TOPIC 2

(CHAPTER 2)

MONEY MARKET

1
Updated: Sept23
LEARNING OUTCOME:
At the end of this lecture, students should be able to:
 Explain the:
1. Nature and role of money market
2. Participants in the money market
3. Instruments traded in money market
4. Money market risk

2
Updated: Sept23
CONTENTS:

1- Nature and 2- Participants

role of money in the money
market market

3- Instruments 4- Money mar

traded in mon ket risk
ey market

3
Updated: Sept23
 1- NATURE AND ROLE OF MONEY
MARKET
• The money market is a segment of the financial markets where short-term
maturity securities are issued and traded.

• The purpose of this market  to provide liquidity to market participants

through short-term financing.

• Money market securities:

• highly liquid (because of its short maturity period)
• considered safe (has relatively low default risk).

• The securities have a maturity period of one year or less.

4
Updated: Sept23
 1- NATURE AND ROLE OF MONEY
MARKET (Cont’d)

Provides secure & effective Enables surplus economic units to

financing - supports both invest in near-money assets which
4
domestic & international trade. 3 are highly liquid, low risk and can be
easily converted into cash.
Vibrant marketplace for short- Helps the commercial banks to
term government or corporate 2 5 become self-sufficient. They need
debt securities; higher rates of not approach the central bank
interest and borrow at a higher interest
rate.
Facilitates governments and 1 6 Serve as a barometer of the
industries -to meet their monetary & banking conditions
working capital in the country. Helps the central
requirements bank to adopt an appropriate
monetary and banking policy.

5
Updated: Sept23
 2- PARTICIPANTS IN THE MONEY MARKET

Central
01 State Government 02
Government

Insurance
06 Commercial Banks 03
companies

Private Sector Public Sector

05 04
Companies Undertaking

6
Updated: Sept23
 3- INSTRUMENTS TRADED IN MONEY
MARKET

3.1- 3.3-
Bankers’ Certificates 3.5-
Acceptances of Deposit Eurodollars
(BA) (CD)

3.6-
3.2- 3.4-
Repurchase
Treasury Commercial
Agreements
Bills (TB) Paper
(Repo)

7
Updated: Sept23
3.1- Bankers’ Acceptances (BA)
• Banker’s acceptance is a time draft payable to the seller that a business can
order from the bank if it wants additional security against the risk of default by
the counter party.

• Used in international trade because of the advantages of security of payment

for both buyer and seller.

• This instrument is a short-term working capital facility extended by the firm’s

bank to the firm to finance its purchases/imports or sales/exports of goods
supported by documents as evidence of genuine transfer of goods to the
receiving party.

8
Updated: Sept23
3.1- Bankers’ Acceptances (BA)
• Bankers’ acceptance needs to be held until maturity.

• However, it is a negotiable instrument:

• may be sold to investors for a discounted price on a secondary market, giving
investors a relatively safe, short-term investment.

• Upon maturity of the BA, the holder of the bearer presents the BA through the
holder’s banker to the paying bank for full payment stated on the BA.

9
Updated: Sept23
3.1- Bankers’ Acceptances (BA) (Cont’d)
• In Malaysia, BA is subject to the prevailing Guidelines on Bankers Acceptances
(2004) issued by Bank Negara Malaysia (BNM BA Guidelines).

• Bankers’ acceptances are issued in multiples of RM1,000 with a minimum

denomination of RM50,000.

• Minimum period of financing usually starts from 21 days and a maximum

financing period of 365 days.

• The Islamic Acceptance Bills (IAB) is the Shariah compliant BA.

10
Updated: Sept23
3.1- Bankers’ Acceptances (BA) (Cont’d)
• If a RM1,000,000 face value BA wit 60 days to maturity is purchased at 5% per
annum, the discounted proceed will be as follows:

Discounted Proceed = RM1,000,000 ( 1 – [5% x 60/365])

= RM991,780.80

• Purchaser:
• pays only RM991,780.80
• at maturity: receive face value RM1,000,000
• Investment earning = RM8,219.20

11
Updated: Sept23
3.2- Treasury Bills (TB)

• A treasury bill (T-Bill) is a short-term debt obligation (maturity period of one

year or less) issued by the government to cover:
• development expenditures,
• budget deficits and
• working capital requirements

• Malaysian Treasury Bills (MTBs) are issued with original maturities of 3-month,
6-month, and 1-year.
• The bills are discounted securities that are issued at a discount from the face
value.
• When the bills mature, the government pays the holder the full par value. Each
certificate of MTB carries a face value in multiples of RM10,000.

12
Updated: Sept23
3.2- Treasury Bills (TB) (Cont’d)

• MTBs are issued on a weekly basis through competitive auction.

• The successful bidders are determined according to the most competitive yield
offered.

• The standard trading amount is RM5 million and are actively traded in the
secondary market.

• Bank Negara Malaysia, on behalf of the Malaysian government, also issues

Malaysian Islamic Treasury Bills (MITB) and Bank Negara Bills in the form of
Bank Negara Monetary Notes in both conventional and Islamic forms

13
Updated: Sept23
3.3- Certificates of Deposit (CD)/
Negotiable Certificates of Deposit (NCD)

• Issued by a bank or financial institution that allows customers to earn an

amount of interest on their deposits.
• CD is issued for a specific period for a fixed amount of deposit with a fixed rate
of interest and can be issued in any denomination.
• The maturity:
• ranges from one month to five years.
• CDs with terms of a year or more are called term CDs.
• The amount deposited cannot be withdrawn until the maturity period (not a
liquid asset); if the early withdrawal penalty is paid.
• A CD may not be attractive to some investors because it is not a negotiable
instrument  cannot be sold to other investors in a secondary market.

14
Updated: Sept23
3.3- Certificates of Deposit (CD)/ Negotiable
Certificates of Deposit (NCD) (Cont’d)
• An NCD  can be negotiated with the issuer (banks and financial institutions).
The more money that the investor is willing to deposit, the more favourable
terms can be agreed with the issuer.
• Tradable instrument  can be bought or sold before the date of maturity. If a
depositor/investor wishes to have cash before the maturity of the NCD, the
investing party can sell the NCD to another investor in a readily active
secondary market. The bank guarantees that the investors holding the
certificate are paid their deposits and the interest earned.
• Issued in multiples of RM50,000, subject to a minimum deposit of RM100,000.
• The tenure: one month and up to ten years.
• There are also the Shariah compliant form of NID which are categorised as
Islamic Negotiable Instruments (INI).

15
Updated: Sept23
3.4- Commercial Paper
• Unsecured, short-term promissory note issued by a highly credit rated
corporation for:
• the financing of accounts payable and inventories (working capital)
• meeting short-term liabilities usually on a roll-over basis.

• Is usually sold at a discount, with the interest immediately deducted from the
face value of the note by the creditor that reflects prevailing market interest
rates.

• Maturities  no longer than nine months (average: one and two)

16
Updated: Sept23
3.4- Commercial Paper (Cont’d)
• In practice, the denomination of commercial paper is large as the issuers are
mostly big institutions and corporations

• Most investors assess a commercial paper’s credit risk using independent

ratings by credit rating agencies to evaluate and rate the quality of the
commercial paper.

• In the Islamic money market, there is an equivalent instrument in the form of

Islamic Commercial Papers (ICP).

17
Updated: Sept23
3.5- Eurodollars
• “Eurocurrency” is the general term for any currency deposited in banks and
financial institutions by governments or corporations operating outside of their
home market.

• Since the US dollar is the major international medium of exchange, many

foreign governments and businesses would hold a time deposit denominated
in dollars outside of the US.
• Depositor can earn the interest income
• There is a penalty for early withdrawal.

• These dollars denominated deposits in a bank outside the US are called the
Eurodollar market.

18
Updated: Sept23
3.5- Eurodollars (Cont’d)
• Eurodollars may be held by governments, corporations and individuals from
anywhere in the world and are not subject to US bank regulations.

• The rate offered for sale on Eurodollar and other Eurocurrencies deposits is
known as the London Interbank Offered Rate (LIBOR). Other benchmark rate
includes the Euro LIBOR.

• The average Eurodollar deposit is very large (in the millions) and the terms
range from overnight to one year.

19
Updated: Sept23
3.6- Repurchase Agreements (Repo)

• A repurchase agreement (repo) is an agreement involving:

• the sale of securities at a particular price by one party (repo seller) to another
(repo buyer)
• with a promise to repurchase the securities at a specified price and on a specified
date in the future.
• If the seller defaults during the life of the repo, the buyer (as the new owner)
can sell the asset to a third party to offset his loss.
• The asset, therefore, acts as collateral and mitigates the credit risk that the
buyer has on the seller. Therefore, companies issue corporate bonds for their
capital requirements.
• Repos are thus collateralised and are usually in very short-term transactions,
mostly in overnight terms, although some extend for a period of years.

20
Updated: Sept23
3.6- Repurchase Agreements (Repo)
(Cont’d)
• Two major reasons why a company with surplus cash prefer repo to marketable
securities;
1. The adjustable maturity provision embedded in the repos  The original repo’s
maturity period can be adjusted to suit the needs of investing companies.
2. Repos are protected against market price fluctuations throughout the contract
period, and therefore, any risk involved in the liquidation is removed. Thus,
companies can invest any surplus cash for a few days.

• In Malaysia, the securities that can be used in repo include:

• Negotiable Instruments of Deposit (NID)
• Malaysian Government Securities (MGS)
• Cagamas Bonds
• Bankers’ acceptance and other securities allowed by Bank Negara Malaysia

21
Updated: Sept23
3.6- Repurchase Agreements (Repo)
(Cont’d) -Mechanics of a Repurchase Agreement

22
Updated: Sept23
 4- MONEY MARKET RISK

• Relatively low..Why?
• Short term instruments

23
Updated: Sept23
REFERENCE:
Mohd Nizal Haniff, Norli Ali, Norashikin Ismail, Noreena Md Yusoff. Introduction to
Malaysian Financial Markets (2024). Mc Graw Hill. Revised First Edition.

24
Updated: Sept23