FINANCIAL MARKETS AND INSTITUTIONS

ULAB SCHOOL OF BUSINESS

University of Liberal Arts Bangladesh

MONEY MARKETS
 The need for money market
• The immediate need for cash doesn’t coincide with receipt
of cash
– Central bank’s tax receipt vs. its operating expenses
– Corporations’ sales receipt vs. their daily operating expenses
• Holding of excess cash means losing interest income
• Better if excess cash could be invested for short-term to
earn some interest income
 Characteristics of Money Market securities

– Maturity: Short-term (one year of less)

– Type: debt instrument
– Liquidity: more liquid
– Discount pricing: issued less than its face value
– Denominations: large
• Mostly institutional investments
• Individuals invest through money market mutual funds
– Transactions costs: low
– Default risks: Low
 Common Money Market Assets
• Treasury bills
• Commercial paper
• Certificates of deposit
• Repurchase agreements
• Banker’s Acceptance
 Treasury bills
– Maturity:  07-day,14-day,30-day, 91-day, 182-day & 364-day
– Issuer: Central Bank on behalf of Government Treasury
– Liquidity: highly liquid
– Discount pricing: issued less than its face value
– Default risk: Almost zero
– Denomination: $1,000; $10,000; $100,000 or multiple
– Purpose of issuing:
• To fund part of the government budget deficit
• To control money supply
– Purpose of investing: secured ST-return; SLR
– Secondary market
 Commercial paper
– Maturity: one day to 270 days
– Issuer: creditworthy corporations
– Higher the credit rating of the issuer, lower the int rate
– Liquidity: moderately liquid
– Direct investment or through dealers
– Discount pricing: issued less than its face value
– Default risk: not as low as T-Bills; unsecured debt (not backed by
collateral)
– Denomination: High ($100,000 or more)
– Purpose: to buy inventories; to meet short-term liabilities
 Certificates of deposit
– Maturity: between one month and one year
– Issuer: large commercial banks
– Liquidity: Can’t be withdrawn before maturity
– Discount pricing: N/A
– Secondary market
– Default risk: well secured
– Denomination: No specific denomination
– Purpose: Collect deposits to finance working capital of
corporations
 Repurchase Agreement
• A bank will agree to buy securities from a dealer and
• Then resell them a short time later at a preset price.
• The difference between the purchase and sale prices
represents the interest paid for the agreement.
• Thus the goals of both parties, secured funding and liquidity
are met.
 Eurodollar CD
• CD for a U.S. dollar deposit at a bank located outside the
United States
• Major corporations use the Eurodollar market to settle
international transactions, to finance import and export
activity, to make short-term loans and as a place to invest
excess cash.
• London Interbank Offered Rate(LIBOR): the rate at which
major international banks are willing to offer term Eurodollar
deposits to each other.
 A Draft
• A draft, sometimes called a bill of exchange (B/E), is the instrument
normally used in international commerce to effect payment
– It is a written order by an exporter instructing an importer to pay
a specified amount at a specified time
– The party initiating the draft is the maker, drawer, or originator
while the counterpart is the drawee.
 Banker’s Acceptances
• If the documents are in order, the importer’s bank either pays the
draft (sight draft) or accepts the draft (time draft). In the latter case,
payment is at a future date.
• If a sight draft is used, the exporter is paid at once, if a time draft is
used the exporter receives the accepted draft, now called a banker’s
acceptance, back from the bank and holds it until maturity or sells it
at a discount.