FINANCIAL INSTRUMENTS

MONEY MARKET INSTRUMENTS

Money market instruments are short-term securities. They are paper or electronic evidences of
debt dealt in the money markets. Only debt securities are short term. Equity securities are long-term
and belong to the capital market. Money market instruments are issued by the government and
corporations needing short-term funds. Government securities are generally issued by the by the Bureau
of Treasury.

Cash Management Bills are government-issued securities with maturities of less than 91 days,
specifically 35 days or 42 days. They have shorter maturities than T-bills. Government securities
(GS) are unconditional obligations of the government issuing them, backed up by the full taxing
power of the issuing government.as such, they are theoretically default –free. Investing in these
bills affords security and liquidity to investors.
Treasury bills (T-bills) are issued by the national treasury with 91-day, 182-day, and 364-day
maturities. They are zero-coupon securities because they have no coupon payments and only
have face values. They are sold at a discount, which means that their purchase price is less than
their face value.
Banker`s acceptance is a time draft issued by a bank payable to seller of goods. It is drawn on
and accepted by the bank. Before acceptance, the draft is not an obligation of the bank; it is
merely an order by the drawer to the bank to pay a specified sum of money on a specified date
to a named person or to the bearer of the draft just like an ordinary check. A time draft issued
by a bank is an order for the bank to pay a specified amount of money to the bearer of the time
draft on a given date. It is different from a sight draft, which is an order to pay immediately.
Commercial letter of credit is a contractual agreement between a bank, known as the issuing
bank, on behalf of the buyer (drawer), authorizing another bank, the correspondent bank known
as the advising or confirming bank, to make payment to the beneficiary, the seller. The issuing
bank, on the request of the buyer, opens the letter of credit. The issuing bank makes a
commitment to honor drawings made under the credit. The beneficiary is the seller of goods or
services.
Certificate of Deposit (CD) is a receipt issued by a commercial bank for the deposit of money. It
is a time deposit with a definite maturity date and a definite rate of interest. CD stipulates that
the bearer is entitled to receive annual interest payments at the rate indicated in the certificate;
together with the principal upon maturity of the certificate. Negotiable certificate of deposit is
a bank-issued time deposit that specifies an interest rate and maturity date and is negotiable
(salable/saleable).
Repurchase agreements are legal contracts that involve the actual sale of securities by a
borrower to the lender with a commitment on the part of the borrower to repurchase the
securities at the contract price plus a stated interest charge at a later date. A reverse repurchase
agreement or reverse repo is an agreement involving the purchase of securities by one party to
another with the promise to sell back at a given date in the future.
 Money market deposit accounts (MMDAs) are PDIC-insured deposit accounts that are usually
managed by banks or brokerages and can be a convenient place to store money that is to be
used for upcoming investments or has been received from the sale of recent investments. They
are very safe and highly liquid investments, typically paying higher interest than regular savings
account but lower than MMMFs.
Money market mutual funds (MMMFs) are investment funds that pool funds from numerous
investors and invest in money market instruments offered by investment companies.

Mutual funds can be classified as:

1. Growth funds – invest in assets that are expected to reap large capital gains (generally
equity securities)
2. Income funds – invest in stocks that regularly pay dividends and in notes and bonds that
regularly pay interest
3. Balanced funds – combine the features of both growth and income funds
4. Sector funds – invest in specific industries as health care, financial services, utilities,
extractive industries
5. Index funds – invest in a basket of securities that make up some market index as S&P 500
index of stocks
6. Global funds –invest in securities issued in many countries providing diversification

Certificate of assignment is an agreement that transfers the right of the seller over a security in
favour of the buyer. The underlying security carries a promise to pay a certain sum of money on
a fixed date like a promissory note. The arrangement allows the buyer to hold the security as a
guaranteed source of repayment. The buyer has an option to force the liquidation of the
underlying security to ensure repayment.
Certificate of participation is an instrument that entitles the holder to a proportionate equitable
interest in the securities held by the issuing firm or an entitlement to a pro rata share in a
pledged revenue stream, usually lease pyments.
Eurodollar certificate of deposits or Eurodollar CDs are dollar-denominated, negotiable, large
time deposits in banks outside the United States.

CAPITAL MARKETS INSTRUMENTS

As stated, these long-term instruments are basically either securities or debt securities. Capital
market instruments include corporate stocks, mortgages, corporate bonds, treasury securities, state and
local government bonds, US government agency securities, and non-negotiable bank, and consumer
loans and leases.

Capital market instruments can be classified as:

A. Non-negotiable/non-marketable instruments
 1. Loans are direct borrowings of deficit units from surplus units. They can be short term or
long-term. They do one-on-one transaction with the lenders. Stockholders usually guarantee
these loans.
2. Leases are rent agreements. The owner of the property is called the lessor and the one who
is renting and using the property is the lessee. The lease can be an operating lease, where
the lessor shoulders all expenses including insurance and taxes related to the property
leased out and the lessee pays a fixed regular amount usually on a monthly basis. It can also
be a financing or capital lease, where the lessee shoulders all expenses of the property as
insurance and taxes. Generally, capital leases are lease-to-own contracts where the lessee
pays a big initial down payment, pays a fixed regular amount, and later pays a minimal
amount to finally own the asset or property being leased.
3. Mortgages are agreements where a property owner borrows money from a financial
institution using the property as a security or collateral for the loan.
4. Lines of credit is a bank`s commitment to make loans to regular depositors up to a specific
amount. Personal lines of credit are for households. Commercial lines of credit are for
businesses. Lines of credit provide the convenience of a readily available source of money
that can be used anytime and for whatever purpose.

B. Negotiable/marketable instruments
1. Corporate stocks are the largest capital market instruments. Stocks are evidence of
ownership in a corporation. The holders are called shareholders or stockholders. Shares of
stocks are actually intangible while the stock certificates are the tangible evidence of
ownership.
2. Bonds are debt instruments issued by private companies and government entities to borrow
large sums of money. Bonds issued by the national treasury are called Treasury Bonds (T-
bonds). Bonds issued by national governments in foreign currencies are normally referred to
as sovereign bonds. Corporate bonds are certificates of indebtedness issued by corporations
who need large amount of cash. Bonds agreements are called bond indentures. Treasury
bonds are government securities which mature beyond one year. These are sold at its face
value on origination. The yield is represented by the coupons, expressed as a percentage of
the face value on per annum basis, payable semi-annually. Municipal bonds are issued by
municipalities or local government units. New issues of municipal bonds are generally
bought by investment bankers and resold to commercial banks, insurance firms, and high-
income individuals.
3. Long-term negotiable certificate of deposit (LTNCDs) are negotiable certificates of deposit
with a designated maturity or tenor beyond one year, representing a bank`s obligation to
pay the face value upon maturity, as well as periodic coupon or interest payments during
the life of the deposit.
4. Mortgage-Backed Securities are usually in the form of bonds. These are usually sold to
pension funds or life insurance companies. The mortgage houses or banks continue to
collect the payments on the mortgages and pass them on the owner of the security in the
form of interest on the bonds held.