CH AP TE R 3

MO NEY MAR KET

What is money market?
 Global financial market for short-term borrowing
and lending

4. An avenue for short-term funds with maturity not

exceeding 12 month
5. An investment outlet for surplus units

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Basic Characteristics:

 Usually sold in large denominations

 Have low default risk
 Mature in one year or less from their
original issue date
 Wholesale markets

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The Purpose of the Money Markets
 An ideal place for a firm or financial
institution to “warehouse” surplus funds
until they are needed
 Provide a low-cost source of funds to
firms, government and intermediaries that
need a short-term funds

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Cont…
 Most investors in the money market who are
temporarily warehousing funds are ordinarily not
trying to earn unusually high returns on their
money market funds

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Cont…
Deficit units (borrower) raise funds from money
market through:
 Borrowing from interbank players
 Sale of papers
 Direct borrowing from the central bank
(BNM)

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Cont…
Operations in the money market comprise 2 broad
categories:
 The placement of deposits
 Purchase and sale of short-term securities
 ie: bankers acceptances, negotiable
instruments of deposits, treasury bills,
cagamas notes and bonds, Khazanah
bonds and Malaysian Government
securities

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Cont…
 The money market is integral to the functioning
of the banking system:
 In providing financial institutions with the
facility for funding and adjusting portfolios
over the short-term
 Serving as a channel for the transmission of
monetary policy

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Cont…
 Main differences between money market and
stock market:
 Money market securities trade in very high
denominations
 Money market is a dealer market
 Firms buy and sell securities in their own accounts, at
their own risk

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Cont…
 Lack of a central trading floor or exchange
 Deals are transacted over the phone or through
electronic systems
 The easiest way for individual to gain access to
money market – money market mutual funds or
through money market bank account
 These accounts and funds pool together the assets of
thousands of investors in order to buy the money
market securities on their behalf

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 Interbank Players

 Interbank players in money market:

 Commercial banks
 Merchant banks
 Discount houses
 Finance companies
 Insurance companies
 Large corporations
 Pension funds
 Money brokers

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 Malaysia - Code of Conduct
January 1994
 Malaysian Code of Conduct for Principals and
Brokers in the Wholesale Money and Foreign
Exchange Markets was introduced
 Sets out the market practices, principles and
standards to be observed in the Malaysian
Market
 A mandatory requirement for new dealers and
brokers to complete an entry examination held
by the Institute of Bankers Malaysia

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 MONEY MARKET
INSTRUMENTS

Characteristics of money market instruments

 High liquidity
 Safety
 Short maturities
 Lower returns than most other securities
 “Risk free”

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 Cont…
Treasury Bills (T-Bills)
 A way for the government to raise money from the
public
 Purchase for a price that is less than their par (face)
value; when mature, the government pays the holder
the full par value
 Interest – difference between the purchase price of
the security and the payment at maturity
 The most liquid of all the money market instruments
– the most actively traded (most marketable)

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Cont…
 Default – a situation in which the party issuing the
debt instrument is unable to make interest payments
or pay off the amount owed when the instrument
matures
 The federal government is always able to meet its
debt obligations because it can raise taxes or issue
currency (paper money or coins) to pay off its debt
 Held mainly by banks, although small amounts are
held by households, corporations, and other
financial intermediaries

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Cont…
Negotiable Bank Certificates of Deposit
 A debt instrument sold by a bank to depositors that
pays annual interest of a given amount, and at
maturity pays back the original purchase price
 Offer a slightly higher yield than T-Bills because of
the slightly higher default risk for a bank
 Interest rate depends on:
 Current interest rate environment
 Amount of money invest
 Length of time
 Type of bank

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Cont…
Commercial Paper
 A short term debt instrument issued by large
banks and well-known corporations
 Is an unsecured short term loan
 Corporation issued commercial paper
typically for financing accounts receivable
and inventories
 It is usually issued at discount
 Maturities – usually no longer than 9 months
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 Cont…
 For the most part, commercial paper is a very safe
investment
 Financial situation of a company can easily be predicted
over a few months
 Typically, only companies with high credit ratings and
credit worthiness issue commercial paper
 Commercial paper usually issued in denominations
of RM100,000 or more
 Smaller investors – invest in commercial paper
indirectly through money market funds

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 Cont…
Banker’s Acceptances (BA)
 A bank draft (a promise of payment similar to a
check) issued by a firm, payable at some future
date, and guaranteed for a fee by the bank that
stamps it “accepted” or

 A short-term credit investment created by a non-

financial firm and guaranteed by a bank to make
payment

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Cont…
 For corporations, a BA acts as negotiable time draft
for financing imports, exports or other transactions
in goods
 Especially useful when the creditworthiness of a
foreign trade partner is unknown
 Advantage:
 It does not need to be held until maturity
 Can be sold off in the secondary markets where
investors and institutions constantly trade BAs

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Cont…
Repurchase Agreements (Repos)
 A short term loans (usually with a maturity of less
than two weeks) in which T-Bills serve as collateral
or
 A holder of government securities (usually T-Bills)
sells the securities to a lender and agrees to
repurchase them at an agreed future date and at the
agreed price

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Cont…

 Provide lenders with extremely low risk

 Short-term maturity and government backing
 Very popular, because they can virtually eliminate
credit problems

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Cont…
Federal Funds
 Is an overnight loan that is settled in
immediate available funds
 Immediate available funds:
1. Deposit liabilities of Federal reserve Banks

2. Liabilities of commercial banks that may be

transferred or withdrawn during a business
day

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