CHAPTER 4: MONEY MARKET

Borrowers issue highly liquid and short-term financial instruments such as bankers'
acceptances, treasury bills, certificates of deposit, commercial paper and Eurodollars
Short term means a maturity period of less than one year
Money market securities are essentially IOUs issued by governments, financial institutions
and large organizations for their short-term cash requirements.
These instruments are very liquid and considered extraordinarily safe.
Money market securities offer significantly lower returns than most other securities because
the financial instruments issuers are extremely conservative
INSTRUMENTS IN THE MONEY MARKET
1. Bankers Acceptances
Bankers Acceptances short-term credit investment created by non-financial
companies and guaranteed by a bank to make a specified payment when it is due
An exporter draws a draft on a specific bank in order to obtain payment for goods
shipped to a customer in another country
A negotiable time draft for financing imports, exports or other transactions in goods
The maturities on acceptances normally range from 30 to 180 days
A banker's acceptance needs to be held until maturity
Acceptances are traded at discounts from their face value in the secondary market,
for example:
Face value of banker's acceptance
Minus 2% per annum commission for one year
Amount received by exporter in one year

RM1,000,000
RM20,000
RM980,000

2. Treasury Bills
Issued with three-month, six-month and one-year maturities
The bills are discounted securities and issued at a discount from the face value
Bank Negara Malaysia facilitates the sale of treasury bills through competitive
auction
Malaysian treasury bills are issued on a weekly basis and auction is held one day
before the issue date
The successful bidders are determined according to the most competitive yield
offered
3. Certificates Of Deposit
CD is a form of savings certificate with relatively low-risk debt instrument
The bearer of a CD is entitled to receive interest -fixed over their stated maturity.
Maturity term of a CD generally ranges from one month to five years.
The certificate can be purchased directly from commercial banks or savings and
loan institutions.
The certificate is a non-tradable security and is not traded on any exchange.
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4. Commercial Paper
Commercial paper is unsecured,
It is short-term loan or promissory note
It is issued by large companies
The proceeds of commercial paper sales used to finance working capital
Issued at a discount,
Based on current market interest rates
Average maturity of commercial paper is between one and two months
Maturities on commercial paper are usually no longer than nine months
Commercial paper is issued by a wide variety of domestic and foreign firms,
including finance companies, banks and industrial firms
5. Eurodollars
Eurodollars are deposits denominated in U.S. dollars deposited in banks outside the
borders of the U.S.
International investors buy U.S. dollars and deposit them in a bank outside the U.S.
and then use these dollars to buy goods in the world markets.
It has become convenient to businessmen to use Eurodollars
The term Eurodollars originated in Europe
Eurodollars have very little to do with the euro or European countries
The average Eurodollar deposit is very large (in the millions) and they have a
maturity period of up to about one year
6. Repurchase Agreements
Repurchase agreement (or repo) is a legal contract between a borrower and a
lender.
Repo transactions involve sale of securities at a particular price by a repo seller to a
repo buyer whereby the repo seller gives a commitment on his part to repurchase
the equivalent securities from the repo buyer
The repo buyer also gives a corresponding commitment to sell the equivalent
securities back to the repo seller on a certain date and at a certain price plus a
stated interest charge.
Both the date and the contract price of the same transaction are fixed for the
duration of the transaction.