Money Market Instruments

10 Key excerpts on "Money Market Instruments"

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  eBook - PDF

  Capital Market Instruments

  Analysis and Valuation

  • M. Choudhry, D. Joannas, G. Landuyt, R. Pereira, R. Pienaar(Authors)
  • 2009(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  Reference Choudhry, M. Fixed Income Markets, Wiley Asia, 2005. 24 Debt Market Instruments Money market securities are debt securities with maturities of up to 12 months. Market issuers include sovereign governments, which issue Treasury bills, corpo- rates issuing commercial paper, and banks issuing bills and certificates of deposit. Investors are attracted to the market because the instruments are highly liquid and carry relatively low credit risk. Investors in the money market include banks, local authorities, corporations, money market investment funds and individuals. How- ever the money market is essentially a wholesale market and the denominations of individual instruments are relatively large. In this chapter we review the cash instruments traded in the money market as well as the two main money market derivatives, interest-rate futures and forward- rate agreements. Overview The cash instruments traded in the money market include the following: • Treasury bill • time deposit • certificate of deposit • commercial paper • bankers acceptance • bill of exchange. We can also add the market in repurchase agreements or repo, which are essentially secured cash loans, to this list. A Treasury bill is used by sovereign governments to raise short-term funds, while certificates of deposit (CDs) are used by banks to raise finance. The other instru- ments are used by corporates and occasionally banks. Each instrument represents an obligation on the borrower to repay the amount borrowed on the maturity date, together with interest if this applies. The instruments above fall into one of two main classes of money market securities: those quoted on a yield basis and those quoted on a discount basis. These two terms are discussed below. 25 3 Money Market Instruments and Foreign Exchange The calculation of interest in the money markets often differs from the calcula- tion of accrued interest in the corresponding bond market.

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  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)

  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. 1 In addition to the cash instruments that go to make up the market, the money markets also consist of a wide range of over-the-counter off-balance sheet derivative instruments. These instruments are used mainly to establish future borrowing and lending rates, and to hedge or change existing interest rate exposure. This activity is carried out by both banks, central banks and corporates. The main derivatives are short-term interest rate futures, forward rate agreements, and short-dated interest rate swaps. In this chapter we review the cash instruments traded in the money market. In further chapters we review banking asset and liability management and capital arrangements, and the market in repurchase agreements. Finally we consider the market in money market derivative instruments including interest-rate futures and forward-rate agreements. 31.1 Introduction The cash instruments traded in the money market include the following: ■ Treasury bill; ■ Time deposit; ■ Certificate of Deposit; ■ Commercial Paper; ■ Bankers Acceptance; ■ Bill of exchange. A Treasury bill is used by sovereign governments to raise short-term funds, while certificates of deposit (CDs) are used by banks to raise finance. The other instruments are used by corporates and occasionally banks. Each instrument represents an obligation on the borrower to repay the amount borrowed on the maturity date together with interest if this applies. The instruments above fall into one of two main classes of money market securities: those quoted on a yield basis and those quoted on a discount basis. These two terms are discussed below. A re-purchase agreement or “repo” is also a money market instrument and is considered in a separate chapter.

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  Capital Market Instruments

  Analysis and valuation

  • M. Choudhry, D. Joannas, R. Pereira, R. Pienaar(Authors)
  • 2004(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  This vital issue is introduced in Chapter 8, and is followed in Chapter 9 by an advanced-level treatment of the B-spline method of extracting the discount function. This is a most efficient technique. The final chapter in Part II considers the analysis of inflation-indexed bonds, an important asset class in a number of capital markets around the world. REFERENCE Choudhry, M. Fixed Income Markets, Wiley Asia, 2004. DEBT MARKET INSTRUMENTS 24 Money market securities are debt securities with maturities of up to 12 months. Market issuers include sovereign governments, which issue Treasury bills, corpo- rates issuing commercial paper, and banks issuing bills and certificates of deposit. Investors are attracted to the market because the instruments are highly liquid and carry relatively low credit risk. Investors in the money market include banks, local authorities, corporations, money market investment funds and individuals. However the money market is essentially a wholesale market and the denomina- tions of individual instruments are relatively large. In this chapter we review the cash instruments traded in the money market as well as the two main money market derivatives, interest-rate futures and forward- rate agreements. OVERVIEW The cash instruments traded in the money market include the following: • Treasury bill • time deposit • certificate of deposit • commercial paper • bankers acceptance • bill of exchange. We can also add the market in repurchase agreements or repo, which are essen- tially secured cash loans, to this list. A Treasury bill is used by sovereign governments to raise short-term funds, while certificates of deposit (CDs) are used by banks to raise finance. The other instruments are used by corporates and occasionally banks. Each instrument repre- sents an obligation on the borrower to repay the amount borrowed on the maturity date, together with interest if this applies.

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  Money, Banking, Financial Markets & Institutions

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

    (Publisher)

  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. • “Short-term debt instruments” refers to the fact that this is a market for promises to repay with interest and that the repayment will take place very quickly. This is not the market for equities or currencies; instead, this is a market of IOUs. These IOUs mostly mature within a year and often in fewer than thirty days. Thus Money Market Instruments are very short-term or short-lived financial assets. • In part because of their short term to maturity, Money Market Instruments have a high level of liquidity. The money market has both a primary market, where a given IOU is issued for the first time, and a much larger secondary market. In these markets, over a tril-lion dollars is traded every working day. As described in the next two sections, the market is made up of thousands of traders, each looking to buy and sell these short-term IOUs. Since there is so much volume in these markets, buying and selling these securities is relatively easy; that is, the market has a great deal of liquidity. • In addition, because Money Market Instruments are issued by only the biggest and safest borrowers, these IOUs have a “low level of default risk.” Buyers of these securities can be relatively sure that the issuers will make good on their promises to repay. This is important because many Money Market Instruments are unsecured IOUs; there is no collateral to back up this borrowing. But, because most of the borrowers in the money market do not have problems paying their debts, this lack of collateral is usually not a problem.

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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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  Understanding Investments

  Theories and Strategies

  • Nikiforos T. Laopodis(Author)
  • 2020(Publication Date)
  • Routledge

    (Publisher)

  What lessons can be learned from this crisis? In 2009, Iceland’s government began a criminal investigation into the reasons for the collapse of the three banks. The investigation focused on questionable financial practices applied by Icelandic banks, the dealings by major financial (business) leaders, and the links between the business sector and politicians. Following this investigation, Iceland’s government collapsed, as many officials (including the prime minister) resigned, which threw the country into further turmoil. The report on the progress of the country’s economic stabilization programs, made public in 2009 under the auspices of the IMF, included a positive outlook for the Iceland’s currency and economic policies.

  Source: The Icelandic Government Information Centre

  Key concepts

  The money market is a market where instruments with a life of less than a year are traded

  When an investor goes through a broker to execute an order, he is engaging in direct investing

  Nonmarketable securities are investment types that investors usually are familiar with because they deal with them all the time

  The Treasury bill is a short-term obligation of the federal government and is sold at a discount from face value

  The Treasury bill is commonly referred to as the risk-free rate

  Commercial paper is an unsecured debt instrument (a note) issued by strong, large, reputable companies to finance day-to-day operations

  A banker’s acceptance is a time draft whereby a customer’s bank is ordered to pay a sum of money at a specific future time

  A repurchase agreement is a contractual agreement between a borrower and a lender to sell and repurchase US Treasury securities

  A reverse repo is the mirror image of a repo, where securities are acquired by the dealer with a simultaneous agreement to resell them at a stated price on a given future date

  When a bank has more funds than required it can lend the excess to other banks on an overnight basis and at an arranged interest rate called the fed funds rate

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  Financial Institutions

  Markets and Money

  • David S. Kidwell, David W. Blackwell, David A. Whidbee, Richard W. Sias(Authors)
  • 2020(Publication Date)
  • Wiley

    (Publisher)

  2 Identify the key characteristics of Money Market Instruments and why each characteristic is impor- tant. Investors in Money Market Instruments want to take as little risk as possible ,given the temporary nature of their cash surplus. Issuers of money market instru- ments are trying to deal with temporary cash deficits. Thus, Money Market Instruments (1) have low default risk, (2) have low price risk because of their short terms‐ to‐maturity, (3) are highly marketable because they can be bought or sold quickly, and (4) are sold in large denominations, typically $1 million or more, so that the cost of executing transactions is low. 3 Discuss the market for Treasury bills and short‐ term agency securities. The most important security issued by the U.S. Treasury Department is the Treasury bill, or T‐bill. T‐bills have maturities of 1 year or less, are highly marketable, and are almost free of default risk because they are backed by the U.S. government. T‐bills have the most active secondary market of any security and can be bought and sold at very low transaction costs. T‐bills are considered to be the ideal money market instru- ment. Government‐sponsored enterprises and federal government agencies also issue short‐term debt in the money markets. They trade in active secondary markets and offer many of the advantages of T‐bills, but at slightly higher yields, because of the small perceived amount of default risk and lower marketability. 4 Explain the fed funds market and explain why it is one of the most important financial markets in the United States. 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.

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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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  Fundamentals of Financial Instruments

  An Introduction to Stocks, Bonds, Foreign Exchange, and Derivatives

  • Sunil K. Parameswaran(Author)
  • 2022(Publication Date)
  • Wiley

    (Publisher)

  In contrast, CDs can be liqui-dated at any time at the prevailing market rate. Thus, these instruments are attractive for investors who seek the high interest rates offered by time deposits but who are reluctant to commit their money for the full term of the deposit. COMMERCIAL PAPER Every year several large corporations borrow billions of dollars in the money market through the sale of unsecured promissory notes known as commercial paper. Such instruments are issued by large corporations and bought principally by other large corporations. In terms of volumes issued and traded, such paper is the single largest instrument issued in the US money market. By definition, such paper consists of short-term unsecured promissory notes issued by well-known companies that are financially strong and carry high credit ratings. The word unsecured connotes that the issuer is not pledging any collateral to back these securities, and that buyers can only depend of the liquidity and earning power of the issuer from the standpoint of repayment. The funds raised in this manner are normally used for current account transactions, such as purchase of raw materials, payment of accrued taxes, meeting wage and salary obligations, and other short-term expenditure, rather than for capital account transactions or, in other words, long-term investments. These days, however, a substantial number of paper Letters of Credit and Bank Guarantees 225 issues are used to provide bridge financing for long-term projects. This works as follows. If the prevailing interest rates in the market are high, a company may issue commercial paper to fund a long-term investment. Subsequently, if rates decline as anticipated, long-term debt can be issued to retire the existing paper. In these instances, issuing companies usually plan to convert their short-term paper into more permanent financing when the capital market looks more favorable.

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