FinMark - Lesson 3

FINANCIAL
MARKETS
Lesson 3 PREPARED BY: BETH B. WATIN, MBA
MONEY MARKETS
• Refers to the network of corporations, financial
institutions, investors, and governments which deal
with the flow of short-term capital.
• Exist to provide the loans that financial institutions and
governments need to carry out their day-to-day
operations.
• Are the mechanisms that bring these borrowers and
investors together without the comparatively costly
intermediation of banks.
• Transactions occur in the investor’s home currency
• Primary function is for banks and other investors with
liquid assets to gain a return on their cash or loans.
• Provide borrowers such as banks, brokerages, and
hedge funds with quick access to short-term
funding.
• Applied to the buying and selling of debt
instruments maturing in one year or less.
• Money-market investors are extending credit,
without taking ownership in the borrowing entity or
any control over management.
• Issuers of money-market instruments are usually
more concerned with cash management or with
financing their portfolios of financial assets.
• Attached a price to liquidity, the availability of
money for immediate investment.
Banks and companies use the
financial instruments traded on
the money market for different
reasons, and they carry different
risks.
TYPES OF MONEY-MARKET INSTRUMENTS:
• Commercial papers
• Banker’s acceptances
• Treasury bills
• Repurchase agreements
• Government agency notes
• Local government notes
• Interbank loans
• Time deposits
• Banker’s acceptance
• Papers issued by international organizations
MONEY MARKET SECURITIES
are short-term with an original maturity of less
than one year.
✓Outstanding for only short periods of time

✓used to “warehouse” funds until needed. The
returns earned on these investments are low
due to their low risk and high liquidity.
✓More widely traded than longer-term
securities and so tend to be more liquid.
Commercial paper
• short term debt obligation of a private-sector firm
or a government-sponsored corporation.
• only companies with good credit ratings issue
commercial paper.
• has lifetime, or maturity, greater than 90 days but
less than nine months.
• must be registered with the regulator, the Securities
and Exchange Commission.
• usually unsecured although a particular commercial
paper issue may be secured by a specific asset of
the issuer or may be guaranteed by a bank.
Banker’s acceptances
• Before 1980s, main way for firms to raise short-term
funds in the money markets.
• 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.
• Have a maturity of less than six months.
• Differ from commercial paper
• Tied to the sale or storage of specific goods, such as
an export order for which the proceeds will be
received in two or three months.
• Not issued at all by financial-industry firms.
Banker’s acceptances
• Do not bear interest
• Investor purchases the acceptance at a discount
from face value and then redeems it for face value
at maturity.
• Investor rely on the guarantor bank, rather than the
issuing company
Treasury bills
• Referred to as T-bills
• Securities with a maturity of one year or less
• Issued by national governments; in its own currency
• Considered the safest of all possible investments in
that currency
• larger share of money-market trading than any
other type of instrument.
Treasury bills
Government agency notes
• National government agencies and government-

sponsored corporations are heavy borrowers in the
money markets in many countries.
• Entities such as development banks, housing
finance corporations, education lending agencies
and agricultural finance agencies.
Local government notes
• Issued by provincial or local governments, and by

agencies of these governments such as school
authorities and transport commissions.
• The approval of national authorities is required
• Local agencies are allowed to borrow only from
banks and cannot enter the money markets.
Interbank loans
• Loans extended from one bank to another with which
it has no affiliation
• Across international boundaries and are used by the
borrowing institution to re-lend to its own customers.
• Banks lend far greater sums to other institutions in
their own country.
• Overnight loans are short-term unsecured loans from
one bank to another.
• Help the borrowing bank finance loans to customers
• Borrowing bank adds the money to its reserves in
order to meet regulatory requirements and to
balance assets and liabilities.
Repos
• Repurchase agreements, plays a critical role in the

money market
• Serve to keep the markets highly liquid
• Ensures that there will be a constant supply of
buyers for new money-market instruments
• Combinations of two transactions.
• In the first, securities dealer, such as a bank, sell
securities it owns to an investor, agreeing to
repurchase the securities at a specified higher price
at a future date.
Repos
• In the second transaction, days or months
later, the repo is unwound as the dealer buys
back the securities from the investor.
• 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.
Thank
You

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FINANCIAL

✓Outstanding for only short periods of time

• National government agencies and government-

• Issued by provincial or local governments, and by

• Repurchase agreements, plays a critical role in the

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