MONEY

MARKETS
 T S
T EN
N
CO Money Market Participants
Yields on Money Market Securities
01 a) Bond Equivalent Yields 03 a)
b)
The Philippine Treasury
The Philippine Government Reserve
b) Effective Annual Return c) Commercial Banks
c) Discount Yields d) Money Market Mutual Funds
d) Single-Payment Yields e) Broker and Dealers
f) Corporations
g) Other Financial Institutions

Money Market Securities

02 a)
b)
Treasury Bills
Federal Funds 04 International Aspects of Money
Markets
c) Repurchase Agreements
d) Commercial Paper
e) Negotiable Certificates of Deposit
f) Banker’s Acceptance
g) Comparison of Money Market Securities
 Do you have any idea
what is money market?
 MONEY MARKETS
Money markets, Markets that trade debt securities or instruments with maturities of less than one year. Money markets

exist to transfer funds from individuals, corporations, and government units with short-term excess funds (suppliers of

funds) to

economic agents who have short-term needs for funds (users of funds).
 MONEY MARKETS

opportunity cost : The forgone Default risk : The risk of late or non-
interest cost from the holding payment of principal or
of cash balances when they are interest.
received.
 Bond Equivalent Yields
Yields on Money ibey - [(Pf P0)/P0](365/h)
01 Market Securities
where
Pf - Face value
P0 - Purchase price of the security
h - Number of days until maturity
 YIELDS ON MONEY MARKET SECURITIES

Effective Annual Return

-The bond equivalent yield is a quoted nominal or stated rate earned on an investment over a one-year
period. The bond equivalent yield does not consider the effects of compounding of interest during a less
than one-year investment horizon. Remember from Chapter 2 , that if interest is paid or compounded more
than once per year, the true annual rate earned is the effective annual return on an investment. The bond
equivalent yield on money market securities with a maturity of less than one year can be converted to an
effective annual interest return ( EAR ) using the following equation:

Example:
Suppose you can invest in a money market security that matures in 75 days and offers a 7 percent nominal
annual interest rate (i.e., bond equivalent yield). The effective annual interest return on this security is:

The effective annual interest return is 7.20%

 YIELDS ON MONEY MARKET SECURITIES

Formula for ibey

Bond equivalent =
Yield formula

Example: ₱1,000 Par Value

₱ 980 discounted price
200 Days to Maturity

The Bond Equivalent Yield is 3.72%

Discount Yield Formula, Meaning and Examples

The discount yield is a way of calculating a bond's return when it is sold at a discount to its face value,
expressed as a percentage. Discount yield is commonly used to calculate the yield on municipal notes,
commercial paper and treasury bills sold at a discount.
 YIELDS ON MONEY MARKET SECURITIES

Example:
Assume, for example, that an investor purchases a ₱10,000 Treasury bill at a ₱300 discount from par value
(a price of ₱9,700), and that the security matures in 120 days.

The Discount Yield is 9%

Single-Payment Yields
Single payment yields (ispy): Interest rate is quoted on an annual basis assuming a 360-day year as a percent
of purchase price. Negotiable (or jumbo) CDs and fed funds are money market securities that pay interest
only at maturity. These use single-payment yields (ispy)
 YIELDS ON MONEY MARKET SECURITIES

to convert a single-payment yield to a bond equivalent yield:

to directly convert a single payment yield to an EAR

Example:
A ₱1M investment in 90 day commercial paper has a 2% discount yield and an equivalent size and risk 90
day CD has a 2% single payment yield. Which security offers the better return? For the CD

The bond equivalent yield for the CD is 2.0278%

 Treasury bills (T-bills) are short-term obligations of the
Money Market U.S.
02
Securities government issued to cover current government budget
shortfalls (deficits) 3 and to refinance maturing
government debt.
Federal funds (fed funds) are short-term funds
transferred between financial institutions, usually for a
period of one day
MONEY MARKET SECURITIES

Repurchase agreements —agreements involving the sale of securities by one party to another
with a promise by the seller to repurchase the same securities from the buyer at a specified date
and price.

Commercial paper —short-term unsecured promissory notes issued by a company to raise

short-term cash.

Negotiable certificate of deposit —bank-issued time deposit that specifies an interest rate and
maturity date and is negotiable, (i.e., can be sold by the holder to another party).
MONEY MARKET SECURITIES

Repurchase
Banker’s acceptance
agreements- is —agreements
a time draft payable
involving
to athe
seller
saleofofgoods,
securities
withby
payment
one party
guarto another
banker’s acceptance
with a promise by thebanker’s
seller to acceptance
repurchase anteed
the sameby securities
a bank. from the buyer at a specified date
and price.
COMPARISON OF MONEY MARKET SECURITIES - Money market securities share characteristics
like large denominations, low default risk, and short maturities. However, they differ in liquidity.
Commercial
Treasury billspaper —short-term
have an unsecuredmarket,
extensive secondary promissory notesquick
allowing issued by a company
conversion to raise
into cash.
short-term
Commercialcash.
paper has no secondary market, requiring resolding. Federal funds have no
secondary market trading, and bank negotiable CDs can be traded on secondary markets.
Trading hascertificate
Negotiable been relatively inactive
of deposit in recent years.
—bank-issued time deposit that specifies an interest rate and
maturity date and is negotiable, (i.e., can be sold by the holder to another party).
 THE PHILIPPINE TREASURY is a key player in the country's money
Money Market market. It issues government securities like T-bills and T-bonds to
03
Participants raise funds, conducts regular auctions, oversees market activity, and
helps
in the development of the market. A diverse range of participants,
including banks, financial institutions, corporations, and individual
investors, engage with the Treasury in these activities.
MONEY MARKET PARTICIPANTS

THE PHILIPPINE GOVERNMENT'S RESERVES - managed primarily by the central bank, have a substantial impact on
the country's money market. They are used to stabilize the currency, manage monetary policy, provide
liquidity support, and contribute to financial stability. The government reserves influence interest rates,
credit availability, and overall economic activity in the Philippines.

COMMERCIAL BANKS - are active and essential participants in the money market. They lend, borrow, invest, and
use various money market instruments to manage their liquidity, optimize their returns, and facilitate
short-term financing for businesses and individuals.

Money Market Mutual Funds

•Money Market Mutual Funds (MMMFs)
•Function: Purchase money market securities in bulk and offer shares based on underlying asset value.
•Accessibility: Enable small investors to participate in money market instruments.
•2010 Statistics: Held $1.5 trillion in short-term financial securities, including repurchase agreements, negotiable
CDs, commercial paper, and U.S. government securities.
•Alternative Investment: Provide an attractive alternative to interest-bearing deposits at commercial banks.
MONEY MARKET PARTICIPANTS

Brokers and Dealers

1. Primary Government Security Dealers:
•Market new Treasury bills and other securities.
•Buy Treasury bills from the Federal Reserve upon issuance.
•Conduct secondary market transactions in Treasury bills.
•Assist the Federal Reserve in repo market operations.
2. Money and Security Brokers (e.g., Cantor Fitzgerald, Garban-Intercapital):
•Act as intermediaries for government securities dealers.
•Facilitate fed funds market transactions.
•Support secondary trading in various money market securities.
•Maintain confidentiality in trades.
3. Brokers and Dealers in Money Markets:
•Link buyers and sellers in money market securities.
•Serve as intermediaries for smaller investors.
•Enhance accessibility to money markets.
MONEY MARKET PARTICIPANTS

CORPORATIONS
• Nonfinancial and financial corporations raise significant funds in money markets, notably
through commercial paper.
• Corporations often face cash imbalances, leading them to invest excess funds in money market
securities.
• Common investment options include T-bills, repos, commercial paper, negotiable CDs, and
banker’s acceptances.

Other Financial Institutions

1.Property-Casualty (PC) and Life Insurance Companies:
• Maintain substantial liquid assets due to unpredictable liability payments.
• Invest significantly in money market securities for liquidity.
• Key investments include T-bills, repos, commercial paper, and negotiable CDs.
2.Finance Companies:
• Unable to issue deposits like banks.
• Raise substantial funds through money markets, particularly via commercial paper issuance.
MONEY MARKET PARTICIPANTS

Individual
CORPORATIONS
•• Nonfinancial
Individual investors engage
and financial in money markets
corporations through two
raise significant fundsmain channels:
in money markets, notably
1. through commercial They
Direct Investments: paper.can personally invest in specific money market
securities likeoften
• Corporations negotiable CDs.imbalances, leading them to invest excess funds in money market
face cash
2. securities.
Money Market Mutual Funds: Alternatively, individuals can choose to invest in
money market
• Common mutual
investment funds,include
options which offer diversified
T-bills, portfolios comprising
repos, commercial paper, negotiable CDs, and
various money
banker’s market securities.
acceptances.

Other Financial Institutions

1.Property-Casualty (PC) and Life Insurance Companies:
• Maintain substantial liquid assets due to unpredictable liability payments.
• Invest significantly in money market securities for liquidity.
• Key investments include T-bills, repos, commercial paper, and negotiable CDs.
2.Finance Companies:
• Unable to issue deposits like banks.
• Raise substantial funds through money markets, particularly via commercial paper issuance.
 International Aspects The international money market is a market where international
04 of Money Markets
currency transactions between numerous central banks of
countries are carried on.
 International Aspects of Money Markets

• The transactions are mainly carried out using gold or in US dollar as a base.

• The basic operations of the international money market include the money borrowed or lent
by the governments or the large financial institutions.

Examples of transactions in the international money markets:

(1) U.S. money market securities bought and sold by foreign investors
(2) foreign money market securities.

Features of the International Money Market

• Handles trades of different currencies
• Provides a safe way to transfer funds • Allows for borrowing, lending, and other deposits
• Allows companies to conduct business internationally
• Handles trillions of dollars
• Transactions can occur 24 hours a day
• The U.S. dollar is the most active type of currency

DISADVANTAGES
• Macro factor effect
• Change in global demand & supply of products
• Changes in industry & financial markets
THANK YOU