The term "Money Market" refers to
What is
Financial Markets
Prepared by: Ms. Ida
When a business needs cash for a
couple of months until a big
payment arrives, or when a bank
wants to invest money that
What is
depositors may withdraw at any
MONEY moment, or when a government
MARKET?
tries to meet its payroll in the face
of big seasonal fluctuations in tax
receipts, the short-term liquidity
transactions occur in the money
market.
They need to ensure that a
proportion of it is liquid (easily
accessible) in market terms.
How does
Otherwise, if a large number of
MONEY
customers wish to withdraw their
MARKET money at the same time, there may
works? be a shortfall between the money
the bank has lent and the cash
deposits it needs to return to savers.
Money Markets
Prepared by: Ms. Ida
The money market exists to provide
the loans that financial institutions
and governments need to carry out
How does
their day-to-day operations. For
MONEY instance, banks may sometimes
MARKET need to borrow in the short term to
fulfill, their obligations to their
works?
customers, and they use the money
market to do so.
Banks may also find that they have
greater demand for mortgages or
loans than they do for savings
How does accounts at certain times. This
MONEY creates a mismatch between the
money they have available and the
MARKET money they have loaned out, so the
works?
bank will need to borrow in order to
be able to fulfill the demand for
loans.
MONEY
the network of corporations,
financial institutions, investors and
governments which deal with the
MARKET? flow of short-term capital.
For example, most deposit accounts
have a relatively short notice period
and allow customers access to their
How does
money either immediately, or within
MONEY a few days or weeks. Because of
MARKET this short notice period, banks
cannot make long-term
works?
commitments with all of the money
they hold on deposit.
The money markets are the
mechanisms that bring these
borrowers and investors together
How does without the comparatively costly
MONEY intermediation of banks. They make
it possible for borrowers to meet
MARKET short-run liquidity needs and deal
works?
with irregular cash flows without
resorting to more costly means of
raising money.
 There is an identifiable money
market for each currency, because
interest rates vary from one
How does
currency to another. These markets
MONEY
are not independent, and both
MARKET investors and borrowers will shift
works? from one currency to another
depending upon relative interest
rates.
The money market is dominated by
professional investors, although
retail investors with P50,000 can
Who uses
also invest. Smaller deposits can be
the Money invested via money market funds.
Market? Banks and companies use the
financial instruments traded on the
money market for different reasons,
and they carry different risks.
Banks
If demand for long-term loans and
mortgages is not covered by
Who uses “deposits from savings accounts,
banks may the issue certificates of
the Money deposit, with a set interest rate and
Market? fixed-term maturity of up to five
years.
However, regulations limit the
ability of some money market
investors to hold foreign-currency
How does instruments, and most
MONEY money-market investors are
concerned to minimize any risk of
MARKET loss as a result of exchange-rate
works? fluctuations. For these reasons, most
money-market transactions occur in
the investor's home currency.
Companies
When companies need to raise
money to cover their payroll or
Who uses running costs, they may issue
commercial paper- short term,
the Money unsecured loans for Php100,000 or
Market? more that mature within 1-9
months.
Investors
Individuals seeking to invest large
sums of money at relatively low risk
Who uses may invest in financial instruments.
Sums of less that Php50,000 can be
the Money invested in money market funds.
Market?
The primary function of the money
market is for banks and other
Who uses investors with liquid assets to gain a
the Money return on their cash or loans. They
provide borrowers such as other
Market? banks, brokerages, and hedge funds
with quick access to short-term
funding.
Companies
A company that has a cash surplus
may “park” money for a time in
Who uses short-term, debt-based financial
instruments such as treasury bills
the Money and commercial paper, certificates
Market? of deposit, or bank deposits.
The money markets do not exist in a
particular place or operate
according to a single set of rules.
Who uses Nor do they offer a single set of
the Money posted prices, with one current
Market? interest rate for money. Rather, they
are webs of borrowers and lenders,
all linked by telephones and
computers.

Who uses At the centre of each web is the
central bank whose policies
the Money determine the short-term interest
Market? rates for that currency.
WHAT MONEY MARKETS DO
There is no precise definition of the money markets,
but the phrase is usually applied to the buying and
selling of debt instruments maturing in one year or
less. The money markets are thus related to the bond
markets, in which corporations and governments
borrow and lend based on longer-term contracts.
WHAT MONEY MARKETS DO
A well-functioning money market facilitates the
development of a market for longer-term securities.
Money markets attach a price to liquidity, the
availability of money for immediate investment. The
interest rates for extremely short-term use of money
serve as benchmarks for longer-term financial
instruments.
Arrayed around the central bankers
are the treasurers of tens of
Who uses thousands of businesses and
the Money government agencies, whose job is
to invest any unneeded cash as
Market? safely and profitably as possible
and, when necessary, to borrow at
the lowest possible cost.
WHAT MONEY MARKETS DO
Similar to bond investors, money-market investors are
extending credit, without taking any ownership in the
borrowing entity or any control over management.
WHAT MONEY MARKETS DO
If the money markets are active, or "liquid",
borrowers and investors always have the option of
engaging in a series of short-term transactions rather
than in longer-term transactions, and this usually
holds down longer term rates. In the absence of active
money markets to set short-term rates, issuers and
investors may have less confidence that longer-term
rates are reasonable and greater concern about being
able to sell their securities should they so choose.
The connections among them are
established by banks and investment
Who uses companies that trade securities as
the Money their main business. The constant
soundings among these diverse
Market? players for the best available rate at
a particular moment are the forces
that keep the market competitive.
WHAT MONEY MARKETS DO
Yet the money markets and the bond markets serve
different purposes. Bond issuers typically raise money
to finance investments that will generate profits - or,
in the case of government issuers, public benefits for
many years into the future. Issuers of money-market
instruments are usually more concerned with cash
management or with financing their portfolios of
financial assets.
WHAT MONEY MARKETS DO
For this reason, countries, with less active money
markets, on balance, also tend to have less active
bond markets.
TYPES OF MONEY-MARKET INSTRUMENTS
Money market securities are short-term instruments
with an original maturity of less than one year.
There are numerous types of money-market
instruments. The best known are commercial papers,
bankers' acceptances, treasury bills, repurchase
agreements, government agency notes, local
government notes, interbank loans, time deposits,
bankers' acceptance, and papers issued by
international organizations.
TYPES OF MONEY-MARKET INSTRUMENTS
COMMERCIAL PAPER
Commercial paper is a short-term debt obligation of a
private-sector firm or a government-sponsored
corporation. Only companies with good credit ratings
issue commercial paper because investors are
reluctant to bring the debt of financially compromised
companies.
TYPES OF MONEY-MARKET INSTRUMENTS
COMMERCIAL PAPER
Many large companies have continual commercial
paper programmes, bringing new short-term debt on
to market every few weeks or months. It is common
for issuers to roll over their paper, using the proceeds
of a new issue to repay the principal of a previous
issue.
TYPES OF MONEY-MARKET INSTRUMENTS
The amount issued the course of a year is much
greater than the amount outstanding at any one time,
as many money-market securities are outstanding for
only short periods of time.
Money market securities are used to "warehouse"
funds until needed. The returns earned on these
investments are low due to their low risk and high
liquidity.
TYPES OF MONEY-MARKET INSTRUMENTS
COMMERCIAL PAPER
They tend to be issued by highly rated banks and are
traded in a similar way to securities. In most cases, the
lifetime, or maturity, greater than 90 days but less
than nine months. This maturity is dictated by
regulations. In the Philippines, most new securities
must be registered with the regulator, the Securities
and Exchange Commission.
TYPES OF MONEY-MARKET INSTRUMENTS
COMMERCIAL PAPER
In effect, this allows issuers to borrow money for long
periods of time at short-term interest rates, which may
be significantly lower than long-term rates. The
short-term nature of the obligation lowers the risk
perceived by investors.
TYPES OF MONEY-MARKET INSTRUMENTS
Money market securities are usually more widely
traded than longer-term securities and so tend to be
more liquid.
TYPES OF MONEY-MARKET INSTRUMENTS
COMMERCIAL PAPER
Commercial paper is usually unsecured although a
particular commercial paper issue may be secured by
a specific asset of the issuer or may be guaranteed by
a has paper bank.
TYPES OF MONEY-MARKET INSTRUMENTS
COMMERCIAL PAPER
These continual borrowing programmes are not
riskless. If market conditions or a change in the firm's
financial circumstances preclude a new commercial
paper issue, the borrower faces default if its lacks the
cash to redeem the paper that is maturing.
TYPES OF MONEY-MARKET INSTRUMENTS
BANKER’S ACCEPTANCES
Before the 1980s, bankers' acceptances were the main
way for firms to raise short-term funds in the money
markets. An acceptance is a promissory note issued by
a non-financial firm to a bank in return for a loan. The
bank resells the note in the money market at a
discount and guarantees payment. Acceptances
usually have a maturity of less than six months.
TYPES OF MONEY-MARKET INSTRUMENTS
TREASURY BILLS
Treasury bills, often referred to as T-bills, are
securities with a maturity of one year or less, issued
by national governments. Treasury bills issued by a
government in its own currency are generally
considered the safest of all possible investments in
that currency. Such securities account for a larger
share of money-market trading than any other type of
instrument.
TYPES OF MONEY-MARKET INSTRUMENTS
LOCAL GOVERNMENT NOTES
In some cases, the approval of national authorities is
required; in others, local agencies are allowed to
borrow only from banks and cannot enter the money
markets.
TYPES OF MONEY-MARKET INSTRUMENTS
BANKER’S ACCEPTANCES
Bankers' acceptances differ from commercial paper in
significant ways. They are usually tied to the sale or
storage of specific of specific goods, such as an export
order for which the proceeds will be received in two
or three months. They are not issued at all by
financial-industry firms.
TYPES OF MONEY-MARKET INSTRUMENTS
GOVERNMENT AGENCY NOTES
National government agencies and
government-sponsored corporations are heavy
borrowers in the money markets in many countries.
These include entities such as development banks,
housing finance corporations, education lending
agencies and agricultural finance agencies.
TYPES OF MONEY-MARKET INSTRUMENTS
INTERBANK LOANS
Loans extended from one bank to another with which
it has no affiliation are called interbank loans. Many
of these loans are across international boundaries and
are used by the borrowing institution to re-lend to its
own customers.
TYPES OF MONEY-MARKET INSTRUMENTS
BANKER’S ACCEPTANCES
They do not bear interest; instead, an investor
purchases the acceptance at a discount from face
value and then redeems it for face value at maturity.
Investors rely on the strength of the guarantor bank,
rather than of the issuing company, for their security.
TYPES OF MONEY-MARKET INSTRUMENTS
LOCAL GOVERNMENT NOTES
Local government notes are issued by, provincial or
local governments, and by agencies of these
governments such as schools authorities and transport
commissions. The ability of governments at this level
to issue money-market securities varies greatly from
country to country.
TYPES OF MONEY-MARKET INSTRUMENTS
TIME DEPOSITS
Time deposits, another name for certificates of deposit
or CDs, are interest-bearing bank deposits that cannot
be withdrawn without penalty before a specified date.
Although time deposits may last for as long as five
years, those with terms of less than one year compete
with other money-market instruments.
TYPES OF MONEY-MARKET INSTRUMENTS
TIME DEPOSITS
Time deposits with terms as brief as 30 days are
common. Large time deposits are often used by
corporations, governments and money-market funds
to invest cash for brief periods. Interest rates depend
on length of maturity, with longer terms getting better
rate. The main risks are being locked into low interest
rates if rates rise and early withdrawal penalties.
TYPES OF MONEY-MARKET INSTRUMENTS
REPOS
The amount the investor lends is less than the market
value of the securities, a difference called the spread
or haircut, to ensure that it still has sufficient
collateral if the value of the securities should fall
before the dealer repurchases them.
TYPES OF MONEY-MARKET INSTRUMENTS
REPOS
Repurchase agreements known as repos, play a
critical role in the money markets. They serve to keep
the markets highly liquid, which in turn ensures that
there will be a constant supply of buyers for new
money-market instruments.
END :)
MORE MARKETS TO COME…
TYPES OF MONEY-MARKET INSTRUMENTS
REPOS
A repo is a combination of two transactions. In the
first, a securities dealer, such as a bank, sells
securities it owns to an investor, agreeing to
repurchase the securities at a specified higher price at
a future date. In the second transaction, days or
months later, the repo is unwound as the dealer buys
back the securities from the investor.