MAS 100 MONEY MARKET

• One primary misconception is that money or currency is the security being traded in a money market
• Financial instruments are the primary subject of trading in a money market
• Financial instruments in the money market are short term and highly liquid, that it can be considered close to being money
• Characteristics of Money Markets


  • Usually sold in large denominations
  • Low default risk
  • Mature in one year or less from original issue date
• Transactions in the money market are not confined to one singular location. Instead, the traders organize the purchasing and selling of the securities among participants and close the transactions electronically
• 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
• Most transactions in the money market are very large, hence, they are considered as wholesale markets
• Dealers and brokers execute transactions in the trading rooms of brokerage houses and large banks to match customers with each other
• Investors who place funds in the money market do not intend to earn high returns for their money. Instead, investors look at the money market as a temporary investment that will provide a slightly higher return than holding on the money or depositing in the banks
• 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
• Participants in the Money Markets

  • Bureau of Treasury
  • Commercial Banks
  • Private Individual
  • Commercial Non-Financial Institution
  • Investment Companies
  • Finance Companies
  • Insurance Companies
  • Pension Funds
  • Money market Mutual funds
• Types of Money Market Instruments

  • Treasury Bills
  • Repurchase Agreement
  • Negotiable Certificate of Deposit
  • Commercial Paper
  • Banker’s Acceptances
• Treasury Bills are government securities issued by the Bureau of Treasury which mature in less than a year
• Treasury Bills


  • 91 days TB
  • 182 days TB
  • 364 days TB
  • Called cash management bills
• Treasury Bills


  • Government securities issued by the Bureau of Treasury which mature in less than a year
  • Market for Treasury Bills is both DEEP and LIQUID
  • Considered the safest investment instrument in the market
  • Interest rate is not explicitly stated, bills are issued at a discount
• Treasury Bills


  • 91 days TB
  • 182 days TB
  • 364 days TB
  • Called cash management bills
• Treasury Bills


  • Being government securities, they are no longer certificated (Scripless)
  • Eligible dealers must be a member of the Government Security Eligible Dealers
  • Virtually zero default risk since the government can always print money to redeem securities
  • Traded through weekly auctions of the Bureau of Treasury
• Treasury Bills


  Risk of inflationary changes is lower since the maturity term is shorter
• Market for Treasury Bills

  • DEEP: Market has numerous buyers and sellers
  • LIQUID: Securities can be quickly traded at low transaction costs
• How investors in Treasury Bills compare performance of financial instruments
• How investors compare performance

  Through computing the discount rate
• Formula for the annualized discount rate: Bv = face value or market value, Bp = purchase price, D = tenor or period in days
• Formula for the annualized investment rate: Bv = face value or market value, Bp = purchase price, D = number of days to maturity
• A 1,000 Treasury bill with a 91-day tenor can be purchased at 995. Compute for the discount rate
• A 1,000 Treasury bill with a 91-day tenor can be purchased at 995. Compute for the investment rate
• Assume investor requires a 5 percent annualized return on a one-year Treasury bill with a 100000 Php par value. What will be the price of the Treasury Bill?
• Assume investor requires a 5 percent annualized return on a six-month Treasury bill with a 100000 Php par value. What will be the price of the Treasury Bill?
• Assume investor requires an 8 percent annualized return on a 91-day Treasury bill with a 100000 Php par value. The price of the security will be?
• Money Market Instruments – Commercial Papers


  • Short-term debt instrument issued only by large, creditworthy companies
  • To provide liquidity and/or finance investments
  • Major issuers are financial institutions like finance companies, bank holding companies, insurance companies
• Commercial paper is a debt instrument issued only by large, well-known, creditworthy companies and is typically unsecured
• Purpose of commercial papers

  To provide liquidity and/or finance investments
• Major issuers of commercial papers

  • Financial institutions such as finance companies, bank holding companies, insurance companies
• Commercial papers are usually short-term, from seven to forty days and need not be registered with SEC for public offering
• Commercial paper


  • Normally unsecured against any specific assets
  • Firms seeking to use the commercial paper market usually seek a credit rating from credit rating agencies
• Borrowing via a commercial bill

  A firm agrees to 'accept' a bill drawn by a creditor
• Borrowing via commercial paper


  A firm issues the paper itself
• Certificate of Deposit


  • A deposit made with a bank for a fixed period of time, repaid with interest
  • Negotiable certificates of deposit are tradable
• Negotiable CDs must be priced offering a premium above government securities


  To compensate for less liquidity and safety
• Premiums for negotiable CDs are generally higher during recessionary periods