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Study Guide for Malaysian Financial Market and Institution

CHAPTER 4
Money market

In finance, the money market is the global financial market for short-term borrowing
and lending. It provides short-term liquid funding for the global financial system. The
money market is where short-term obligations such as Treasury bills, commercial paper
and bankers' acceptances are bought and sold.

The money market consists of financial institutions and dealers in money or credit who
wish to either borrow or lend. Participants borrow and lend for short periods of time,
typically up to thirteen months. Money market trades in short term financial instruments
commonly called "paper". This contrasts with the capital market for longer-term funding,
which is supplied by bonds and equity.

Whenever a bear market comes along, investors realize (yet again!) that the stock market
is a risky place for their savings. It's a fact we tend to forget while enjoying the returns of
a bull market! Unfortunately, this is part of the risk-return tradeoff. To get higher returns,
you have to take on a higher level of risk. For many investors, a volatile market is too
much to stomach - the money market offers an alternative to these higher-risk
investments.

The money market is better known as a place for large institutions and government to
manage their short-term cash needs. However, individual investors have access to the
market through a variety of different securities. In this tutorial, we'll cover various types
of money market securities and how they can work in your portfolio.

What is Money market?

The money market is a subsection of the fixed income market. We generally think of the
term fixed income as being synonymous to bonds. In reality, a bond is just one type of
fixed income security. The difference between the money market and the bond market is
that the money market specializes in very short-term debt securities (debt that matures in
less than one year). Money market investments are also called cash investments because
of their short maturities.

Money market securities are essentially IOUs issued by governments, financial


institutions and large corporations. These instruments are very liquid and considered
extraordinarily safe. Because they are extremely conservative, money market securities
offer significantly lower returns than most other securities.

One of the main differences between the money market and the stock market is that most
money market securities trade in very high denominations. This limits access for the
individual investor. Furthermore, the money market is a dealer market, which means that
firms buy and sell securities in their own accounts, at their own risk. Compare this to the
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Study Guide for Malaysian Financial Market and Institution

stock market where a broker receives commission to acts as an agent, while the investor
takes the risk of holding the stock. Another characteristic of a dealer market is the lack of
a central trading floor or exchange. Deals are transacted over the phone or through
electronic systems.

The easiest way for us to gain access to the money market is with a money market mutual
funds, or sometimes through a money market bank account. These accounts and funds
pool together the assets of thousands of investors in order to buy the money market
securities on their behalf. However, some money market instruments, like Treasury bills,
may be purchased directly. Failing that, they can be acquired through other large
financial institutions with direct access to these markets.

There are several different instruments in the money market, offering different returns
and different risks. In the following sections, we'll take a look at the major money market
instruments.

Participants

The core of the money market consists of banks borrowing and lending to each other,
using commercial paper, repurchase agreements and similar instruments. These
instruments are often benchmarked to the London Interbank Offered Rate (LIBOR).

Finance companies typically fund themselves by issuing large amounts of asset-backed


commercial paper (CP) which is secured by the pledge of eligible assets into an CP
conduit. Examples of eligible assets include auto loans, credit card receivables,
residential/commercial mortgage loans, mortgage backed securities and similar financial
assets.

Certain large corporations with strong credit ratings, issue commercial paper on their
own credit. Other large corporations arrange for banks to issue commercial paper on their
behalf via commercial paper lines.

In the Malaysia, federal, state and local governments all issue paper to meet funding
needs. States and local governments issue municipal paper, while the Malaysian Treasury
issues Treasury bills to fund the public debt.

Common money market instruments


• Bankers' acceptance - A draft issued by a bank that will be accepted for payment,
effectively the same as a cashier's check.

• Certificate of deposit - A time deposit at a bank with a specific maturity date;


large-denomination certificates of deposits can be sold before maturity.

• Repurchase agreements - Short-term loans—normally for less than two weeks


and frequently for one day—arranged by selling securities to an investor with an
agreement to repurchase them at a fixed price on a fixed date.

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Study Guide for Malaysian Financial Market and Institution

• Commercial paper - An unsecured promissory notes with a fixed maturity of one


to 270 days; usually sold at a discount from face value.

• Federal Agency Short-Term Securities - (in the US). Short-term securities issued
by government sponsored enterprises such as the Farm Credit System, the Federal
Home Loan Banks and the Federal National Mortgage Association.

• Federal funds - (in the US). Interest-bearing deposits held by banks and other
depository institutions at the Federal Reserve; these are immediately available
funds that institutions borrow or lend, usually on an overnight basis. They are lent
for the federal funds rate.

• Municipal notes - (in the US). Short-term notes issued by municipalities in


anticipation of tax receipts or other revenues.

• Treasury bills - Short-term debt obligations of a national government that are


issued to mature in 3 to 12 months. For the U.S., see Treasury bills.

• Money market mutual funds - Pooled short maturity, high quality investments
which buy money market securities on behalf of retail or institutional investors.

• Foreign Exchange Swaps - Exchanging a set of currencies in spot date and the
reversal of the exchange of currencies at a predetermined time in the future.

Money Market offered by May Bank Malaysia

Maybank's wide network and balance sheet strength offers you the advantage of a variety
of Money Market products at competitive prices. You will benefit from the wide
experience of our team and commitment to deliver the best value on your investments.

 Banker's Acceptance (BA)


 Short Term Revolving Credit (STRC)
 Repurchase Agreement (REPO)
 Negotiable Instrument Of Deposit
 Fixed Deposit
 Foreign Currency Account
 Investment Products

Banker's Acceptance

A Banker's Acceptance (BA) is a bill of exchange, drawn on and accepted by finance


from 21 to 200 days.

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Study Guide for Malaysian Financial Market and Institution

Banker's Acceptance is a discounting instrument and interest is paid up front by


deducting from the principal amount. Maybank provides both conventional and Islamic
Banker's Acceptance.

Short Term Revolving Credit

Short Term Revolving Credit (STRC) is a financial tool for short-term non trade-related
activities. The tenor ranges from 1 to 12 months.

Repurchase Agreement

In a Repo or Repurchase Agreement, the bank sells its money market instruments
approved by Bank Negara Malaysia to an investor, with an understanding to buy back the
said instruments at an agreed price (interest rate) on a specific future date.

A Repo offers flexibility because the tenor ranges from 1 day to 1 year and investors can
retire the transaction earlier (Reverse Repo), subject to rate adjustment, should they need
the funds prior to maturity. Maybank offers both conventional and Islamic Repo.

Negotiable Instrument Of Deposit

A Negotiable Instrument of Deposit (NID) is a financial instrument issued by banks for


the deposit of a specific sum of money for a fixed period of time at a prefixed interest
rate. An NID can be bought or sold before the date of maturity. Maybank's financial
strength and standing assures your investment and returns.

Fixed Deposit

A fixed deposit bears interest at an agreed rate based on a specific maturity date. The
tenor may vary from 1 to 60 months. The minimum placement is RM5,000 for 1 to 2
months and RM1,000 for 3 months or longer. A fixed deposit earns higher interest than a
savings account and offers protection from interest rate fluctuations.

Foreign Currency Account

Maybank accepts currency deposits for major foreign currencies like USD, EURO and
AUD, besides MYR deposits. Our worldwide branch networking and extensive
correspondent banking relationships enable us to quote competitive pricing for tenors
ranging from 1 day to 1 year.

Investment Products

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Study Guide for Malaysian Financial Market and Institution

Maybank's strong presence in the market enables us to offer investors interest-bearing


investment products on outright sale basis, such as Banker's Acceptance (Maybank and
other banks), Private Debt Securities (PDS), Malaysia Government Securities(MGS),
Cagamas, Treasury and Bank Negara Bills.

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