MAS 100 DEBT MARKET

• Importance of debt instrument

  • Makes the repayment of debt legally enforceable
  • Increases the transferability of the obligation, giving it increased liquidity and giving creditors a means of trading these obligations on the market
• Debt instrument as a trading means

  Debt obligations can be moved from one party to another quickly and efficiently
• Types of Debt Instruments

  • Short term Debt Instruments
  • Long-term Debt Instruments
• Debt instruments


  Legally enforceable evidence of financial debt and the promise of timely repayment of the principal, plus any interest
• Short term Debt Instruments

  • Come in the form of obligations expected to be repaid within one calendar year
  • Examples of consumer loans that have repayment terms less than 12 months
  • Short-term debt usually comes in the form of revolving lines of credit, loans that cover networking capital needs and treasury bills
• Long-term Debt Instruments


  • Obligations due in one year or more, normally repaid through periodic installment payments
  • Usually mortgage payments or car loans
• Types of Debt Securities

  • Money Market debt securities
  • Capital Market Debt Securities
• Higher risk of payment default

  Almost always lead to highest interest rates to borrow capital
• Debt Security refers to a debt instrument that can be bought or sold between two parties and has basic terms defined such as notional amount, interest rate, and maturity and renewal date
• Financial instruments

  • Not all financial instruments are securities
  • A security is a fungible, negotiable financial instrument that holds some type of monetary value
• The holder of debt securities will still be able to receive cash
• Corporate bonds are provided to raise money for different reasons such as financing ongoing operations or expanding businesses
• Credit card bills and payday loans are debt instruments but not debt securities
• Debt securities are negotiable and tradable debt instruments which carry value on them
• Types of Bond Markets

  • Corporate Bonds
  • Government Bonds
  • Municipal Bonds
  • Mortgage Bonds
  • Asset-backed bonds
  • Collateralized Debt Obligations
• Government bonds are debt instruments and also debt securities since they carry value that is negotiable and tradable in the financial market
• The bond market is a financial market in which participants are provided with the issuance and trading of debt securities
• Municipal bonds are issued by local governments and their agencies to fund their projects
• National governments issue government bonds and entice buyers by providing the face value on the agreed maturity date with periodic interest payments
• Government bonds are attractive for conservative investors
• Corporate bonds are usually longer-term debt instruments with a maturity of at least one year
• Mortgage bonds are provided by pooling mortgages on real estate properties and are locked in by the pledge of particular assets
• Asset-backed bonds are collateralized by a pool of assets such as loans, leases, credit card debt, royalties, or receivables
• Collateralized Debt Obligations are structured financial products that pool together cash flow generating assets and repackages them into discrete tranches that can be sold to investors
• Senior Tranches have higher credit ratings and lower coupon rates than junior tranches
• Senior Tranches in Collateralized Debt Obligations are safer and have priority on payback from the collateral in the event of default
• Junior Tranches in Collateralized Debt Obligations offer higher coupon rates to compensate for their higher default risk
• Characteristics of Bonds

  • Coupon rate- some bonds have an interest rate, also known as the coupon rate, which is paid to bondholders semi-annually
  • Maturity date- all bonds have maturity dates, some short-term, others long term
  • Current or Market Price- depending on the level of interest rate in the environment, the investor may purchase the bond at par, below par, or above par
• At maturity, the full face value of the bond is repaid to the bondholder
• A bond is a debt instrument that provides a steady income stream to the investor in the form of coupon payments
• Money market instruments become a flexible tool as individuals/organizations may invest in these for short-term gains and convert it back to cash quickly once liquidity need arises. Money market instruments are considered cash and cash equivalents.
• Characteristics of Money Markets


  • Usually sold in large denominations - millions and billions - take place between financial institutions and companies rather than individuals
  • Low default risk - relatively conservative and low-risk vehicles invested in highly marketable and “near-cash” instruments. As such expect to have relatively low returns than bond and equity
  • Mature in one year or less from original issue date - most are less than 4 months
• Financial instruments are the primary subject of trading in a money market.
• Dealers and brokers execute transactions in the trading rooms of brokerage houses and large banks to match customers with each other. Despite this limitation, individual investors nowadays can invest in the money market by joining funds that trade mostly using money market instruments.
• Money markets offer a least expensive alternative for fund demanders when they have short-term fund requirements. Fund demanders need to have funds quickly because the timing of cash inflows and outflows does not synchronize with each other. For government, collection of revenue only comes at certain points of the year but expenses are incurred throughout the year.
• 91 days TB are called cash management bills
• Types of Money Market Instruments

  • Treasury Bills
  • Repurchase Agreement
  • Negotiable Certificate of Deposit
  • Commercial Paper
  • Banker’s Acceptances
• One primary misconception is that money or currency is the security being traded in a money market. This is not true.
• Most transactions in the money market are very large, hence, they are considered as wholesale markets. The required size of the transaction usually averts individual investors in directly participating in the money market.
• Financial instruments in the money market are short term and highly liquid, that it can be considered close to being money.