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MONEY MARKET
- the securities trade in money market is called MONEY MARKET SECURITIES
- Misleading
- temporarily house their extra funds
- NO TRADING of currency or money in money markets
- higher return than depositing in banks
- short term - maturity value - one year or less
- highly liquid
- less risky
BASIC CHARACTERISTICS:
- Large denomination
- Law default risk
- Mature in one year or loss (most money market instruments mature in less than 120 days)
- Issued in bulk (usually wholesale markets)
- Upon initial issuance money market securities transactions are fairly large
Notes to remember:
- Money market is ideal for those who cannot or are not willing to commit on long term investments.
- MONEY MARKET transactions are usually participated over the phone and completed
electronically.
- They readily have a secondary market –that after the initial issuance which if you remember happens
in the primary market it can readily change hands from one investor to another owing to its high
liquidity.
- Gives the reputation of being flexible instruments that cane be readily used to meet short term financial
needs.
- DEALERS AND BROKERS of large banks and brokerages bring interested investors together to
allow them to participate in retail amounts because of the flexibility and liquidity of money market
securities they got traded quickly
3. COMMERCIAL BANKS
- Highly regulated
- Invests in money market securities because they are not risky, issues money market securities
to raise funds
- Major issuers of negotiable certificates of deposit, bankers acceptances, federal funds and
repurchase agreements.
4. BUSINESSES
6. INDIVIDUALS
TYPES OF MONEY MARKET SECURITIES
1. TREASURY BILLS
- t-bills are issued by the government when they need to raise/borrow funds and come with a very
short maturity
- government issued an amount BELOW PAR VALUE; thus it is issued at a DISCOUNT
- PRIMARY T-BILL MARKET is an AUCTION - because t-bills is issued by the government hence
they have ZERO DEFAULT RISK
DEEP MARKETS:
- liquid markets
- low returns
- very close to being risk-free
2. FEDERAL FUNDS
- short-term funds transferred between financial institutions, usually for a period of one day or overnight
- interest rates on fed funds reported as the effective federal fund rate (EFFR) - influenced by supply and
demand
- normally higher than a returns on a t-bill
- Its purpose is to provide banks with an immediate infusion of reserves should they run short of
minimum reserve requirements
6. BANKER'S ACCEPTANCE
- indicates that a bank accepts responsibility for a future payment
- an exported that is sending goods to an importer whose credit rating is not known will often prefer that a
bank act as a guarantor
- bearer instruments and sold to discounted basis