Course:

Financial Markets and Institutions:

Topic # 5: Money Market & Bond Market:

Money Market:
Market for short-term debt securities with a maturity of one year or less and often 30 days or less. Money market securities are generally very safe investments which return a relatively low interest rate that is most appropriate for temporary cash storage or short-term time horizons. Bid and ask spreads are relatively small due to the large size and high liquidity of the market

Importance of Bank (Commercial Banks) in Money Market:

The single most important privately owned institution in most money markets is the commercial bank. The importance is attributed to the following role played by banks in money market: 1. Banks provide millions of rupees in funds daily, through money market, to governments & corporations in need of cash. 2. Banks lend their cash reserves to other financial institutions to cover short term liquidity needs.

Importance of Bank (Commercial Banks) in Money Market:

3. Banks make large purchases of Treasury bills and other money market securities.
4. Commercial banks support private corporation borrowing in money market, both by purchasing their securities and by granting lines of credit.

Banks Money Market Roles Principal channel for payments for loans, securities & other transactions Custody agents for safekeeping securities owned by market participants and pledged as collateral for loans

Agents in trust for property management on behalf of bank customers

Direct lenders to money market borrowers

Guarantors of performance & payment

Channel for government money & credit policy

Sources of financing for Banks in Money Market:

For banks to lend huge amounts of funds daily in the money market, they must also borrow heavily in that market. The owners (shareholders) supply only a minor portion of a commercial banks total resources; the bulk of banks funds must be borrowed. The majority of bank borrowing come from deposits.

Instruments of Money Market:

Following are money market instruments in Pakistan: 1) Pakistan Investment Bonds (PIBs) 2) Federal Investment Bonds (FIBs) 3) Treasury Bills (TBs) 4) Term Finance Certificates (TFCs) 5) Certificate of investments (COIs) 6) Certificate of deposits (CODs) 7) Commercial Papers (CPs) 3 30 years 5 10 years 3 6 months 5 or more years

Functions of Money Market

The money market functions are: Transfer of large sums of money Transfer from parties with surplus funds to parties with a deficit Allow governments to raise funds Help to implement monetary policy Determine short-term interest rates

Bonds
Certificates of indebtedness

Bonds
Terminologies: Issuer Bond Holder Issue Price Principal Profit / Interest Maturity date Coupon Yield

Bond market participants.

Bond market participants are similar to participants in most financial markets and are essentially either buyers (debt issuer) of funds or sellers (institution) of funds and often both. Participants include: Institutional investors Governments Traders Individuals

Conclusion
Purpose of the Capital Market: provide financing for long-term capital assets Capital Market Participants: governments and corporations issue bond, and we buy them Types of Bonds: includes Treasury, government, and corporate bonds Treasury Notes and Bonds: issued and backed by the full faith and credit of the Pakistan government Corporate Bonds: issued by corporations and have a wide range of features and risk Investing in Bonds: most popular alternative to investing in the stock market for long-term investments.

End of topic no. 5