ALDERSGATE COLLEGE, INC.

Solano, Nueva Vizcaya

School of Business, Management and Accountancy
RAMIRO, LORREN GRAZE I.
BSA-3A (NEW)
FINANCIAL MARKETS: Money Market

1. Explain the phrase ‘money market’.

Based on my comprehension, money market is the segment of the financial market

which covers financial or investment products with maturities of one year or less. In money
market, inter-bank loans are arranged as money market mutual funds, commercial paper, term
certificates of deposit, Treasury bills, municipal notes, federal funds, negotiable certificates of
deposit, repurchase agreements (repos), and securities lending.

The general distinguishing feature of a money market is that it facilitates the lending
and borrowing of money on a short-term basis, in contrast to the capital market, which is
concerned with medium and long-term credit. Specifically, money market is a place where
banks, retail investors and money managers make short-term investments; hence, in such case,
banks, hedge funds, broker-dealers and non-financial corporations have access to low-cost
funds. Consequently, it is an umbrella term that covers a range of market types, which can vary
depending on the needs of the borrowers and lenders. Its functions definitely boil down to: (1)
to finance industry; (2) to finance trade; (3) to invest profitability; (4) to improve commercial
banks’ sufficiency; and (5) to help central banks.

2. Describe how the money market mechanism works to bring providers and users of
short term fund together.

Basically, money market is the meeting point of all providers and users of short-term
funds. It exists to provide the loans that financial institutions and governments needed to
perform their day-to-day operations. In addition, banks may have greater demands for loans
than savings. In this case, this may create the need for the bank to borrow money to meet the
demands for loans from clients.

Consequently, money markets are the mechanisms that bring these borrowers and
investors together without the intermediation of banks. They make it possible for borrowers to
meet short-run liquidity needs and deal with irregular cash flows without resorting to more
costly means of raising money.

3. Explain how banks, companies and investors use financial instruments I the money
market.

As the name suggests, money market instrument is an investment mechanism that

allows banks, businesses, and the government to meet large, but short-term capital needs at a
low cost. They serve the dual purpose of allowing borrowers meet their short-term
requirements and providing easy liquidity to lenders. Thus, the short-term debts and securities
sold on the money markets—which are known as money market instruments—have maturities
ranging from one day to one year and are extremely liquid. Treasury bills, federal agency notes,
certificates of deposit (CDs), commercial paper, bankers' acceptances, and repurchase
 ALDERSGATE COLLEGE, INC.
Solano, Nueva Vizcaya
School of Business, Management and Accountancy
agreements are examples of such instruments. The suppliers of funds for money market
instruments are institutions and individuals with a preference for the highest liquidity and the
lowest risk.

4. Enumerate and describe the types of money market instruments.

 Treasury Bills: Treasury bills (T-bills) are short-term notes issued by the government.
They come in three different lengths to maturity: 90, 180, and 360 days. The two shorter
types are auctioned on a weekly basis, while the annual types are auctioned monthly. T-
bills can be purchased directly through the auctions or indirectly through the secondary
market.

 Certificates of Deposit : Certificates of deposit (CDs) are certificates issued by a

federally chartered bank against deposited funds that earn a specified return for a definite
period of time. They are one of several types of interest-bearing "time deposits" offered by
banks. An individual or company lends the bank a certain amount of money for a fixed
period of time, and in exchange the bank agrees to repay the money with specified
interest at the end of the time period. The certificate constitutes the bank's agreement to
repay the loan. The maturity rates on CDs range from 30 days to six months or longer,
and the amount of the face value can vary greatly as well. There is usually a penalty for
early withdrawal of funds, but some types of CDs can be sold to another investor if the
original purchaser needs access to the money before the maturity date.

 Commercial Paper : Commercial paper refers to unsecured short-term promissory notes

issued by financial and nonfinancial corporations. Commercial paper has maturities of up
to 270 days (the maximum allowed without SEC registration requirement). Dollar volume
for commercial paper exceeds the amount of any money market instrument other than T-
bills. It is typically issued by large, credit-worthy corporations with unused lines of bank
credit and therefore carries low default risk.

 Government Bonds : A government bond is a debt security issued by a government to

support government spending and obligations. Government bonds can pay periodic
interest payments called coupon payments. Government bonds may also be known as
sovereign debt.

 Other debt securities approved by the Bangko Sentral ng Pilipinas : BSP Securities
are monetary instruments issued by the BSP for its monetary policy implementation and
liquidity management operations to steer short-term market interest rates towards the
policy rate and influence liquidity conditions in the financial system.

5. Define a money market fund and describe how it differs from other financial intermediaries.

A money market fund is a kind of mutual fund that invests in highly liquid, near-term
instruments. These instruments include cash, cash equivalent securities, and high-credit-rating,
debt-based securities with a short-term maturity. Money market funds are intended to offer
investors high liquidity with a very low level of risk. Money market funds are also called money
market mutual funds.
 ALDERSGATE COLLEGE, INC.
Solano, Nueva Vizcaya
School of Business, Management and Accountancy
While money market funds and financial intermediaries have a few features in common,
in broad terms, the two differ considerably in that the most typical types of financial
intermediaries funnel money from savers to spenders and money market funds are a type of
investment product. Both mutual funds and financial intermediaries accept money from
consumers, what each does with the funds after acceptance differs as in money market funds,
The holder of shares in a money market fund is an owner, not a creditor, and stands to lose if
the fund has financial difficulty. The money obtained through the sale of shares is then invested
in money market instruments, such as certificates of deposits, commercial paper, Treasury bills,
and bankers’ acceptances.

6.Discuss the factors that have contributed to the growth of money market funds.

Money market funds have experienced phenomenal growth because they offer
financial services with desirable characteristics. The desirability of these financial services may
be discussed within a general or a specific context. Within a general context, money market
funds have prospered because they offer an efficient means of financial intermediation. With a
more specific context, money market funds have attracted shareholders by offering high yields,
check-writing, wire transfer, float, liquidity, and other services.

Apparently, investors can use money market funds when they want a cash-like
investment. These investments may provide a small return while assuming limited risk.
Contrast that with a portfolio invested heavily in stocks. You can often reduce risk by switching
to a money market fund or keeping some portion of your assets in these investments.

Also, what contributed to the growth of money market funds is the fact that some
institutions allow you to write checks to withdraw your funds from a money market fund. As a
result, you get the advantages of dividend earnings as well as easy access to your cash.

Meanwhile, money market funds pay higher or lower rates over time. If you expect
rates to rise, keeping your money in an investment that adjusts to the markets might be
appealing. Due to the understandable trade-offs between risk and return, you might expect
money market funds to provide long-term returns that are relatively low.

7. Compare the management problems facing money market funds with those of other
financial intermediaries.

There is a high risk that when you opted for money market funds, you could lose your
principal since the fund managers could keep the share price constant at P10 per share, for
example. However, there is no guarantee that the share price would stay at P10 per share. If
the share price declines, you could lose some or all of your principal. While in financial
intermediaries, there is no guarantee they will spread the risk. Due to poor management, they
may risk depositors money on ill-judged investment schemes.

Furthermore, money market funds are not FDIC insured. If you keep money in a
regular bank deposit account, such as savings or checking, your bank provides insurance for
up to $250,000 from the Federal Deposit Insurance Corporation (FDIC). Although money
market funds are relatively safe, there is still a small amount of risk that could have disastrous
 ALDERSGATE COLLEGE, INC.
Solano, Nueva Vizcaya
School of Business, Management and Accountancy
consequences if you can’t afford any losses. There is no government entity covering potential
market losses.

In return for that risk, you should ideally earn a better return on your cash than you’d
earn in an FDIC-insured savings account. Relatively, financial intermediaries have poor
information.A financial intermediary may become complacent about spreading the risk and
invest in schemes which lose their depositors money

Also, money market fund rates are variable. You cannot know how much you’ll earn on
your investment as the future unfolds. The rate could go up or down. If it goes up, that may be
a good thing. However, if it goes down—and you earn less than you expected—you may end
up needing more cash to meet your goals. In the same way, because money market funds are
considered to be safer than other investments such as equities, long-term average returns on
money market funds may be lower than long-term average returns on riskier investments. Over
long periods, inflation can eat away at your returns, and you might be better served with higher-
yielding investments if you have the capacity and desire to take the risk.

In some cases, money market funds can become illiquid, which helps to reduce
problems during market turmoil. Funds can impose liquidity fees that require you to pay for
cashing out. They may also use redemption gates, or temporary suspensions, which require
you to wait before receiving proceeds from a money market fund.
Financial intermediaries on the other hand rely on liquidity and confidence. To be profitable,
they may only keep reserves of 1% of their total deposits. If people lose confidence in the
banking system, there may be a run on the bank as depositors ask for their money bank. But
the bank won’t have sufficient liquidity because they can’t recall all their long-term loans.

8. Identify the key trends affecting money market funds today.

Recently, it has been said that money market funds melted in pandemic panic; now
they’re under scrutiny.

As the pandemic took hold in March 2020, investors in money market mutual funds
started trying to pull their cash out, which helped push the financial system closer to a collapse.
The funds, which contain a wide variety of holdings like short-term corporate debt and
municipal debt, are deeply interlinked with the broader financial system. Consumers expect to
get their cash back rapidly in times of trouble. In March last year, the funds helped push the
financial system closer to a collapse as they dumped their holdings in an effort to return cash to
nervous investors.