MONEY MARKET

DEFINITION
The money market is the market for buying and selling high liquidity & short-term
securities. The buyer of the money market instrument is the lender of money and the seller is
the borrower of money. Most money market instruments are issued in very large
denominations.

MAIN FUNCTION
The main function of the money markets is to provide liquidity, so that those who have it
(investor) can earn interest on it and those who need it (issuer) can get it by paying the
interest. Thus, the money market allows the institutions that are short of cash (deficit unit) to
quickly acquire it from those who have an excess of cash (surplus unit) for that period.

STRUCTURE
The money markets consist of a network of dealers and brokers who transact trades over
the telephone or electronically.

OPERATION
- Interbank market
- Market for short-term funds

INSTRUMENTS
- Money market instruments can be negotiable or non-negotiable.
i) Negotiable money market instruments can be traded in secondary market places.
Example of securities: commercial paper or negotiable certificates of deposit / NCD/
NID.
ii) Non-negotiable money market instruments cannot be traded, so there is no
secondary marketplace and must be held until maturity. Non-negotiable money
market instruments generally have a very short maturity — in many cases, such as
with repos, terms of a single day are common, so there is little need for a secondary
market.
Example of securities: interbank loans, repos.

- While money market instruments are diverse, they have several features /
characteristics in common:
i) All have terms of less than 1 year, with most less than 6 months.
ii) Money market instruments have very low credit default risk and interest-rate
risk. Credit default risk is low because only the most creditworthy institutions
 can participate in the money markets. Interest-rate risk is very low because of
their short maturities.
iii) They also have high liquidity because of their short maturities or because they
have highly liquid secondary markets.
iv) Transaction costs are also very low.
v) Interest earned is lower compared to interest offered by capital market
instrument such as bond.

No. Instrument Definition Yield / discount rate /

proceed

Issued by a banking institution Annualized yield

certifying that a certain sum in
1. NID = Predeem – Ppurchase + I x 100%
MYR or Foreign Currency has
Ppurchase
been deposited with the issuing
bank for a certain tenor at a
specified rate of interest (coupon
rate may be fixed, floating or
zero).

2. REPO A short-term secured loan: one Annualized yield

party sells securities to another
= SP – PP x 360 x 100%
and agrees to repurchase those
PP n
securities later at a higher price.
The securities serve as collateral.

T-Bills resemble zero-coupon Annualized yield

bonds in that they are issued at a
= SP – PP x 360 x 100%
discount and mature at par value,
PP n
3. TBill with the difference between the
purchase and sale prices
representing the interest paid to
the investor. TB Discount (to determine the
discount rate)
The discount rate is calculated at
the time of auction, and the = Par – PP x 360 x 100%
interest on these securities is paid PP n
at maturity.

The banker's acceptance is a Proceeds =

negotiable piece of paper that
4. BA FV ( 1 – r * t )
functions like a post-dated check,
36500
although the bank rather than an
“Bill account holder guarantees the Where,
payment.
P = Discounted Proceeds
Banker's acceptances are used FV = Face value of the BA
by companies as a relatively safe r = Rate of discount (% per
form of payment for large annum)
t = No of days remaining to
transactions. (usually used for
maturity
international trade).
The BA also is a short-term debt
instrument, similar to a Treasury
bill, and is traded at a discount to
face value in the money markets.