CHAPTER 3: MONEY MARKET AND RELATED  Commercial Non-Financial Institutions -

FINANCIAL INSTRUMENTS. These entities buy and sells money

market securities to manage their cash
•Money Market i.e. to temporarily store excess funds in
- Deals with the exchange of financial exchange of somewhat higher return
instrument that are practically short term or and obtain short-term funds
characterized as usually sold in large  Investment companies - Trade
denominations, low default risk; and mature in securities on behalf of their clients.
one year or less from original issue date. Makes a market for money market
securities through maintaining an
- Offer a least expensive alternative for fund inventory of financial instruments that
demanders such as the government and can be bought or sold. Investment
financial intermediaries when they have short- companies help maintain liquidity of
term fund requirements. the money market since they make sure
that sellers can easily sell their
>Three fundamental characteristics.
securities when the need arises.
1) Usually sold in large denominations;  Finance / commercial leasing
2) Low default risk; and companies - These companies raise
3) Mature in one year or less from original money market instruments i.e.
issue date commercial paper to lend funds to
individual borrowers
>Participants in the money market include the  Insurance companies - These are
following companies that invest in the money
market to maintain liquidity level in
 Bureau of Treasury - The bureau sells
case of unexpected demands most
government securities to raise funds.
especially for property and casualty
Short-term issuances of government
insurance companies.
securities allow the government to
 Pension funds - Maintain funds in the
obtain cash until tax revenues are
money market as preparation for long-
collected.
term investing in stocks and bonds.
 Commercial banks - Issues treasury
securities; sells certificates of deposits
 Money market mutual funds - These
and extends loans; offers individual
funds permit small investors (e.g.
investor accounts that can be used to
individuals) to invest in the money
invest in money markets. Banks are the
market by accumulating funds from
primary issuer negotiable certificates of
numerous small investors to buy large-
deposits, banker's acceptances and
denominatior money market securities.
repurchase agreements.
 Private Individual - These private •Financial instruments - Are the main vehicle
individuals made their investment used for transactions in the financial market.
through money market mutual funds Securities that are maturing within 90 days or
less are classified under cash equivalents.
>There is a minimum of two parties involved in  There are three tenors of Treasury Bills:
a financial instrument: (1) 91 day (2) 182-day (3) 364-day Bills.
 Have virtually zero default risk since the
 The issuer - The issuer is the party that government can always print more
issues the financial instrument and money that they can use to redeem
agrees to make future cash payments to these securities at maturity.
the investor.
 The investor - Is the party that receives >Treasury bills can be sold via two methods:
and owns the financial instrument and
bears the right to receive payments to  Competitive Bidding/Auctions - the
be made by the issuer. Usually have Bureau of Treasury announces the
surplus funds. quantity and type of securities that they
will sell.
>Financial instruments have two main economic  Noncompetitive bidding - Bidders only
purposes: give the amount of securities that they
want to buy.
 Allows transfer of fund from entities  The main difference between the two
with excess funds (investors) to entities methods is that competitive bidders
who needs funds (issuer) for business may or may not receive allocation from
purposes (e.g. to pay for tangible the securities being sold while
assets). noncompetitive bidders are guaranteed
 Permit transfer of fund that allows to receive the securities.
sharing of inherent risk associated with
the cash flows coming from tangible ✓Repurchase Agreement (repo)
asset investment between the issuer
and investor.  Is a contract where a party which is a
seller/borrower of an instrument will
•Money market Instruments agree to the buyer/lender that the
instrument will be repurchased or
- Take the form of short-term deposits, bought back on a later date at a higher
government securities, commercial papers and price. Enable short-term funds to be
certificates of deposit which form part of the transferred
Philippine interest rate market. Governed by  There are repos which are called open
Philippine regulations and are influenced by repos which do not have an indicative
market movements. date of repurchase.
 Repos are a key component of the debt
securities market that produces short-
>Types of Money Market Financial Instruments: term cash or securities liquidity critical
to price-making.
✓Treasury Bills
 Since repos are collateralized by the
 Government securities issued by the accompanying securities, these usually
Bureau of Treasury which mature in less are treated as low-risk investments with
than a year. low interest rates.
✓Negotiable Certificates of Deposit •Evaluating Money Market Securities -Money
market securities may be evaluated based on
 Are securities issued by banks which the interest rates and liquidity.
record a deposit made.
 The certificate indicates the interest ✓Interest rates - Very relevant in deciding
rate and the maturity date of the which money market securities to invest since
deposit. this dictates the potential return that can be
 Are treated as a term security with a received from the investment.
specific maturity date.A certificate of
deposit essentially restricts holders ✓Liquidity - refers to how quick, efficient and
from withdrawing funds on demand. cheap it is to convert a security into cash.
 Classified as Bearer Instrument. •Valuation of Money Market Securities -
 Have a maturity period between one to important to determine at what amount an
four months up to six months. investor is willing to pay in exchange for a
security.

✓Commercial Paper

 Are unsecured promisson notes. May CHAPTER 4: DEBT MARKET

be short-term or long-term. •Debt Securities Market - Is a type of financial
 Short term commercial paper means an market where the debt instruments or
evidence of indebtedness of any person securities are transacted by suppliers and
with a maturity of three hundred and demanders of funds.
sixty-five (365) days or less.
 Long term commercial paper is an •Debt Instrument - Is a paper or electronic
evidence of indebtedness of any person obligation that enables the issuing party to raise
with a maturity of more than three funds with a promise to return it to the lender
hundred sixty-five (365) days. in accordance with terms of a contract.

✓Banker's Acceptances >Importance of a debt instrument

 Refer to an order to pay a specified  It makes the repayment of debt legally

amount of money to the bearer on a enforceable.
specified date.  It increases the transferability of the
 Often used to finance purchase of obligation, giving it increased liquidity
goods that have not yet been and giving creditors a means of trading
transferred from the seller to the buyer. these obligations on the market.
 An acceptance is formed when a draft
>Types of Debt Instruments
or a promise to pay is made by the
bank's client and the bank then
ultimately accepts, promising to pay on
behalf of the client.
  Short-term debt instruments - both  Debt market, also known as bond
personal and corporate, come in the market, is a financial market in which
form of obligations expected to be the participants are provided with the
repaid within one calendar year. issuance and trading of debt securities.
 Long-term debt instruments - are  Primarily includes government-issued
obligations due in one year or more, securities and corporate debt securities,
normally repaid through periodic facilitating the transfer of capital from
installment payments. savers to the issuers or organizations
requiring capital.

>Types of Bond Markets

Corporate Bond - Corporations provide

•Debt Security - Refers to a debt instrument, corporate bonds to raise money for different
such as a government bond, corporate bond, reasons, such as financing ongoing operations
certificate of deposit (CD) or municipal bond or expanding businesses. The term "corporate
that can be bought or sold between two parties bond" is usually used for longer-term debt
and has basic terms defined. instruments that provide a maturity of at least
•Difference between debt securities and debt one year.
instruments - Debt securities are negotiable Government Bonds - National governments
and tradable debt instruments which carry issue government bonds and entice buyers by
value on them. providing the face value on the agreed maturity
>Types of Debt Securities date with periodic interest payments. This
characteristic makes government bonds
 Money market debt securities -Are debt attractive for conservative investors.
securities with maturity of less than one
year. Money market securities of most Municipal Bonds - Local governments and their
interest toindividual investors are agencies, states, cities, special-purpose districts,
treasury billsand certificates of deposit public utility districts, school districts, publicly
(CDs). owned airports and seaports, and other
 Capital market debt securities - Are government-owned entities issue municipal
debt securities with maturities of longer bonds to fund their projects.
than one year. Mortgage Bonds - Pooled mortgages on real
•Safety of Debt Securities - Debt securities have estate properties provide mortgage bonds.
an implicit level of safety simply because they Mortgage bonds are locked in by the pledge of
ensure that the principal amount is returned to particular assets. They pay monthly, quarterly
the lender at the maturity date or upon the sale or semi-annual interest.
of the security. Asset-backed bonds (or asset-backed security) -
•The Bond Market Is a financial security collateralized by a pool of
assets such as loans, leases, credit card debt,
royalties or receivables.
•Sustainability Bonds or Green Bonds - Are used
to finance or fund environmental or social
initiatives and programs, or projects or both.  Forward Rates - Forward rates are
normally contracted rates that fix the
> Characteristics of Bonds rates and allow another party to
assume such risk on the difference
 Coupon rate - Paid to bondholders between the contracted rate and the
based on the agreement (usually semi- spot rate.
annually). The fixed return that an  Swap Rate - Swap rate is a contract rate
investor earns periodically until it where a fixed rate exchange for a
matures. The coupon rate is multiplied certain market rate at a certain
to the principal to arrive at the interest maturity.
to be paid.
 Maturity date - All bonds have maturity •Bond Valuation - Is a technique for
dates. When the bond matures, the determining the theoretical fair value of a
bond issuer repays the investor the full particular bond.
face value of the bond.
 Current or Market Price - Depending on •Credit Ratings - Credit rating affects the
the level of interest rate in the confidence level of the investors to countries or
environment, the investor may companies.
purchase a bond at par, below par, or Three major ratings companies
above par.
1. Standard and Poor's Corporation - Is an
•Determination of Interest Rate: American financial services corporation was
- Interest rates in the industry founded in 1941 by Henry Varnum Poor in New
York, USA.
- Risk exposure
2. Moody's Investors Service - Is credit rating
- Compensation on the market expectation. company particularly on debt securities
established in 1909 in New York, USA.
•Risk-free rate - is the rate that assumes zero
default in the market which is more or less 3. Fitch Ratings - The third credit rating agency
equivalent to the rates offered by the is Fitch Ratings. It was founded in 1914 in New
sovereign. York, USA.

>Mitigating the Interest Rate Risks  Other rating agencies - There are other
credit rating agencies other than the
 Spot Rates - Spot rates are already three major like DBRS and CARE
actual rates and are not hedge. The Ratings. These credit rating agencies
applicable interest rate is based on the were not located in the United States.
prevailing market rate at the particular
time. ✓DBRS was established in 1976 in Toronto,
Canada. The company was considered as the
fourth largest ratings agency.
✓CARE Ratings started its operation in 1993
based in India. The company is based in
Mumbai with partners in Brazil, Portugal,
Malaysia and South Africa. .