Erasmus Learning Programme

Faculty of Business Administration and Tourism

THE MONEY MARKETS

Juan J. García-Machado, Ph.D.
Professor of Finance
UNIVERSITY OF HUELVA (SPAIN)

Key words: Public Debt, T-Bills, Repos, Book entry, Commercial papers, Certificate
deposit, Bankers acceptances, Corporate bills, Time deposits, Banks bonds.

CONTENTS:

1. Introduction.
2. Concept and general characteristics.
3. Money market agents and mediators.
4. Money market assets.
5. Short-term Public Debt Market.
5.1. Treasury Bills (T-Bills).
5.2. Primary Market: How Spanish Treasury issues its Treasury Bills.
5.3. Secondary Market: Repurchase Agreements (repos).
6. Corporate Asset Market.
6.1. Commercial Paper.
6.1.1. Asset-Backed Commercial Paper.
6.1.2. Financial Commercial Paper.
6.1.3. Corporate Commercial Paper.
6.2. Corporate Bill.
7. Asset market of banking financial intermediaries.
7.1. Interbank market.
7.2. Current account.
7.3. Time deposit market.
7.3.1. Time deposits.
7.3.2. Bank note often known as a bill.
7.3.3. Certificates of deposit or CD.
7.4. Mixed market.
7.4.1. Banks bonds.
7.4.2. Mortgage securities.

1
 THE MON
NEY MARK
KETS
Prof. Juaan J. Garcíaa-Machado, Ph.D.
Universityy of Huelva, Spain

1. INTRODUCT
TION

The Financial crisis,

c whicch peaked in 2007, an
nd also the European debt crisis are
two enormous crisis, whicch took placce in the la
ast nine ye
ears. The ccollapse of large
ncial instituttions, the bailout
finan b of ba
anks by na
ational gove
ernments an
nd downturrns in
stockk markets around
a the world werre the result of it. The n debt crisis still
e European
cove
ers a lot of uncertainties, which has a hug
ge impact on
o the deve
elopment of
o the
econ
nomy.

mes, in whiich one crissis is follow

In tim wed by ano
other, investors are loo
oking for se
ecure
place
es to investt their money. Investin
ng in financ
cial instrum
ments of the
e Money Ma
arket,
which provides liquidity for the global financial system,
s due
e to high liquidity and
d very
shortt maturitiess, means a low risk for
f the borrowed or le
ent money. Therefore
e it is
intere
esting to engage in th
he money market, wh
hich is a pa
art of the g
general fina
ancial
markket.

ey market is
The term Mone i actually a wrong name. Moneyy —currencyy— is not trraded
in the money markets.
m Because the securities
s that do trad
de there are
e short-term
m and
highlly liquid, ho
owever, they are close
e to being money.
m Money markett securities have
three
e basic cha
aracteristic
cs in common:

• They are
e usually so
old in large denominatio
d ons.
• They havve low defa
ault risk.
• They ma
ature in on
ne year or less from their
t origina
al issue da
ate. Most money
m
nstruments mature in less than 12
market in 20 days.

Mone
ey market transactions
t s do not takke place in any one pa
articular loca
ation or building.
Inste
ead, traderss usually arrrange purcchases and
d sales betw
ween particcipants ove
er the
phon
ne and com
mplete them electronica
ally. Becaus
se of this ch
haracteristicc, money market
m
secu
urities usua
ally have an
a active secondary
s market. This
T meanss that afte
er the
secu
urity has bee
en sold initially, it is relatively eas
sy to find bu
uyers who w
will purchase it in
the future.
f An active
a seco
ondary markket makes money market securitties very fle
exible
instru
uments to use to fill short-term
s f
financial ne
eeds. For example,
e Microsoft's annual

2
 THE MON
NEY MARK
KETS
Prof. Juaan J. Garcíaa-Machado, Ph.D.
Universityy of Huelva, Spain

report states, “W
We considerr all highly liquid
l intere
est-earning investmentts with a ma
aturity
of 3 months
m or less
l at date of purchasse to be cas
sh equivalen
nts.”

Anotther charactteristic of th
he money markets
m is th
hat they are
e wholesalle markets. This
mean
ns that mosst transactio
ons are veryy large, usually in exce
ess of $1 million. The size of
these ons preventts most individual inve
e transactio estors from participatin
ng directly in
i the
mone
ey markets. Instead, dealers
d and
d brokers, operating
o in the trading
g rooms of large
bankks and brokkerage housses, bring customers
c together. Th
hese traderrs will buy or
o sell
$50 or
o $100 million in mere
e seconds.

Flexiibility and in
nnovation are
a two impo
ortant chara
acteristics of
o any finan
ncial markett, and
the money
m marrkets are no
n exceptio
on. Despite the whole
esale nature
e of the money
m
markket, innova
ative securrities and trading
t me
ethods havve been de
eveloped to
o give
smalll investors access to money
m markket securitie
es.

2. CO
ONCEPT AND
A GENER
RAL CHAR
RACTERIST
TICS

In the money market,

m finan
ncial instrum
ments with high liquiditty and veryy short matu
urities
are traded.
t Furrthermore a low risk is
i given, be
ecause of the solvenccy of the issuer
instittutions as treasury bonds,
b ban o public ccompanies, who
nks, biggerr private or
particcipate in this kind of market.
m Sho
ort-term refe
ers to less than one ye
ear (12 mon
nths),
altho
ough some market seccurities, as bonds or mortgage
m s
securities offten exceed
d that
perio
od usually up
u to three years of liffe. The rea
ason for liqu
uidity comes from the short
term and the existence of
o large se
econdary markets,
m en quick and easy
nsuring a q
otiation of asssets.
nego

The money marrket is used

d by particip
pants for bo n the short term,
orrowing and lending in
which can be frrom severa
al days up to
t one yearr. Money market
m secu
urities consiist for
mple of ne
exam egotiable ce ankers’ accceptances, U.S.
ertificates of deposit (CDs), ba
Treasury Bills, commercia
al paper, municipal
m notes,
n fede
eral funds and repurc
chase
he money market is used by a wide array of partiicipants, fro
agreements. Th om a
pany raising money by
comp b selling commercial
c paper into the marke
et to an inv
vestor
purch e place to invest in the
hasing CDss as a safe t short te
erm. The m
money mark
ket is
typiccally seen as
a a safe place
p to invest money due the highly liquid nature of
o the

3
 THE MON
NEY MARK
KETS
Prof. Juaan J. Garcíaa-Machado, Ph.D.
Universityy of Huelva, Spain

secu
urities and short
s maturitties, but the
ere are risks
s in the marrket that any investor needs
n
to be
e aware of in
ncluding the
e risk of deffault on sec
curities.

, low-risk and high liquidity th

ddition to short-term,
In ad s he money market inc
cludes
otherr main characteristics. Typical th
here are larrge amoun
nts of finan
ncial resou
urces
trade
ed, becausse their participants
p are big companiess or financial institutions.
Furth
hermore a direct
d negottiation betw gh intermediaries
ween markett participantts or throug
(brokkers or dea
alers) can be
b found. A high grad
de of financcial disintermediation exists
e
and the classicc intermedia
aries (banks) act mos
st of the tim
me like norrmal contractors.
Flexibility, ima
agination and innov
vation are characteriistics due to continu
uously
emerrging new assets
a on. Among these are: Discount issue,
and techniquess of emissio
receiipt of interest, zero-cou
upon issue and emissio
on of variab
ble interest rates.

3. MO RKET AGENTS AND MEDIATOR

ONEY MAR M RS

Traders in the money

m marrket are borrrowers, len
nders or me
ediators. No
ormally, you
u can
ow money of public budget
borro b and non-financ
cial compan
nies. But a
apart from these
t
recen
nt borrowers, financia
al intermediaries, whic
ch can be also
a a bank, tend to issue
secu
urities in the
e money ma
arket. Althou
ugh in this case,
c they are
a the so-ccalled secon
ndary
asse
ets. For insttance, the issuance off certificates
s of deposiits by comm
mercial ban
nks or
the issuance of mortgag
ge bonds by saving
g banks. Lenders
L are non-fina
ancial
orations, public ones in general or familie
corpo es with savvings. With
h respect to
o the
mediiators of th
his market, who have
e a very ac
ctive presence on a m
market whiich is
comp
plex, becau ationship between len
use there is no rela nders and borrowers. For
insta
ance, a sing
gle saver goes
g to aucctions of Treasury
T own risk is very
Billls on his o
unlikkely, it is mo
ore normal to go to a mediator,
m fo
or example a commerccial bank, to
o deal
with your paperrwork. Theyy can act in
n the mone
ey market as
a brokers
s respective
ely as
ers, but without transfforming asssets. Among the mediiators that a
deale act on theirr own
risk, like dealers, we can find
f a comm
mercial ban ed intermediaries
nk or betterr specialize
like old
o stock co n the moneyy market. Those companies were created in order
ompanies in
to acct as marke
et makers, being alwa
ays willing to buy and sell short-te
erm assets,, thus
giving scope to the money market, abo
ove all in th
he interbankk market.

4
 THE MON
NEY MARK
KETS
Prof. Juaan J. Garcíaa-Machado, Ph.D.
Universityy of Huelva, Spain

4. MO
ONEY MAR
RKET ASSE
ETS

Before speaking
g about the assets in the
t money market,
m you
u have to no
ote that the
ey are
stantly evo
cons olving. Therrefore any attempt
a to classify
c them is tempo
orary and re
elated
to the
e present moment.
m

h assets are
Cash a the am
mount of funds or dep
posits that credit insttitutions hav
ve to
main
ntain in theirr asset maintenance accounts
a to meet reserrve requirem
ments. The level
of thiis coefficie
ent is betwe
een 1.5 and 2% of relev
vant liabilitie
es. Retaine
ed cash is pa
aid at
a ratte equal to the average
e interest ra
ates at wee ns on the ESCB1 durin
ekly auction ng the
main
ntenance pe
eriod-in num
mbers 30 da
ays.

The certificate of the Ban

nk of Spain
n (CBE) aro
ose from the
e reform of the legal ra
atio of
h in 1990. It
cash I was a ce
ertificate of deposit, is
ssued at a discount, d
decadal ten
nders,
o serve the objectives of moneta
which aimed to o the Bankk of Spain. They
ary policy of
e issued with a maturityy of one ye
were ear or six months, with nominal va
alue of 10 million
m
pese
etas, and co
ould only be
e purchased
d by savings
s banks and
d other finan
ncial instituttions.
The debt certifiicates of th
he Europea
an Central Bank are similar
s to th
he former CBE's,
C
but adapted
a to the new co
ommunity environmen
e nt. They are
e issued at discount, either
e
regular or irreg
gular, through the aucction system
m. Moreove ave a maximum
er, they ha
matu d can be placed
urity of twelve months and are trransferable without resstriction and
betw
ween individuals and co
ompanies.

Borro
owers in th
he money markets
m pa
ay interest for the use money they have
e of the m
borro
owed. Mosst money market
m seccurities pay
y interest at a fixed rate, which is
deterrmined by market con
nditions at the
t time the
ey are issue
ed. Some iissuers prefer to
offer adjustable
e-rate instru
uments, on
n which the rate will change from time to
t tie
ording to prrocedures la
acco aid down at
a the time the instrum
ments are ssold. Becau
use of
their short maturities, mosst money-m
market instruments do
o not pay periodic intterest
ng their lifettimes but ra
durin ather are so
old to inves
stors at a diiscount to their face value.
v
The investor ca
an redeem them
t at facce value wh
hen they ma
ature, with the profit on
o the
redemption servving in place
e of interestt payments.

1
Euro
opean System of o Central Bankks (ESCB) commprises the Euroopean Central Bank (ECB) an
nd the national central
banks (NCBs) of all EU Member Stattes whether theyy have adopted the euro or nott.

5
 NEY MARK
THE MON KETS
Prof. Juaan J. Garcíaa-Machado, Ph.D.
Universityy of Huelva, Spain

The value of the

e money market
m secu
urities changes inverrsely to changes in short-
s
term
m interest rates.
r Beca
ause mone nstruments by nature are short--term,
ey-market in
their prices are much less volatile tha
an the price
es of longerr-term instru
uments, and
d any
om holding
loss or gain fro g the securrity in the short time until matu
urity rather than
invessting at currrent yields is small.

ey market securities
Mone s arre very liquiid and are considered
c to be very ssafe. As a result,
r
they offer a low
wer return th
han other se
ecurities.

The easiest wa
ay for indivviduals to gain
g access
s to the money
m markket is throu
ugh a
ney market mutual fun
mon nd. Money funds with pooled sho
ort maturity and high quality
q
which acquire money
m markket securities on behalff of retail or institutiona
al investors.

The most impo ets, which are specialized in deb

ortant asse bt securitiess that matu
ure in
less than one ye
ear in the money
m marrket, are the
e following:

− Treasurry Bills (T-Bills) are short-term governmen

nt securitiess that matu
ure in
one year or less frrom their issue date. They
T are co
onsidered tto be one of
o the
nvestments as a result they do nott provide a great
safest in g return
n.

− Certifica
ate of Depo posit with a bank. CDs are safe, bu
osit (CD) iss a time dep ut the
returns are
a not grea
at, and yourr money is tied
t up for th
he length off it.

− Commercial Paper is an unssecured, short-term loa

an issued b
by a corporation.
Returns are higher than T-bills because of the higherr default riskk.

− Bankers
s Accepta
ances (BA
A) are ne
egotiable times
t draftt for financing
transactiions in goo
ods. BAs arre used fre al trade and are
equently in internationa
generallyy only available to indivviduals thro
ough moneyy market fun
nds.

− Eurodolllars are U.S.

U dollar--denominate
ed depositss at bankss outside of
o the
United States.
S The average Eurodollar
E deposit
d is ve
ery large. T
The only wa
ay for
individua
als to investt in this marrket is indire
ectly through a money market fund
d.

6
 THE MON
NEY MARK
KETS
Prof. Juaan J. Garcíaa-Machado, Ph.D.
Universityy of Huelva, Spain

− Repurch
hase Agree
ements (RE
EPOS) are a form of overnight
o bo
orrowing ba
acked
by goverrnment secu
urities.

5. SH
HORT-TER
RM PUBLIC DEBT MAR
RKET

ment of the money market is the short-term

The main segm s f
focused pub
blic debt ma
arket.
Thesse securitie
es are issu
ued by the
e state, reg
gional gove
ernments a
and other public
p
instittutions.

eneral, “Sh
In ge hort Term”” means ho
olding an asset for a short period of tim
me. In
acco
ounting, thesse are asse
ets expecte
ed to be con
nverted into ng the next year,
o cash durin
or a liability com
ming due in
n the next year.
y They are
a also kn
nown as current assets
s and
liabilities. Furthe
ermore theyy mature in one year orr even less.. For taxes, it would me
ean a
holdiing period of
o less than one year.

5.1. Treasury
T B
Bills (T-Bills
s)

Treasury Bills are the mostt marketable

e money ma ntially, T-Bills are
arket securrities. Essen
ay for the governments
a wa g s to raise money
m from
m the publicc. Moreoverr they are short-
s
term assets of the
t public debt
d market which are
e issued by the state tthrough the
e U.S.
Treasury Deparrtment (in United Sta
ates) or the
e General Directorate
D of Treasury (in
Spain).

n one year or
T-Bills mature in o less from e date. The maturities
m their issue s are basica
ally 4
ks (1 montth), 13 wee
week eks (1/4 yea
ar), 26 wee
eks (1/2 yea
ar) and 52 weeks (1 year).
y
Due to the high
h liquidity of
o this loan form, the Treasury
T Biills are cou
unted among the
mostt important instrumentss of the mo
oney markett. Furthermo
ore, they arre purchase
ed for
a price that is le
ess than th
heir par (facce) value. Therefore
T th
hey are typ
pically sold
d at a
discount from their par amount (allso called face value). When th
hey mature
e, the
gove
ernment payys the holde
er the full pa
ar value. Efffectively, yo
our interest is the differrence
betw
ween the purchase pricce of the security and what
w you ge
et at maturiity. For instance,
you might
m pay $990
$ for a $1000 bill. When
W the billl matures, you
y would b
be paid $10
000.

7
 THE MON
NEY MARK
KETS
Prof. Juaan J. Garcíaa-Machado, Ph.D.
Universityy of Huelva, Spain

The difference between

b the
e purchase price and face
f value is the intere
est. It is pos
ssible
for a bill auction
n to result in a price equal
e to parr, which me easury will issue
eans that tre
and redeem
r the
e securities at par value
e. According nvention of banks, the basis
g to the con
of ca
alculation is 360 days per
p year, in
nstead of 36
65 (366). Th
hey exist in a practical way,
so th
hat you can evaluate th
hem, but no
ot in a physical way. Furthermore they are allways
issue
ed by the treasury
t att discount via compe
etitive tend
ders and mo
oreover the
ey are
repre
esented in the
t book-en m2. Issuing the T-Bills gets
ntry system g through a compe
etitive
bidd
ding proces
ss at auctio
ons. If you want
w to buy
y a T-Bill, yo
ou have to ssubmit a bid
d that
is prrepared eith
her non-co
ompetitively
y or comp
petitively. The
T biggestt reason th
hat T-
Bills are so pop
pular is thatt they are one
o of a few money market
m instrruments tha
at are
affordable to the individ
dual investtors. In ad
ddition the
ey are usu
ually issue
ed in
deno
ominations of $1,000; $5,000; $10,000; $25
5,000; $100
0,000 and $
$1 million. Other
O
posittives are that
t T-Billss (and all Treasuries
s) are con
nsidered to be the safest
s
invesstments in the
t world, because
b the
e United States´ goverrnment baccks them. In
n fact,
they are considered to be risk-free. Furthermore
F e they are exempt
e m state and local
from
taxess. The only
y disadvanttage of T-B
Bills is that one
o will not get a greatt return, bec
cause
treassuries are exceptionall
e ly safe. Corporate bon
nds, certificates of dep
posit and money
m
markket funds wiill often give
e higher rates of intere
est. Besidess, one mightt not get ba
ack all
of yo
our investm
ment, if you
u cash out before the maturity date.
d There
efore you should
defin
nitely avoid this.
t

u decide to invest in American

If you A T
Treasury Bills, you firsst have to decide how much
mone
ey you wan
nt to spend. Secondly, you
y make a bid on the
e Treasury B
Bills. If you make
a no
on-competittive bid, yo
ou’ll receive
e the entire amount of the
t securityy you want at
a the
returrn rate, whicch is set right there at the auction. With com
mpetitive bid
dding, you have
to sp
pecify the re
eturn that yo
ou would likke to receiv
ve. If the retturn you specify is too high,
you might
m not re
eceive any securities,
s o just a porrtion of wha
or at you reque
ested.

Com t varying credit quality of

mmercial Biills have hiigher yieldss than T-Billls, due to the
each
h bill type. The
T credit rating
r of the
e entity issu
uing the bill gives inve
estors an id
dea of
the liikelihood th
hat they will be paid ba
ack in full. The
T T-Bills are conside
ered to hav
ve the

2
Accoounting record which
w representts a set of rightts over the financial content asssociated with a security. The person
who iss certified in the entries of the accounting recorrd is presumed to own the secu urity. The transmmission of a boo
ok entry
takes place
p by accounntancy transfer,, without the intervention of a public
p notary be
eing necessary. The registrationn of the
transfe
er is enforceable e against third parties
p and has the same conse equences as the e transfer of phyysical deeds.

8
 THE MON
NEY MARK
KETS
Prof. Juaan J. Garcíaa-Machado, Ph.D.
Universityy of Huelva, Spain

highe
est credit ra
ating in the market, beccause of its
s size and ability
a to raisse funds thrrough
taxess. On the other hand, a firm that issues Com
mmercial Bills does not have the same
s
abilitty to generrate cash inflow, beccause it do
oes not ha
ave the same power over
conssumers that a governm
ment has over its electo
orate. There
efore, Comm
mercial Bills
s and
T-Bills differ in the
t credit quality of the
e bodies tha
at issue the
em. If you w
would choos
se the
highe
er-risk Com
mmercial Billls, you would get the higher
h yield acts as a ccompensatio
on for
your investmentt. In other words:
w A hig
gher yield acts as compensation ffor investors
s who
ose the high
choo her-risk Com
mmercial Billls.

5.2. Primary
P Ma
arket: How
w Spanish Treasury
T is
ssues its Trreasury Billls

The primary market

m is th
hat part of the money or capital market tha
at deals witth the
ance of new
issua w securitiess. Companies, governm
ments or pu
ublic sectorr institutions
s can
obtaiin funding through
t the
e sale of a new stock or bond isssue. This is normally done
throu
ugh a synd
dicate of securities
s d
dealers. he process of selling new issue
Th es to
invesstors is called underw
writing. In the case of
o a new isssue, this ssale is an initial
i
publlic offering
g (IPO). A newly
n issue
ed IPO will be considered a prima
ary market trade
when
n the securities are first
f purcha
ased by inv
vestors dire
ectly from tthe underw
writing
invesstment ban
nk. After tha
at any of them
t traded
d will be on
o the seco
ondary ma
arket,
betw
ween investo
ors themsellves. In the primary ma
arket pricess are often sset beforeh
hand,
wherreas in the
e seconda
ary market only basic forces like supply
y and dem
mand
determine the price
p of the
e security.

Therrefore, the primary

p marrket is when
n the purchase of secu
urities occurs at the po
oint in
time in which the securitties are isssued and offered to the publicc. Acquisitio
on of
urities in the primary ma
secu arket is also
o called "su
ubscription" in Spain.

nance its acctivities and

To fin d the national debt, the
e Spanish Treasury
T issues a varie
ety of
debt securities (treasury bills
b -Letras ment bonds and deben
s-, governm ntures -Bon
nos y
gaciones del
Oblig d Estado-- and non Euro
E Debt -Deuda
- en divisas-). T
The most widely
w
held and the mo
ost liquid se
ecurity is the
e Treasury Bills.
B

9
 THE MON
NEY MARK
KETS
Prof. Juaan J. Garcíaa-Machado, Ph.D.
Universityy of Huelva, Spain

SPAN
NISH PU
UBLIC D
DEBT ISSSUES 

SHORT TERM PUBLIC
C DEBT INTERMEEDIATE AND LLONG TERM  PUBLIC DEB
BT

T
TREASURY NOOTES AND BO
ONDS
T
TREASURY BIL
LLS (LETRAS D
DEL TESORO)
(BON ACIONES DEL  ESTADO)
NOS Y OBLIGA

MON
NEY MARK
KET CAPITALL MARKET
0 18 months + 18 montths

Figu
ure 1. Distincttion of markets
s in Spanish Debt.
D

Span
nish Letras
s are the folllowing feattures:

- T-bills are short-terrm fixed inccome instru

uments which exist on
nly in book--entry
form.
- ere created in June 198
They we 87 when the
e book-entryy system was establish
hed.
- T-bills have a face
e or maturitty value (p
par value) of
o EUR1.00
00 and they
y are
typically sold at a diiscount from
m the par am
mount.
- e sold with 3,
They are 3 6, 12 and
d 18-month maturities.
- T-bills arre issued in
n auctions and everyon
ne can particcipate in the
em.
- anish Treasury has sett up a direc
The Spa ct purchase option thatt individuals
s may
use to bu
uy T-bills ovver the Internet or they
y can purcha
ase them th
hrough a ba
ank or
broker.

ve auction is the syste

The competitiv em chosen by the Spa sury to issue all
anish Treas
its securities. At
A the beginning of each
e year, the Treasu
ury publish
hes its issu
uance
objecctives. On a quarterly basis, it pub
blishes in th
he Official Gazzette
G (B
Boletin Oficial del
Estado) the au
uction cale
endar for each of th
he offered instrumentt. The cale
endar
speccifies not only the auction dates bu
ut also the dates
d by wh
hich bids mu
ust be subm
mitted
and the allocate
ed securitie
es paid for. Bids must be made for
f at least EUR1,000,, or a
multiiple of this minimum amount.
a Aucctions of 12
2 and 18 month
m T-billss are hold every

10
 THE MON
NEY MARK
KETS
Prof. Juaan J. Garcíaa-Machado, Ph.D.
Universityy of Huelva, Spain

two weeks.
w The
ey usually take place on Wedne
esday, unle
ess it is a n
national ho
oliday.
Speccial auctionss can be he
eld on other dates than those men
ntioned abovve.

Invesstors in Spa
anish T-Billss may particcipate in auctions throu
ugh two typ
pes of bids:

• Compettitive bids: The investo

or must ind
dicate the de
esired nom
minal amoun
nt and
the price
e he is willin
ng to pay. The
T price must
m be ex
xpressed a
as a percen
ntage
of the nominal
n (orr face) valu
ue. Compettitive bids are
a especia
ally designe
ed for
participa
ants with a certain
c degrree of know
wledge of the
e market. T
The investorr runs
the risk that the bid
d will not be
b accepted
d by the Trreasury. Each investorr may
submit as
a many com
mpetitive bid
ds at differe
ent prices as he or she
e desires.

• Non-com
mpetitive bids:
b In thiss case, only nal amount which is so
y the nomin ought
must be indicated. The price to be paid will
w be the weighted
w average price in
a
the aucttion. Non-ccompetitive bids are, in
n general te
erms, the m
most approp
priate
for retail investors. Investors will
w receive an interest rate equal to the weig
ghted
average yield of biids accepte
ed in the auction. Non
n-competitivve bids must be
or at least EUR1,000
made fo E o a multiple of this am
or mount. How
wever, there
e is a
maximum
m of EUR1,000,000 on the glo
obal amoun
nt of non-ccompetitive bids
submitte
ed by each participant.
p

e, the bids submitted are classified by desccending ord

he auction procedure
In th der of
price
e. Auctions are gene
erally run on
o a modiffied Dutch auction b
basis, comb
bining
elem
ments of the latter (single price) witth elements
s of standarrd auctions (multiple prrices).
The General Dirrector of the e nominal amount to be
e Treasury decides the e issued an
nd, on
the basis
b of the
e last bid ad
dmitted, the
e stop-out price,
p on which
w the m
marginal intterest
rate is calculate
ed. All bids at or above
e this minim
mum are acccepted, unless the pro
o rata
formula is bein
ng used (affecting only
o bids made
m at the margin
nal price). Non
petitive bids are acce
comp epted in the
eir entirety.. The alloccation price of securitiies is
calcu
ulated as fo
ollows: bids made at th m price are accepted a
he minimum at the same; bids
falling between the minimu
um and rou
unded-up weighted
w a
average priice also pa
ay the
e actually bid; and bids higher than
price n the rounded-up weighted averag
ge price and
d non
comp
petitive bidss pay the ro
ounded-up weighted
w av
verage price
e.

11
 THE MON
NEY MARK
KETS
Prof. Juaan J. Garcíaa-Machado, Ph.D.
Universityy of Huelva, Spain

5.3. Secondary
S y Market: Repurchase
R e Agreemen
nts (repos))

e fluctuation
Price ns in the se
econdary market
m tend
d to be quitte small; therefore, the
e risk
incurrred by inve
estors who intend to se
ell T-Bills priior to maturrity is usually low.

Repu
urchase ag
greements (repos) wo he same as Fed funds except thatt non-
ork much th
bankks can partiicipate. A fiirm can selll Treasury securities in
i a repurchase agree
ement
wherreby the firm agrees to
t buy back the securities at a specified
s fu
uture date. Most
reposs have a very
v short te
erm, the most
m commo
on being fo
or 3 to 14 d
days. There
e is a
markket, howeve
er, for one- to
t three-mo
onth repos.

ernment se
Gove alers frequently engag
ecurities dea ge in reposs. The dealer may se
ell the
secu
urities to a bank with the promise to buy th
he securitie
es back the
e next day. This
make
es the repo
o essentiallyy a short-tterm collatteralized lo
oan. Securities dealers
s use
the repo
r to ma nd to take advantage of anticipa
anage their liquidity an ated chang
ges in
intere
est rates.

eserve also uses reposs in conduc

The Federal Re cting monettary policy. The condu
uct of
etary policyy typically requires
mone r tha
at the Fed adjust bank reserves on a temp
porary
basiss. To accom
mplish this adjustment,
a the Fed wiill buy or se
ell Treasury securities in the
repo market. Th
he maturitiess of Federa
al Reserve repos
r neverr exceed 15
5 days.

ause repos are collate

Beca eralized wiith Treasurry securitie
es, they are
e usually low
w-risk
invesstments and
d therefore have low interest rate
es. Though rare, losses have occ
curred
in th
hese marke
ets. For exxample, in 1985, ESM
M Governm
ment Securrities and Bevill,
B
Bresler & Schulman declarred bankrup
ptcy. These firms had used
u the sa
ame securities as
collateral for more
m than one
o loan. The resultiing losses to municip
palities thatt had
hased the repos
purch r excee
eded $500 million.
m Suc
ch losses also caused the failure of
o the
state
e-insured thrift insurancce system in
n Ohio.

pain, all Tre

In Sp easury secu
urities are traded in an
n active sec
condary market for Le
etras,
Bono
os and Ob
bligaciones, in which most financial interm
mediaries p
participate. This
esents a significant ad
repre dvantage to nts with a horizon diffferent
o investors: investmen
from 12 and 18
1 months in Letras, or 3, 5, 10, 15 and
d 30 yearss in Bonos
s and

12
 THE MON
NEY MARK
KETS
Prof. Juaan J. Garcíaa-Machado, Ph.D.
Universityy of Huelva, Spain

Oblig
gaciones, are
a made possible.
p Fo
or example
e, an investor wishing
g to invest for a
perio
od of 4 mon
nths (a matturity not cu
urrently bein
ng offered by
b the Trea
asury) can buy
b a
12-m
month Letra
a issued 18
8 months before, and
d thus with
h a residua
al maturity of 4
montths.

The purchase of securities in the secondary

s market ca
an be made
e in the follo
owing
wayss:

• Directly, through a financiall intermediiary (bankss, savings b

banks, cred
dit co-
operative
es, brokera
age firms, etc.).
e The conditions
c of the tran
nsaction -i.e
e. the
price and
d commissiions- are fre
eely set between the client
c and the firm, and
d can
therefore
e differ from one firm
m to anothe
er. Furtherm
more, if a very shortt-term
investme
ent is desire
ed, a tempo
orary purcha
ase of secu
urities is posssible, by means
m
of so-callled "repos"" on Public Debt. As we saw before, "repos" are transac
ctions
in which the financcial institutio
on commits itself to bu
uy back the
e securities from
the invesstor on a sp
pecified date
e and at a previously
p a
agreed price
e.

• Through
h the Stock
k Exchange
e. All Treasury Securitiies can be b
bought or sold in
the stocck market. In this casse, the purchase orde
er must be submitted to a
brokerag
ge firm, in a similar fasshion as forr any listed security. Itt is also pos
ssible
hrough any other financial interme
to close the deal th ediary, whicch will process it
in collaboration with
h any of the
e "Entidades
s Gestoras"" which are members of
o the
Stock Exxchange. The
T advanta
age of making purchasse and sale
e transactio
ons in
securitie
es through th
he Stock Exxchange is that it is po
ossible to kn
now the pric
ces at
which Trreasury Seccurities can
n be boughtt and sold through the Public Trea
asury
information line (tellephone 902-15 50 50
0). Additiona
ally, the daily press us
sually
lists the prices for th
he precedin
ng working day.
d

eral types of
Seve o operation
ns may be conducted in the seco
ondary mon
ney markett:

e transactions. In whiich the transaction is one

1. Single o way onlly. Securitie
es are
sold alon
ng with all the
t rights attached:
a co
oupon paym
ment, redem
mption value
e, etc.
Debt is considered
c transferred to maturity
y, allowing th
he new own
ner to transact in

13
 THE MON
NEY MARK
KETS
Prof. Juaan J. Garcíaa-Machado, Ph.D.
Universityy of Huelva, Spain

it freelyy on the secondary

s market un
nder any authorised format. Single
S
operations can be:

• S
Spot transa
actions: setttlement take
es place within the five business days
f
following the transactio
on date.

• F
Forward ansactions: settlement takes place
tra e after the fifth business day
f
following he transaction. The ke
th ey elementts of each operation (price
(
a
agreed, exe
ecution datte, nominal value, effe
ective value
e, etc.) must be
n
notified to th
he Bank of Spain and may not be modified th
hereafter.

2. Dou
uble, or buy-back
k transac
ctions. W
When conttracting parties
simultan
neously agre
ee two sing
gle transacttions, a buyy and a se
ell, one spo
ot and
the othe
er forward or
o both forw
ward. The buyer in the first transa
action will be
b the
seller in the second
d and vice versa. These are firm transaction
ns, with the
e sale
and rep
purchase price
p previo
ously agree
ed at a given
g date. This buy--back
arrangem
ment entitle
es the hold
der of the asset
a to co
ollect coupo
on payments on
maturity.. Double op
perations ca
an be divide
ed into:

• Ordinaryy repos or "simulttáneas": b

both buyin
ng and selling
s
transactions refer to
t the sam
me type of instrument
i and are fo
or the
same nominal
n value. The buyer can transact freely with
h the
securitie
es purchase
ed, regardless of the bu
uy-back date set.

• Blocked or "Spanissh" repos: th

he differencce vs. ordinary repos is
s that
the secu
urities are not transferred to all effects and
d, as such, buy-
back tra
ansactions can
c only ta
ake place up
u to the d
date set forr their
return. The
T buyer, however, is
s entitled to
o collect co
oupon paym
ments
falling du
ue in the in
nterim. This kind of rep
po cannot b
be traded on
o the
blind ma
arket

14
 THE MON
NEY MARK
KETS
Prof. Juaan J. Garcíaa-Machado, Ph.D.
Universityy of Huelva, Spain

6. CO
ORPORATE
E ASSET MARKET
M

ddition to the
In ad e Treasury Bills non-fiinancial co
ompanies can
c also perrform emiss
sions
in the money markets.
m Log
gically the volume of emission
e iss very small compared
d with
the Treasury
T Bills. To havve an overvview about the maturiity and disttinction bettween
comm
mercial pap ate bills and long term assets
per, corpora a see Figure 2.

Figure 2.
2 Maturities of
o assets.

6.1. Commercia
C al Paper

The registration
n for Comm
mercial Pap
per in Unite
ed States iss usually ba ection
ased on Se
3(a)((3) of the 19
933 Securitties Act, wh
hich requires Commerccial Paper issuers to satisfy
s
three
e criteria. First,
F the maturity
m of Commercia
al Paper mu
ust not be more than
n 270
s. Practicallly, Commercial Paperr typically has
days h far shorrter maturitties - betwe
een 1
and 90
9 days - with
w an averrage maturitty of about 30 days. Se
econdly, Co
ommercial Paper
P
must not be targeted tow
wards the general pub
blic. Issuerss of Comme
ercial Paperr offer
to institutional investors an
nd are usually offering
g large den
nominationss of $100,000 or
e. Third, isssuers of Co
more ommercial Paper
P mustt only use their
t procee
eds from issuing
Com
mmercial Paper to finan
nce current assets su
uch as rece
eivables orr inventorie
es. In
practtice, this requirementt implies th
hat firms need
n to de
emonstrate that they have
sufficcient scale of current transaction
ns to justify
y the size of their Co
ommercial Paper
P
programs.

15
 THE MON
NEY MARK
KETS
Prof. Juaan J. Garcíaa-Machado, Ph.D.
Universityy of Huelva, Spain

In Sp
pain, to issu
ue a comme
ercial paper it is also necessary
n t register it at the CN
to NMW
misión Naccional del Marcado de Valorres –Span
(Com nish Securrities Exch
hange
Com
mmission-)

he following
In th mercial Papers will be described. The
g, three diffferent kindss of Comm
Asse
et-Backed and Financial Comm
mercial Pap
pers are Not-Corpora
N ate Commercial
Pape
ers and are explained to
t give a ge
eneral overv
view about Commercia
C al Papers.

6.1.1
1. Asset-Ba
acked Com
mmercial Pa
aper

Asse
et-Backed Commercial
C l Paper is issued
i by off-balance onduits of large
e-sheet co
finan
ncial institu
utions, whe
ere “off balance sheett” means th
hat the asse
ets and liab
bilities
of the conduits are not included on th
he financial institutions’ balance sheets. How
wever,
the assets
a are under
u the co
ontrol of the
e financial institution in
n the sense
e that the co
onduit
is a shell comp
pany that is managed
d by the financial institution. The Asset-Ba
acked
mmercial Paper is a sh
Com hort-term invvestment with
w a maturrity of 90 to
o 180 days. The
secu
urity itself is typically issued by a bank
b or oth
her financiall institution. The paperrs are
backked by physsical assets such as tra
ade receivables, and are
a generallyy used for short-
s
term financing needs.
n

6.1.2
2. Financiall Commerc
cial Paper

ncial Comm
Finan mercial Pap
per is issue
ed by large
e financial institutionss. In contra
ast to
Asse
et-Backed Commercia
C al Paper, Financial
F Commercial
C Paper is issued by
y the
institution dire
ectly and not via a conduit. Also,
A Finan
ncial Comm
mercial Pap
per is
ecured and the issuer does not pledge
unse p asse
ets as collatteral. Finan
ncial Commercial
Pape
er is considered a low-risk assett, because of
o its short maturity. Th
he fact is th
hat its
issue
ers are larg
ge institutio
ons with strrong balanc
ce sheets. If the balan
nce sheet of an
issue
er deteriorrates, investors usua
ally becom nt to roll over matturing
me reluctan
Com
mmercial Pa
aper and th
he issuer has to exit the Comme
ercial Pape
er market. Many
foreig
gn issuers are U.S. subsidiaries
s of foreign banks, wh
hich are sett up primarrily to
acce
ess the U.S. Commercial Paper Market.

16
 NEY MARK
THE MON KETS
Prof. Juaan J. Garcíaa-Machado, Ph.D.
Universityy of Huelva, Spain

The two main

n U.S. issu
uers of Fin
nancial Co
ommercial Paper
P are captive fin
nance
comp
panies and
d bank-related finance
e companie
es. Captive
e finance companies
s are
subssidiaries off automobiile compan
nies or manufacturin
m ng compan
nies that issue
Com
mmercial Pa
aper to secure financcing for their parent companiess. Bank-re
elated
finan
nce compa
anies are funding subsidiaries of la
arge bank holding
h com
mpanies.

6.1.3
3. Corporatte Commerrcial Paperr

porate Commercial Paper is issued by non-financial businesses

Corp b s. Like Fina
ancial
Com
mmercial Pa
aper, Corp
porate Com
mmercial Paper
P is un
nsecured a
and only large,
l
crediitworthy firm nce sheets can issue Commerccial Paper. Most
ms with sttrong balan
issue
ers are in th
he largest size
s quintile
e of publicly
y traded corporations. For these firms,
f
Com
mmercial Paper is an im
mportant so
ource of fina
ancing, representing a
about 30 pe
ercent
of their current liabilities. Among
A the main issu
uers of Corrporate Fina
ancial Pape
er are
Gene
eral Electricc and Coca--Cola.

In Spain, Corp
porate Com
mmercial Pa
apers are issued
i thro
ough a discount to face
e. Profitabillity is derive
value ed from the
e difference between th
he purchase price and
d face
value
e of the pa
aper on the
e due date, which is generally
g be
etween 3, 6 or 12 mo
onths.
Gene
erally, the ra
atings are high,
h from 1,500 to 6,00
00 €.

stors can be
Inves b every market
m partticipant, but mainly oth
her compan
nies subscriibe to
these
e papers. All
A papers to
t be offere
ed to the public
p mustt be backed
d by a reco
orded
broadcast program in the
e CNMV, exxcept in th
he case tha
at the issuer is a reg
gional
pany. As th
comp hese assets are facin
ng stiff com
mpetition fro
om the deb
bt issued by the
Treasury Bills, the yield from them
m must be
e higher th
han the offfered shortt-term
ernment deb
gove bt. But on the
t other hand, an iss
suer wants to perform the issuan
nce of
pape
ers. This retturn must be somethin
ng less than
n the cost off bank finan
nce. Commercial
Pape
er generallyy has no sp
pecial guarrantee and it is placed
d, thanks to
o the faith by
b the
invesstor, in the company
c th
hat issues it.

The advantages of Corporrate Comme

ercial Papers are:

17
 THE MON
NEY MARK
KETS
Prof. Juaan J. Garcíaa-Machado, Ph.D.
Universityy of Huelva, Spain

• Lowerr costs fo
or issuers and highe
er returns for investtors than in
i an
intermed
diated markket, because
e of the skip
pped bank margins.
m
• High fllexibility in amounts and terms.
• Possibility of making purchas
se, sale and repurcha
ase agreem
ments.

Emis
ssions of Commercial
C Paper can be of two types:
t

• In serie
es, the pap
pers are registered in th
he CNMV.
• With measures,
m t
these are no
ot registere
ed papers, but
b adapted
d to the dem
mands
of the ap
pplying com
mpanies.

Acco e emission process, there

ording to the t are va
arious options:

• Comp
petitive au
uction: This is often
n used am
mong com
mpeting fina
ancial
intermed
diaries, ma
ainly used for serial papers isssued by la
arge compa
anies.
Financia
al institution
ns who are invited to this processs bid competitively fo
or the
papers, bidding forr interest ra
ates. After receiving these
t pape
ers, the fina
ancial
diaries redisstribute them
intermed m to the pub
blic.

• Direct auction: Issuers directly se

ell the pap
pers to in
nvestors without
intermed
diaries.

arding to th
Rega he second
dary marke
et for Com
mmercial Pa e the previously
aper, where
issue
ed papers are
a traded, two other markets
m exist: The firstt is the uno
organized market
m
and works with the financial intermed
diaries, while the seco
ond refers tto the organized
markkets of the Financial Assets In
ntermediaries Association (AIA
AF). Due to
o this,
Spaiin has three
e markets where Com
mmercial Pa
apers can be
e negotiated
d:

• Private
e market.
• Markett public debt.
• AIAF market.
m

18
 THE MON
NEY MARK
KETS
Prof. Juaan J. Garcíaa-Machado, Ph.D.
Universityy of Huelva, Spain

The AIAF markket is secon

ndary par exxcellence fo
or the pape
ers of privatte issuers, while
otherr two remaining marke
ets are use
ed especially by some ous communities
e autonomo
issuing Commercial Paperss.

6.2. Corporate
C Bill

porate bills are busiiness documents th

Corp hat origin from ope
erations trade.
t
Participants of the corporatte bills are:

wing manda
• Redraw ate of the ba
ank.
• Costum
mer of the bank.
b
• The bill with a certtain amountt to be paid at the matu
urity.

The issued bills have matu om six and twelve mon

urity periodss ranging fro nths and nominal
e of 3,000 and
value a 6,000 €.
€ These fin ets are veryy similar to the Commercial
nancial asse
Pape
ers, becausse they are issued witth similar te
erms and fo
orms of neg
gotiation an
nd on
organized markets.

ue and give
The client accepts the valu es a blank writing,
w which makes iit easier to trade
m in the secondary marrket. The co
them orporate biill market has declining until it
h been d
disappeared in the presen
nt. Regardin
ng the actors involved, we have the following::

• Financial institutio
on, mainly crredit banks, because of
o a forced e
exchange
• Subscrribers and other
o compa
anies or inve
estors

Therre are two ways

w of pla
acing the bills:

• With securities:
s S
Signing a contract
c of adhesion between
b th
he bank and the
stock ma
arket, where the first delivers
d t second to be auctioned
the effects of the
at a disccount.
• Direct: The bank ittself seeks to place the
e bills directtly for their cclients.

19
 THE MON
NEY MARK
KETS
Prof. Juaan J. Garcíaa-Machado, Ph.D.
Universityy of Huelva, Spain

7. AS
SSET MAR
RKET OF BA
ANKING FIINANCIAL INTERMED
DIARIES

7.1. Interbank
I m
market

This is the fina

ancial syste
em and trad
ding of currencies am
mong banks
s and fina
ancial
institutions, excluding
e r
retail invesstors and smaller tra
ading parties. Banks
s are
transsferred, dire
ectly or through speccialized inte
ermediariess (such ass money market
m
broke
ers), deposits or other financial asssets at very
y short term
m, usually a day or a week.

e sizes are
Minimum trade e one millio
on of the base
b curren
ncy. Much larger trades of
betw
ween $10 million
m and $100
$ n are routine and can go through the marke
million et in a
matte
er of seconds. Even larger trades and orders
s are a regu
ular feature of the mark
ket.

The interbank market,

m as the prefix suggests, is “betwee
en banks,” with each trade
repre
esenting an nt between the banks to exchan
n agreemen nge the agrreed amoun
nts of
curre
ency at the specified rate on a fixed
f date. It is a netw
work of inte
ernational banks
b
operating in fin
nancial cen
ntres around the worlld. Currenccy trading today is la
argely
centrated in
conc n the handss of about a dozen majjor global fin
nancial firm
ms, such as UBS,
Deuttsche Bankk, Citibank, JPMorgan
n Chase, Barclays,
B Goldman Sa
achs, and Royal
R
Bankk of Scotland, to nam
me just a few.
f Hundre
eds of othe
er international banks
s and
finan
ncial instituttions trade alongside the top ba
anks, and all contribu
ute liquidity
y and
markket interest.

The basic fun

nction of this
t markett is to ena
able institutions to fu
und deficits
s and
surplluses loana
able entitiess. And its un
nderstanding can be be
eneficial be
ecause of its
s role
as th
he circulatorry system of
o a nation’ss economy.. Tensions in the interbank marke
et are
refleccted in the various cha
aracteristicss of other fiinancial ma
arkets as wiidening spreads,
lack of liquidity,, increased volatility and
a currenc
cy shortages. If banks themselve
es are
unab
ble to obtaiin the fund
ds necessary to mainttain their own
o busine
ess, they will
w be
unab
ble to extend credit to consumerss, firms, mortgage borrrowers, stud
dents, and many
otherr types of borrowers.
b T
Tensions an
nd turmoil in the interb
bank market have impo
ortant
implications for general ecconomic sta
ability, and market tren
nds, and th
hey are carrefully
moniitored by the relevant authorities.
a

20
 THE MON
NEY MARK
KETS
Prof. Juaan J. Garcíaa-Machado, Ph.D.
Universityy of Huelva, Spain

Altho
ough this is a restricted
d market in which only
y financial in
nstitutions ccan operate
e, it is
impo
ortance in in
nvestment assets
a is jusstified by its influence in determin
ning the intterest
rates
s of all fina
ancial instruments traded in oth
her marketss. Because the interes
st rate
on in
nterbank tra
ansactions is often ta
aken as a reference for the con
nditions in other
proce
eedings.

e the purpo
Since ose of the in
nterbank ma
arket for dep
posits is sup
pply and de
emand, therre are
logiccally two ty
ypes or inte
erest rates
s for each operation
o th
hat are crosssed. There
e is a
rate at which a financial in
nstitution is willing to borrow
b money and, on the other hand,
h
e is other ra
there ate at which a bank is willing
w to len
nd money.

7.2. Current
C ac
ccount

The profitability of these acccounts is very

v little. However,
H off
ffer investorrs the advan
ntage
of ab
bsolute liquidity, which allows acce
ess to the fu
unds at anyy time.

7.3. Time
T deposit market

1. Time dep
7.3.1 posits

ngs accou
Savin n a financcial institution for a fixed terrm or with
unt hold in h the
unde
erstanding that
t the cusstomer can withdraw only by givin
ng advanced
d notice. In such
transsactions, the
e bank's ob
bligation is reduced
r to return to th
he client at the deadlin
ne the
depo ount, while for the depositor the investment mad
osited amo de is incre
eased
profittability, as well ecurity against other in
w as a se nvestment operations
o that have im
mplied
a gre
eater degree
e of risk.

7.3.2
2. Bank notte often known as a bill
b

Is a kind of neg
gotiable insstrument, a promissory note ma
ade by a ba
ank, payab
ble on
and, used as
dema a money and
a in manyy jurisdictions is legal tender.
t In a
addition to coins,
c
bankknotes make
e up the cassh or beare
er forms of all
a modern fiat
f money.

21
 THE MON
NEY MARK
KETS
Prof. Juaan J. Garcíaa-Machado, Ph.D.
Universityy of Huelva, Spain

7.3.3
3. Certificattes of depo
osit or CD

Shorrt or mediu
um term de
ebt instrum
ments are offfered by ba
anks. CDs o
offer higher rates
of return than most
m compa
arable invesstments, in exchange
e f tying up invested money
for m
he duration of the certtificate's ma
for th aturity. Money removed
d before ma
aturity is su
ubject
to a penalty. CDs are low
w risk, low return
r inves nd are also known as "time
stments, an
osits", becau
depo use the acccount holderr has agree
ed to keep th
he money in
n the accou
unt for
a spe
ecified amo
ount of time,, anywhere from three months to six
s years.

7.4. Mixed
M Mark
ket

In th
his market include tho m term that have a high
ose securitties maturiing medium
degrree of liquidity. This iss the case of bank bon
nds and mo
ortgage seccurities. It ha
as no
clearr trend, with
h about the same numb
ber of advan
ncing and declining
d sto
ocks.

7.4.1
1. Bank Bon
nds

A debt instrume
ent issued fo
or a period of more tha
an one yearr with the pu
urpose of ra
aising
capittal by borro
owing. The Federal go
overnment, states, citie
es, corpora
ations and many
otherr types of institutions sell bondss. Generally
y, a bond is a promise to repay the
princcipal along with
w interest on a specified date. Some
S bondss do not pay interest (c
called
Zero coupon bo
onds), but all
a bonds require a repayment of principal. W
When an inv
vestor
buyss a bond, he
e becomess a creditor of the issuer. Howeve
er, the buye
er does nott gain
any kind
k of ownership rightts to the issuer, unlike in the case of equities..

eric term bank

Within the gene b bonds
s we can distinguish
d t
two types: C
Cash bonds
s and
treassury bonds. In the case of cash bonds,
b there is an arrrangement w
where in a party
givess to anothe
er an amount of mone
ey to secure
e the fulfilm
ment of an obligation, while
treas
sury bonds
s are debt security with
w a maturity of morre than 10 years. Treasury
bond
ds make intterest paym
ments semi--annually and the inco
ome that ho
olders receive is
only taxed at the
e federal levvel.

22
 THE MON
NEY MARK
KETS
Prof. Juaan J. Garcíaa-Machado, Ph.D.
Universityy of Huelva, Spain

7.4.2
2. Mortgage
e securities
s

Mortg
gage securrities are ba
acked by a pool of mo
ortgages. This
T genera
ates more money
m
for fu
uture mortgaging lendiing. There are
a also commercial mortgage-ba
m acked securities,
which are secu
ured by com
mmercial or
o multi-fam
mily properties, also ca
alled mortg
gage-
back
ked certific
cate. They are also acctive with medium-term
m m maturity but have a high
liquid
dity as they are include
ed in the mo
oney market securities.

Among the mosst important characteriistics of the

ese assets there
t he following:
are th

− equirement of a registrration.
No re
− The maturity of the securities is from one
o to three
e years.
− Theyy enjoy full freedom
f reg
garding the issuance.
− The outstanding
g bonds may
m not excceed in vollume to 90
0% of the m
mortgage
portffolio of the isssuer.

REFERENCES

- F
FABOZZI, F.JJ.; MODIGLIANI, F. and JONES, F.J. (2009): Fou
undations off Financial Ma
arkets
ns. 4th Edition. Pearson. New Jersey..
a Institution
and
- K
KIDWELL, D
D.S; BLACK
KWELL, D.W EE, D.A. and PETERSO
W.; WHIDBE ON, R.L. (2
2008):
F
Financial oney. 10th Ed
Insttitutions, Marrkets, and Mo dition. Wiley.. New Jerseyy.
- M
MISHKIN, F. and EAKINS
S, S. (2012): Financial Markets
M on. 7th
and Institutions. Global Editio
E
Edition. Pearsson. Boston..
- S
SAUNDERS, A. and COR
RNETT M. M. (2008): Fin ets and Instittutions. 4th Edition.
nancial Marke
M
McGraw-Hill. New York.

WEB
B REFEREN
NCES

- h
http://www.tes
soro.es/en/d
deuda/valoress/vls_letras.a
asp
- h
http://www.ec
cb.europa.eu
u/ecb/orga/esscb/html/inde
ex.en.html
- h
http://www.tre
easurydirect..gov/indiv/pro
oducts/prod_
_auctions_gla
ance.htm

23