the institutions and markets that facilitate the transmission of foreign and domestic savings to companies for investment in plant and equipment, to government to finance public debt, and to households for purchases of homes, cars, and other durable products. The second section of this chapter examines the role of money in the economy, monetary policy, and interest rates.

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  Introduction to Finance

  Markets, Investments, and Financial Management

  • Ronald W. Melicher, Edgar A. Norton(Authors)
  • 2020(Publication Date)
  • Wiley

    (Publisher)

  Banker’s acceptances 2. Match the following Money Market securities with the level of secondary market activity. a. Treasury bills b. Commercial paper c. Federal funds d. Negotiable CDs 3. Go to the website of the Federal Reserve Bank of St. Louis at https://www.stlouisfed.org. Go to “Research and Data” and access the Federal Reserve Economic Database (FRED). Compare the present size of M1 and M2 money stock mea- sures with the data presented in the Measures of the U.S. Money Supply section of this chapter. Also find the current sizes of these M1 components: currency, travelers’ checks, demand deposits, and other checkable deposits. Express each compo- nent as a percentage of M1 and compare your per- centages with those presented in the chapter. 4. Find several recent issues of Bloomberg Business- week. Identify articles relating to developments in the U.S. monetary system. Also search for possible developments occurring in foreign monetary systems. 5. We are faced with ethics decisions involving money almost every day. For example, we all probably have seen money in the form of coin or currency lying on the ground or floor somewhere. We also may have at some time discovered a lost wallet. Should it matter if the amount of money is small or large? Should it matter if no one else is around or there is no evidence of who lost the money? Sometimes we hear the finders-keepers argument being used to rationalize an individual’s decision. How would you react to the following scenarios? a. You are walking down a street and find a dollar bill lying on the ground. No one else is close by. You consider picking up the dollar, acknowledging your good luck, and putting it in your pocket. What would you do? b. While you are shopping in a grocery store you see a wallet lying on the floor.

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  Fundamentals of Finance

  Investments, Corporate Finance, and Financial Institutions

  • Mustafa Akan, Arman Teksin Tevfik(Authors)
  • 2020(Publication Date)
  • De Gruyter

    (Publisher)

  Money supply has various definitions as M1, M2, and M3. Economists believe that the money supply is important in managing economic activity. The interest rate is the cost of money. For banks, interest is paid on savings de-posits; to consumers, interest is paid on loans and credit card balances. Interest can also be defined as the cost of postponing consumption. The nominal interest rate (NIR) is subject to risks of inflation, maturity, default, and liquidity. The yield curve plots yield against time to maturity for default-free securities. 6 For a complete discussion of bank regulation, see S. Dow, “ Why the banking system should be Regulated, ” Economic Journal , 106(436), 1996, pp. 698 – 707. 2.11 Summary 29 The Central Bank in general is a government-established organization responsi-ble for supervising and regulating the banking system and for creating and regulat-ing the money supply. The balance sheet of a Central Bank is an important economic indicator followed by markets. The banking industry is heavily regulated to inform investors properly, insure soundness of financial intermediaries, and improve monetary control. 30 2 Money and Interest Rates

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