Financial Markets

Prepared by: Ms. Ida

Money Markets
Prepared by: Ms. Ida
 The term "Money Market" refers to
What is the network of corporations,
MONEY financial institutions, investors and
governments which deal with the
MARKET? flow of short-term capital.
 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 tries
MARKET? to meet its payroll in the face of big
seasonal fluctuations in tax receipts,
the short-term liquidity transactions
occur in the money market.
 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
works? fulfill, their obligations to their
customers, and they use the money
market to do so.
 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
works? cannot make long-term
commitments with all of the money
they hold on deposit.
 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.
 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.
 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.
 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 loss as a result
MARKET of exchange-rate
works? fluctuations. For these reasons, most
money-market transactions occur in
the investor's home currency.
 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.
 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.
 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.
 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.
 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.
 Investors
Individuals seeking to invest large
sums of money at relatively low
Who uses risk may invest in financial
instruments. Sums of less that
the Money Php50,000 can be invested in
Market? money market funds.
 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.
 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.
 The connections among them are
established by banks and
investment companies that trade
Who uses securities as their main business.
the Money The constant soundings among
Market? these diverse players for the best
available rate at a particular
moment are the forces that keep the
market competitive.
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

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

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

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.
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.
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

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

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 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
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
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
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

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

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

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

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

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

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

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

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

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

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
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.
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.
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.
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