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Unit 13 The Money Market

Unit 13 The Money Market. I. What is the money market?. The money market refers to a group of markets where low-default risk, very liquid, large-denomination, short-term (less than one year) debt instruments are traded. II. Major Types of Debt Instruments in Money Market.

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Unit 13 The Money Market

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  1. Unit 13 The Money Market

  2. I. What is the money market? • The money market refers to a group of markets where low-default risk, very liquid, large-denomination, short-term (less than one year) debt instruments are traded.

  3. II. Major Types of Debt Instruments in Money Market

  4. a. Treasury bills, issued to cover government’s short-term cash deficits, are direct obligations of the government. They are the main debt instruments in the money market. There are several different types of treasury bills according to original maturity, namely 3- month, 6-month, and one year T-bills. Treasury bills do not carry a promised interest rate but instead are sold at a discount from par (face value). Thus, their yield is based on their appreciation in price between time of issue and the time they mature or are sold by the investor.

  5. Treasury bills

  6. b. Banker’s Acceptance A corporation in need of short-term funds will issue a draft on a bank ordering the bank to pay a certain sum of money to the holder of the draft at some future date. The corporation then takes the draft to the bank, and the bank stamps “accepted” across the face of it. By accepting the note, the bank has obligated itself to pay the draft when it becomes due. The draft is now a negotiable, marketable debt instrument and may change hands several times in a secondary market. When the due date arrives, the draft is presented to the bank for payment. Simultaneously, the original issuing corporation is expected pay into its demand account at the bank where funds sufficient to cover the draft. The bank then simply takes the money out of the corporation’s account and pays it over to the holder of the draft. The bank charges the corporation a fee for this service.

  7. c. Commercial Paper consists of the promissory notes of large corporations. The Corps are sufficiently well known so that their credit worthiness is not in doubt and consequently their promises to pay can be bought and sold in an organized market. This commercial paper generally carries a maturity of from 4 to 6 months and is used by the issuers as a supplement to borrowing from commercial banks. Commercial paper may either dealer placed or directly place. e.g. Dealer Placed (经济商发行): large Corps financial intermediation the public (commercial or investment banks) Directly Placed (直接发行): large Corps the public (There is no middleman between large corps and the public.)

  8. Banker’s Draft

  9. Check

  10. d. Broker and Dealer Loans Securities brokers and dealers represent a substantial source of demand for short-term funds. Dealers need funds for financing their inventories of securities(股票建仓), and brokers need funds to relend to their customers who wish to borrow to finance stock purchase. Loans to dealers and brokers may either call (payable on demand at any time when the borrower calls) or time loans (made for a definite period of time)

  11. e. Negotiable Certificates of Deposits In the early 1960s, the rise in interest rates induced a number of large corporations to shift funds out of demand deposits and into short-term money market instruments. Faced with the possibility of a serious drop in their deposits, some of the NY city banks began issuing CDs-a money market instrument of their own-to these corporations in order to stem their drop in deposits. A negotiable CD is a receipt given by commercial banks for a deposits of funds, which stipulates that the holder of the receipt at maturity will be paid interest plus principal. The CD may not be redeemed by the bank before it matures. But because it is negotiable, it may be sold by the initial buyer on a secondary market. Banks issue CDs in order to acquire new funds and to be able to hold on to the funds they already have.

  12. f. Federal Funds: The federal funds market is composed almost exclusively of banks, both as buyers and sellers, because purchases and sales are made in large amounts and because the instrument has the shortest maturity, often one day. Federal funds are balances in the federal reserve system. Member banks of the Fed Reserve System are required by law to hold a certain percentage of their deposits as cash-reserve assets (现金储备资产－储备金要求). These reserves are hold in the form of deposit balances at each District Federal Reserve Bank. If a member bank holds less than the required amount of reserve, it is penalized, if it holds more, it has lost profits.So, the federal funds market is simply a market where in banks with too much reserves lend them to banks with too few reserves.

  13. g. Repurchase Agreement Repurchase agreement (Repos) are effectively short-term loans (usually with a maturity of less than 2 weeks) in which Treasury bills serve as collateral, an asset that the lender receives if the borrower does not pay back the loan. The most important lenders in this market are large corporations. e.g. sell T-bills worth of $ 1 M A Bank GM after one week, buy back T-bills at a price slightly above the GM’s purchase price (Note: GM has an idle capital of $ 1 M for one week.)

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