FM 415 Money Markets
FM 415 Money Markets
FM 415 Money Markets
COMMERCIAL PAPER
Commercial paper is a short-term debt obligation of a
private-sector firm or a government-sponsored
corporation. Only companies with good credit ratings
issue commercial paper because investors are
reluctant to bring the debt of financially compromised
companies.
TYPES OF MONEY-MARKET INSTRUMENTS
COMMERCIAL PAPER
They tend to be issued by highly rated banks and are
traded in a similar way to securities. In most cases, the
lifetime, or maturity, greater than 90 days but less than
nine months. This maturity is dictated by regulations.
In the Philippines, most new securities must be
registered with the regulator, the Securities and
Exchange Commission.
TYPES OF MONEY-MARKET INSTRUMENTS
COMMERCIAL PAPER
Commercial paper is usually unsecured although a
particular commercial paper issue may be secured by
a specific asset of the issuer or may be guaranteed by
a has paper bank.
TYPES OF MONEY-MARKET INSTRUMENTS
COMMERCIAL PAPER
Many large companies have continual commercial
paper programmes, bringing new short-term debt on
to market every few weeks or months. It is common
for issuers to roll over their paper, using the proceeds
of a new issue to repay the principal of a previous
issue.
TYPES OF MONEY-MARKET INSTRUMENTS
COMMERCIAL PAPER
In effect, this allows issuers to borrow money for long
periods of time at short-term interest rates, which may
be significantly lower than long-term rates. The short-
term nature of the obligation lowers the risk perceived
by investors.
TYPES OF MONEY-MARKET INSTRUMENTS
COMMERCIAL PAPER
These continual borrowing programmes are not
riskless. If market conditions or a change in the firm's
financial circumstances preclude a new commercial
paper issue, the borrower faces default if its lacks the
cash to redeem the paper that is maturing.
TYPES OF MONEY-MARKET INSTRUMENTS
BANKER’S ACCEPTANCES
Before the 1980s, bankers' acceptances were the main
way for firms to raise short-term funds in the money
markets. An acceptance is a promissory note issued by
a non-financial firm to a bank in return for a loan. The
bank resells the note in the money market at a
discount and guarantees payment. Acceptances usually
have a maturity of less than six months.
TYPES OF MONEY-MARKET INSTRUMENTS
BANKER’S ACCEPTANCES
Bankers' acceptances differ from commercial paper in
significant ways. They are usually tied to the sale or
storage of specific of specific goods, such as an
export order for which the proceeds will be received
in two or three months. They are not issued at all by
financial-industry firms.
TYPES OF MONEY-MARKET INSTRUMENTS
BANKER’S ACCEPTANCES
They do not bear interest; instead, an investor
purchases the acceptance at a discount from face
value and then redeems it for face value at maturity.
Investors rely on the strength of the guarantor bank,
rather than of the issuing company, for their security.
TYPES OF MONEY-MARKET INSTRUMENTS
TREASURY BILLS
Treasury bills, often referred to as T-bills, are securities
with a maturity of one year or less, issued by national
governments. Treasury bills issued by a government in
its own currency are generally considered the safest of
all possible investments in that currency. Such
securities account for a larger share of money-market
trading than any other type of instrument.
TYPES OF MONEY-MARKET INSTRUMENTS
INTERBANK LOANS
Loans extended from one bank to another with which
it has no affiliation are called interbank loans. Many
of these loans are across international boundaries and
are used by the borrowing institution to re-lend to its
own customers.
TYPES OF MONEY-MARKET INSTRUMENTS
TIME DEPOSITS
Time deposits, another name for certificates of deposit
or CDs, are interest-bearing bank deposits that cannot
be withdrawn without penalty before a specified date.
Although time deposits may last for as long as five
years, those with terms of less than one year compete
with other money-market instruments.
TYPES OF MONEY-MARKET INSTRUMENTS
TIME DEPOSITS
Time deposits with terms as brief as 30 days are
common. Large time deposits are often used by
corporations, governments and money-market funds to
invest cash for brief periods. Interest rates depend on
length of maturity, with longer terms getting better
rate. The main risks are being locked into low interest
rates if rates rise and early withdrawal penalties.
TYPES OF MONEY-MARKET INSTRUMENTS
REPOS
Repurchase agreements known as repos, play a
critical role in the money markets. They serve to keep
the markets highly liquid, which in turn ensures that
there will be a constant supply of buyers for new
money-market instruments.
TYPES OF MONEY-MARKET INSTRUMENTS
REPOS
A repo is a combination of two transactions. In the
first, a securities dealer, such as a bank, sells securities
it owns to an investor, agreeing to repurchase the
securities at a specified higher price at a future date. In
the second transaction, days or months later, the repo
is unwound as the dealer buys back the securities from
the investor.
TYPES OF MONEY-MARKET INSTRUMENTS
REPOS
The amount the investor lends is less than the market
value of the securities, a difference called the spread
or haircut, to ensure that it still has sufficient
collateral if the value of the securities should fall
before the dealer repurchases them.
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