Financial Institution and Markets

Assignment
On
“Money Market Instruments in Bangladesh”

Submitted To:
Ms. Fahmida Saima
Lecturer,
Department of HRM
Premier University, Chittagong.

Submitted By:
Name: Raquib Chowdhury
ID: 1603410109197
Semester: 8th
Department: Finance
Batch: 34th

Submission Date: 02,Feb, 2021

1.Definition of Money Market 3

2.Characteristics 3

3.Participants of the Money Market 5

4. Functions 6

5. Types of Money Market Instruments 7

6. Money Markets Instruments in Bangladesh 12

7.Role and Importance of Money Market in the 16

Economy of Bangladesh

8.Conclusions 17
1.Money Market
What is the Money Market?

Money Market is a market where short-term and open-ended

funds are traded between institutions and traders; where the

borrower can easily meet with fund requirements through

any financial assets which can be easily converted into money,

providing a high amount of liquidity and transferability to an

organization.

2.Characteristics
 The money market is a fixed income market which means it

deals in financial instruments that pay a fixed rate on the

investment. This is the opposite of the capital markets where

there is no fixed return on investments.

 Investing in the money markets is considered to be very

safe as the returns are fixed in nature. Since investing in this

 market is safe it also means that the returns are lower. This is

on account of the risk-return trade-off. Higher the risk, the

higher is the return and vice-versa. On the other hand, the

capital markets which do not have a fixed return on

investments are volatile in nature and riskier as compared to

the money markets. However, capital markets present the

opportunity to earn a high rate of return.

 Money market instruments are highly liquid in nature. This

is the reason why financial institutions and governments

approach the market for short-term needs. The purpose of

this market is to tend to short-term cash needs rather than

investing in the needs of various financial institutions.

 Money market instruments are short-term in nature. The

maturity of these instruments is generally less than a year.

 The maturity of these securities can be as less as one day

also.

 This money market is dominated by wholesale

transactions and retail investors like you and me will not

have direct access to this market. The main reason for this is

the ticket size or the value of transactions. Money market

transactions are high in value as opposed to capital market

transactions. Individual investors will not have enough funds

to cope up with this market.

3.Participants of the Money Market

1. The government of different countries

2. Central Banks

3. Private & Public Banks

4. Mutual Funds

5. Insurance Companies
 6. Non-banking financial institutions

7. Other organizations (these organizations are generally at

the borrowing side of the market and generally trade

in Commercial Papers, Certificate of Deposits, etc.)

4.Functions
1. Monetary Equilibrium: This market helps to bring a balance

between the demand and supply of short-term funds in the

market. This helps to bring a monetary equilibrium

2. Availability of funds: By making funds available to various

different participants in the market, the money market

promotes the economic growth of the country

3. Check on liquidity: The Government can keep a check on

the liquidity in the country by means of the money market.

(Please refer Treasury Bills section to understand how

 liquidity can be controlled by the Government and the

Central Bank)

4. Check on inflation: By controlling the liquidity in the

marketing, the Government can keep a check on the inflation

of the country as well. If the liquidity is controlled, it will tend

to control the ever-increasing prices in the market.

5. Promotes saving and investment in the country by giving a

platform to wholesale as well as retail investors for

investing/borrowing of funds.

5.Types of Money Market Instruments

Money market instruments have their own set of unique short-

term securities. Let us understand the most important of these

securities.
#1 – Call Money
Call money is one of the most liquid forms of money market

instruments. The validity is generally one working day. Banks can

have shortfalls that they can fund through borrowing call money

from the money market. Other banks who have access or surplus

cash can invest in other banks through call money.

This is also called Bank Money although it is not restricted to

banks. Other financial institutions can also invest/borrow through

call money. There is no organized market for call money and the

transactions between banks generally take place by means of

phone calls/emails/faxes. The rate at which call money can be

borrowed or invested in the market is called as the call rate.

The main reason why banks require call money is for maintaining

the statutory reserves such as cash reserves. Banks have to

maintain certain liquid cash on a day-to-day basis as a mandatory

requirement by most Central Banks. In case there is a shortage of

liquid cash that does not cover the mandatory requirement at the

end of the day, banks turn to the call money market for funds.

#2 – Treasury Bills
T-bills are issued by the Central Bank of the country on behalf of

its Government. Whenever Government is in need of funds, it

raises money in the market through Treasury Bills. This is

considered one of the safest investments as it is backed by the

government itself. The tenure of these bills is generally from 14

days to 364 days.

#3 – Commercial Papers (CPs)

As the name itself suggests, Commercial Papers are generally

used by various companies to fund their short-term working

capital needs such as payment of accounts receivables, buying of

inventory, etc. These are unsecured in nature which makes that

there is an underlying asset of the company attached to it. In case

of liquidation of the company, they will not have priority against

other secured financial money market instruments.

They are short-term in nature with the average maturity being two

odd months. Just like the Treasury Bills, these are also issued at a

discount and therefore, interest is not paid separately. The rate of

interest is determined by the forces of demand and supply of

liquid funds in the market.

#4 – Certificate of Deposits (CDs)
A Certificate of Deposit is a type of Time Deposit with the bank.

Only a bank can issue a CD. Like all other Time Deposits, even CDs

have a fixed maturity date and cannot be liquidated or withdrawn

prior to that date. This tends to be one of the

major disadvantages of Certificate of Deposit as it restricts its

flexibility.

#5 – Repos
Repo is a short repurchase agreement. Let us take an example of

Bank A is in need of funds and Bank B has surplus funds. Bank A

will enter into an agreement with Bank B for selling its securities

(mostly Treasury Bills) and get the required funds from Bank B.

However, this does not end here. There is a twist in the agreement

which states that Bank A will repurchase these securities from

Bank B at a fixed future date.

These are very short-term in nature. They can be for just overnight

purposes or up to a period of one month depending on the

agreement between the banks. These are popular amongst banks

because this eliminates the credit risk involved as the securities

are directly transferred to one another.

6.MONEY MARKET INSTRUMENTS

IN BANGLADESH
A variety of instruments are available in Bangladesh money market.
They were
a)Treasury Bills (T-bills)
b)Commercial Paper
c)Certificate of deposit
d)Bankers‟ Acceptances
 e)Call loans
a)Treasury Bills:
Government used to finance fiscal deposits .Bangladesh Bank
treasure bills are issued in one ,three, six ,twelve month
maturity .They pay a set amount at maturity. Tax revenues or any
other source of government funds may be used to repay the
holders of these financial instruments. They carry great weight in
the financial system used to their zero(or nearly zero) default risk,
ready marketability, and high liquidity.

T-bills do not carry a promised interest rate. Instead, they are sold
at a discount from their par or face value.
Bill yields are determined by the bank discount method, which
does not compound interest rates and uses a 360-day year
simplicity. The bank discount rate (DR) on T-bills.
=Par value – Purchase value/Par value * 360/days to maturity.

 
b)Commercial paper is rated
 prime
,
desirable
, or
satisfactory
, depending on the credit standing of the issuing company.
Types of Commercial Paper:
There are two major types of commercial paper.
 Direct paper
is issued mainly by large finance companies and bank holding
companies directly to the investor.
 Dealer paper 
, or
industrial paper 
, is issued by security dealers on behalf of their corporate customers
(mainly nonfinancial companies and smaller financial companies).
c)Certificate of deposit
Time deposit, commonly offered to consumers by banks, thrift
institutions, and credit unions. It is a short-term borrowing more like a
bank term deposit account to raise the fund. It is a promissory note
issued by a bank in form of a certificate entitling the bearer to receive
interest. The certificate bears the maturity date, the fixed rate of interest
and the value. It can be issued in any denomination. They are stamped
and transferred by endorsement. Its term generally ranges from three
months to five years and restricts the holders to withdraw funds on
demand .However, on payment of certain penalty the money can be
withdrawn on demand also. The returns on certificate of deposits are
higher than T-Bills because it assumes higher level of risk. While buying
Certificate of Deposit, return method should be seen. Returns can be
based on Annual Percentage Yield (APY) or Annual Percentage Rate
(APR). In APY, interest earned is based on compounded interest
calculation. However, in APR method, simple interest calculation is
done to generate the return. Accordingly, if the interest is paid annually,
equal return is generated by both APY and APR methods. However, if
interest is paid more than once in a year, it is beneficial to opt APY over
APR.A
certificate of deposit (CD)
is an interest-bearing receipt for funds left with a depository institution
for a set period of time.CD interest rates are computed as a yield to
maturity (YTM) on a 360-day basis .Term in days
Interest income = * Deposit Principal * Promised YTM360In secondary
market trading, the bank discount rate (DR) is used as a measure of CD
yields .Par
value Purchase value 360DR = *Par value Days to maturity .The
principal buyers of negotiable CDs include corporations, state and local
governments, foreign central banks and governments, wealthy
individuals, and a variety of financial institutions. Most buyers hold CDs
until they mature .However, prime-rate CDs are actively traded in the
secondary market.
d)Bankers’
 Acceptances
It is a short- term credit investment created by a non financial firm and
guaranteed by a bank to make payment. It is simply a bill of exchange
drawn by a person and
accepted by a bank. It is a buyer’s promise to pay to the seller a certain
specified
amount at certain date. The same is guaranteed by the banker of the
buyer in exchange for a claim on the goods as collateral. The person
drawing the bill must have a good
credit rating otherwise the Banker’s Acceptance will not be tradable.
The most common term for these instruments is 90 days. However, they
can vary from 30 days to180 days. For corporations, it acts as a
negotiable time draft for financing imports, exports and other
transactions in goods and is highly useful when the credit worthiness of
the foreign trade party is unknown. The seller need not hold it until
maturity and can sell off the same in secondary market at discount from
the face value to liquidate its receivables .A
bankers’ acceptance
is a
time draft
drawn on and endorsed by an importer’s bank.
Acceptances are used in international trade because most exporters are
uncertain of the credit standing of their importers. The issuing bank
unconditionally guarantees to pay the face value of the acceptance when
it matures, thus shielding exporters and investors in international
markets from default risk. Acceptance scarry maturities ranging from 30
to 270 days, with 90 days being the most common. They are traded
among financial institutions, industrial corporations ,and securities
dealers as a high-quality investment and source of ready cash.
e)Call loans
Call loans are short term loans provided for a period of one day or
maximum seven days without any collateral securities.

7.ROLE AND IMPORTANCE OF MONEY

MARKET IN THE ECONOMY OF
BANGLADESH
A money market plays a significant role in the developing country like
Bangladesh. The following are the important roles of a money market.
1.Money market facilitates the working of capital market, because the
institutions operating in the capital market often make use of funds
obtained in the money market.
2.Money market provides not only short-term funds to businessman but
also to the government. It supplies the government with short term funds
and helps to trade with temporary financial difficulties. The government
can obtain temporary short-term accommodation by means of treasury
bills in the money market without interfering with the normal
functioning of the banking and credit system. Money market gives
stability to the government security market and strengthens the credit of
the government.
3.Opportunities are provided by the money market though commercial
banks for investing their funds in proper channels.
4.Money market can properly managed money, a monetary management
is done by the monetary authority through the operations of money
market .In fact, the progress of money economy largely depends on
progress of money market.
5.Money market is a channel for mobilizing the resources and funds for
more productive investment.
6.Money market finances industry, trade and commerce. It is also
helpful for the central bank for purchasing its monetary policy and
program of monetary management.
7.Monetary market gives an opportunity to the surplus fund-holders to
invest their funds in more productive and profitable channel.
8.Money market uses near money assets, and therefore, there can be
economy in the use of money proper.
9.Money market helps in the transfer of funds from one part of the
country to the other. Hence, a money market is helpful mobilization of
funds or for financial mobility.
10.Saving and investment can be encouraged by a money market bu
ensuring
 

 
liquidity and safety to the financial assets.
11.Money market is a center for bringing about monetary equilibrium
between the demand for and supply of loan able funds .Thus it is clear
that the money market plays a vital role by helping the government ,the
business sector and the personal sector by providing the necessary funds
required in the short-term. It also helps the central bank in implementing
its monetary policy. In this way, the money market exerts its influence in
the monetary economy।
8.CONCLUSIONS
The money market of Bangladesh reached its present phase through a
series of changes and evolution. Initially, after liberation, money market
was the major constituent part of the financial market of the country.
Capital market, its other segment was a relatively smaller part. All
financial institutions of the country were nationalized after liberation.
The growth and evolution of money market in the country took place
during the period from 1971 to the early eighties under various sets of
interventionist rules and regulations of the government and as such it
could hardly reflect the actual market conditions. However, in this
period a vast financial superstructure with large network of commercial
bank branches was established in the country. Simultaneously,
specialized financial institutions under government sector also emerged
with the objective of mobilizing financial resources and channeling them
for short, medium and long-term credit and investments