MONEY MARKET &

RELATED FINANCIAL INSTRUMENTS

Members:
Java, Maica S.
Lapuz, Genesis
Landicho, Joshua M.
Legaspi, Mariel

GROUP 6
Legaspi, Nichole C.
Financial Instruments
According to Conceptual Framework for
Financial Reporting (2018), an asset is a
resource controlled by the entity as a result of
past events and from which future economic
benefits are expected to flow to the entity.
Assets can be classified in terms of
physicality, tangible and intangible assets.

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Tangible Assets Intangible assets
Tangible assets are assets Intangible assets are identifiable
that has physical properties assets that do not have physical
and can be easily seen, substance and usually represents
touched or perceived by the a legal claim to some future
five senses Value of economic benefit. Financial
tangible assets are based instruments (also called as
on its physical properties. financial assets or securities) are
Examples of tangible assets basically intangible as future
include buildings, economic benefit takes form of a
equipment, machinery, claim to cash that will be received
land and supplies in the future.

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There is a minimum of two parties involved in a financial
instrument
the issuer, and
the investor

Issuer
the party that issues the financial instrument and agrees to make
future cash payments to the investor.
Investor
the party that receives and owns the financial instrument and bears
the right to receive payments to be made by the issuer.
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Financial instruments have two main economic purposes:

Allows transfer of fund from entities with excess funds (investors) to entities
who needs funds (issuer) for business purposes (e.g. to pay for tangible assets).
Permit transfer of fund that allows sharing of inherent risk associated with the
cash flows coming from tangible asset investment between the issuer and
investor.
Money Market
One primary misconception is that money or currency is the security
being traded in a money market. This is not true. Same with other
markets, financial instruments are the primary subject of trading in a
money market. However, the financial instruments traded in the money
market are short-term and highly liquid, that it can be considered close
to being money
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 Transactions in the money market are not
Money market characteristics: confined to one singular location. Instead,
Usually sold in large the traders organize the purchasing and
selling of the securities among participants
denominations.
and closes the transactions electronically.
Low default risk As a result, money market securities
Mature in one year or less commonly have an active secondary market.
from original issue date.
A mature secondary market for money
market instruments allows the money
market to be the preferred place for firms to
temporarily store excess funds up until such
time they are needed again by the
organization. Investors who place funds in
the money market do not intend earn high
returns for their money.
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Participants in the money market include the following:

Bureau of Treasury.
Commercial banks.
Private Individual.
Commercial Non-Financial Institutions.
Investment companies.
Finance/commercial leasing companies.
Insurance companies.
Pension funds.
Money market mutual funds

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 BUREAU OF TREASURY
The bureau sells government
securities to raise funds. Short- term
issuances of government secunties
allow the government to obtain cash
until tax revenues are collected.

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COMMERCIAL BANKS
Issues treasury securities; sell
certificates of deposits and extends
loans; offers individual investor
accounts that can be used to invest in
money markets. Banks are the
primary issuer negotiable certificates
of deposits, banker's acceptances and
repurchase agreements.

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PRIVATE INDIVIDUAL
These private individuals
made their investment
through money market
mutual funds

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COMMERCIAL NON- FINANCIAL
INSTITUTIONS
These entities buy and sells
money market securities to
manage their cash i.e. to
temporarily store excess funds in
exchange of somewhat higher
return and obtain short-term
funds
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INVESTMENT COMPANIES
Trade securities in behalf of their
clients. Makes a market for money
market securities through
maintaining an inventory of financial
instruments that can be bought or
sold. Investment companies help
maintain liquidity of money market
since they make sure that sellers can
easily sell their securities when the
need arises.
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FINANCE/ COMMERCIAL
LEASING COMPANIES

These companies raise

money market instruments
i.e. commercial paper to
lend funds to individual
borrowers.

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INSURANCE COMPANIES

These are companies that

invest on money market to
maintain liquidity level in case
of unexpected demands most
especially for property and
casualty insurance companies

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 PENSION FUNDS
Maintain funds in money
market as preparation for
long-term investing in
stocks and bonds market.

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 MONEY MARKET
MUTUAL FUNDS
These funds permit small
investors (e.g. individuals) to
invest in the money market by
accumulating funds from
numerous small investors to
buy large-denomination
money market securities.
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TYPES OF MONEY MARKET
FINANCIAL INSTRUMENTS

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TREASURY BILLS
also known as T-bills are the short-term
money market instrument, issued by
the central bank on behalf of the
government to curb temporary liquidity
shortfalls.

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Government securities, particularly treasury bills,
are the safest investment instrument in the
market. Because they are backed by the full
taxing power of the government, they are
practically default risk-free.
Treasury bills can be sold via two methods: auctions or
competitive bidding and noncompetitive bidding. In auctions, the
Bureau of Treasury announces quantity and type of securities that
they will sell. Interested parties give bid offering and the Treasury
accepts the highest bids. The Treasury accepts the bids in
ascending order of yield until the accepted bids reach the offering
amount. Each accepted bid is awarded at the highest yield paid to
any accepted bid.
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In noncompetitive bidding, bidders only give the
amount of securities that they want to buy. The
Treasury accepts all noncompetitive bids. The
price for all the securities under noncompetitive
bids is set at the highest yield paid to any
accepted competitive bid.
When analyzing investments, investors often try to compare
performance of financial instruments with each other. To address this,
most investors look at percentages to be able to compare returns
better. At the point of view of investors, the discount rate indicates
how much retum, in %, they can get from a particular security. The
annualized discount rate for a non-interest-bearing security (like
Treasury bill) is described in Eq 3.1.
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EQ.4.1 ANNUALIZED
DISCOUNT RATE

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For example, a P1,000 Treasury bill with a 91-
day tenor can be purchased at 995. To
compute for the discount rate, we just need to
substitute above information in the formula

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Another variation of the annualized discount rate is what we call
the investment rate. The investment rate address two-weaknesses
of the discount rate. The first one is the use of face amount as the
denominator. Since the investor will pay less than the face amount
and the security is sold as a discount instrument, the computed
return is understated. The second weakness is the use of 360 days
to annualize the return which also understates the return. To be
more specific, investment rate uses 365 days (368 days during
leap year) to annualize the return. The investment rate portrays a
more accurate representation of how much investor will earn from
the security since it uses the actual number of days per year and
the true initial investment in the computation. Eq. 4.2 presents the
formula for the annualized investment rate.
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Using the previous example, the annualized investment rate is

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REPURCHASE AGREEMENT
A repurchase agreement (repo) is a financial contract
involving two securities transactions, a sale/purchase of a
debt security on a near date and a reversing
purchase/sale of the same or equivalent debt security on
a future date. Repurchase agreements enable short-term
funds to be transferred between financial or non-financial
institutions, usually ranging from one-day to 3 to 14 days.

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NEGOTIABLE CERTIFICATES
OF DEPOSIT
are securities issued by banks which
records a deposit made. The certificate
indicates the interest rate and the
maturity date of the deposit.

Negotiable certificate of deposit is also

classified as a bearer instrument.

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COMMERCIAL PAPERS
an unsecured, short-term debt instrument
issued by corporations. It's typically used
to finance short-term liabilities such as
payroll, accounts payable, and inventories.
Commercial paper is usually issued at a
discount from face value.

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IN THE PHILIPPINES, COMMERCIAL PAPERS
ARE NOT REQUIRED TO REGISTER WITH SEC
IF THEY MEET THE FOLLOWING
REQUIREMENTS:

Issued to not more than 10 non-institutional

lenders
Payable to a specific person
Neither negotiable her assignable and held
on to maturity
Amount not exceeding P50million

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BANKER'S ACCEPTANCES

refer to an order to pay a specified amount of

money to the
bearer on a specified date.

Banker's acceptances are often used to finance

purchase of
goods that have not yet been

transferred from the seller to the buyer.

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EVALUATING MONEY
MARKET SECURITIES

As a finance person, you should be able to

understand and evaluate which money

market securities to invest on depending on

the purpose of the business. Money market

securities may be evaluated based on the

interest
rates and liquidity.

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 VALUATION OF MONEY
MARKET SECURITIES

market securities
Valuation of money is important to

determine at what amount an investor is willing to pay in

exchange of a security. In some cases, investors need to give

an amount as a bid to be able to buy securities. Money

be valued using the present value
market securities can
approach.

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For example, face value of a one-year Treasury bill is at P1,000

with an annual Interest rate of 3%. To compute for the value of
the Treasury bill, use the formula above. The face value which
will be received upon maturity is P1,000. The interest rate will
be 3% and the number of periods is 1 (since it has a one-year
maturity term

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Assume that another P1,000 Treasury bill with maturity term of

90 days with an annual interest rate of 4% is being evaluated.
Assume 360 days. The value of said Treasury bill is computed as
follows:

The annual interest rate should be converted to match the 90-

day maturity term. Hence, annual interest term of 4% shall be

much is the interest rate for
multiplied with 90/360 to get how
the tenor of the security. In this case, the interest rate to be used
is 1% which represents the interest cost associated with the 90
days that the money is held by the government.

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